Economics
Cartel Pricing
Cartel pricing refers to the practice where a group of competing firms in an industry collude to set prices at a higher level than would exist in a competitive market. By coordinating their pricing strategies, cartel members can restrict output and maximize their collective profits. This behavior is typically illegal and can lead to antitrust investigations and legal actions.
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8 Key excerpts on "Cartel Pricing"
- Trefor Jones(Author)
- 2004(Publication Date)
- Wiley(Publisher)
CARTELS A cartel is a formal agreement among producers. The cartel is designed to overcome uncertainty of actions by rivals and to maximize joint pro¢ts for the industry. It achieves this by controlling or restricting output and operating as a multi-plant monopolist. A cartel can establish a joint pro¢t-maximizing position by selling the monopoly output and charging the monopoly price; this would result in a lower output and higher price, compared with the Cournot position. To determine the optimal output for a cartel, we assume that there are two ¢rms with di¡ering operational e⁄ciencies. To maximize joint pro¢ts, the cartel allocates more output to the most e⁄cient ¢rms. It does this by summing horizontally the marginal costs of each member and equating them with the market marginal revenue curve. The monopoly price can then be established. Individual ¢rms in the cartel are asked to contribute to industry output by producing an output quota according to their marginal costs. The process is illustrated in Figure 9.8(a, b), which show the average and marginal cost curves, respectively, for ¢rm 1 and ¢rm 2. Firm 1 is more e⁄cient than ¢rm 2 in that it has a lower average cost curve. In part (c) the market demand, marginal revenue and marginal cost curves are shown. The marginal cost curve for the market is derived by adding horizontally the marginal cost curves of ¢rms 1 and 2.
- Michal S. Gal, Michal S. GAL(Authors)
- 2009(Publication Date)
- Harvard University Press(Publisher)
Overall, it is believed that the cartel boosted the price of products sold worldwide by more than $20 billion. Several jurisdictions, including the United States, Canada, Australia, and the EC, have successfully brought charges against the cartel members. 4 Restrictive agreements might also result from the incentives of firms in vertical or adjacent markets to increase their profits. For example, assume that one bank finances all the oligopolists by giving them loans at fixed rates. To reduce its risks, the bank might impose condi-tions on the potentially competing firms which will reduce its risk if one of them should fail. For example, it might include in the loan con-tract a requirement that the price for their product will not fall below a certain amount, which would ensure that they can all cover their costs. The colluding scheme is not a stable one. Rather, it creates a basic tension between competition and cooperation. Although the oligop-olists’ fates are interdependent, their individual self-interests are not The Regulation of Oligopoly Markets • 157 perfectly consonant. Any collusive agreement that is based on a joint profit-maximizing scheme is thus inherently plagued by the natural temptation of each cartel member to “cheat” by deviating from the joint scheme. Cheating can take many forms including lowering price below the fixed one, granting secret rebates, entering into reciproc-ity agreements in which the cartel member buys something back from the customer at a supracompetitive price, or providing increased ser-vices. Such conduct by numerous cartel members would erode the joint profits and eventually undermine the agreement. The joint-profit-maximizing point is thus not an equilibrium but rather a modus vivendi.
- Kumar, K Nirmal Ravi(Authors)
- 2021(Publication Date)
- Daya Publishing House(Publisher)
though the firms do not formally agree to cooperate. A. Cartel A cartel model of oligopoly is a model that assumes that oligopolies act as if they were a monopoly and set a price to maximize profit. Thus, ‘cartel’ is an organization of independent firms, producing similar products, which work together to make output and price decisions. So, a cartel is a group of firms that creates a formal written agreement specifying how much each member will produce and charge. Basically, the term ‘cartel’ was used for the agreement in which there exist a common agency, which alone undertook the selling operations of all the firms that were party to the agreement. But, now-a-days, all types of formal and informal agreements reached among the oligopolistic firms of an industry are known as Cartels. For example, the OPEC is the most significant international cartel. OPEC members meet regularly to decide, how much oil each member of the cartel will be allowed to produce. Thus, in a cartel, several firms form an organization in order to act, so that, they may capture the benefits that would accrue to a monopolist in that market. So, to ensure monopoly benefits, the cartel will reduce output and increase price compared to what the members would produce as individuals in order to increase total profits. If each firm in an oligopoly sells a homogenous product like oil, the demand curve that each firm faces will be horizontal at the market price. If, however, the oil-producing firms form a cartel like OPEC to determine their output and price, they will jointly face a downward-sloping market demand curve, just like a monopolist. In fact, the cartel’s profit-maximizing decision is the same as that of a monopolist. The profits will then be distributed among the cartel members according to some agreed-upon system.
- Marian Radetzki, Linda Wårell(Authors)
- 2020(Publication Date)
- Cambridge University Press(Publisher)
The findings of our cartel analysis are not only of interest for the sake of history. They have a bearing on the future too. 10.1 Formal Preconditions for Successful Cartel Action Successful cartelization measures involve either a restriction of supply or a rise in the price charged by the members of the collaborating group, leading to increased revenue for the group. With a given demand 205 schedule there is a unique relationship between the quantity supplied and the price at which the market is cleared, so the two measures would have equivalent consequences. Where the institutional market arrange- ments involve producer-set prices, cartel action would ordinarily take the form of an increase in the producer quotations. Where primary commodity prices are set by exchanges, as is increasingly common, the colluding producers could achieve their aim by reducing supply until the desired price level is reached. Under ideal conditions, producer collaboration should aim at max- imizing the joint profits of its members. In terms of Figure 10.1, this would be achieved by reducing supply from Q 1 , the competitive equili- brium, to Q 3 , given by the intersection between the collaborating group’s marginal cost and marginal revenue. Any output above this level would be unprofitable, because the marginal cost of that output exceeds the marginal revenue. This is the standard profit maximization rule applied by a perfect monopoly. The criterion for successful pro- ducer collaboration employed here involves the cruder rule of revenue maximization, which disregards the costs saved by production cuts. Under this criterion, output would be reduced from Q 1 to Q 2 , the latter determined by the marginal revenue of the producer group being equal to zero. Revenue would then rise from P 1 Q 1 to P 2 Q 2 . We have adopted this cruder rule for the purpose of the following discourse because we believe that this is about as much as a real world cartel could aim for.
eBook - PDF- John M. Letiche(Author)
- 2014(Publication Date)
- Academic Press(Publisher)
5 See Stigler (1952, chap. 14). 6 Of course, the problem rem· f fi d· shares. See Cross (1969, pp 207~;~). 0 n Jog a mutuaJ1y agreeable set of market PART V. CARTELS, COMMODITY AGREEMENTS, AND THE OIL PROBLEM 317 etc.) among the various members. Enforcement costs are then reduced to those of assuring that no one sells to a forbidden customer. There has been some analysis of optimally imperfect terms of agreement for cartels that cannot achieve complete joint maximization. For instance, Comanor and Schankerman (1976) point out that, for industries selling on the basis of bids on individual transactions, identical bids are less costly to enforce than a scheme of rotated bids that requires explicit agreement on market shares, so that we expect (and find) schemes involving the rotation of bids typically to encompass smaller numbers of sellers. Second, a cartel may have a positive value to its members even if it achieves no long-run departure from a competitive market outcome. Con-sider the simple story often told in the institutional literature on cartels operated between World Wars I and II: A cartel is formed without the accession of all actual or potential producers of the good in question. The price is raised. The outsiders find price comfortably in excess of their marginal costs and expand output. Newcomers observe the elevated price to exceed their minimum attainable average costs and enter the industry. The cartel members start to lose market share, and the cartel-managed price gives way. The usual account then concludes that the cartel failed, and a soporific moral is drawn about the ultimate triumph of pure compe-tition. The trouble is that the cartel members did expropriate consumers' surplus and cause deadweight losses of welfare while the cartel was in operation.
- Marian Radetzki, Linda Wårell(Authors)
- 2016(Publication Date)
- Cambridge University Press(Publisher)
The findings of our cartel analysis are not only of interest for the sake of history. They should have a bearing on the future too. 10.1 The Formal Preconditions for Successful Cartel Action Successful cartelization measures involve either a restriction of sup- ply or a rise in the price charged by the members of the collaborat- ing group, leading to increased revenue for the group. With a given 10 10.1 The Formal Preconditions for Successful Cartel Action 199 demand schedule, there is a unique relationship between the quantity supplied and the price at which the market is cleared, so the two meas- ures would have equivalent consequences. Where the institutional market arrangements involve producer-set prices, cartel action would ordinarily take the form of an increase in the producer quotations. Where primary commodity prices are set by exchanges, as is increas- ingly common, the colluding producers could achieve their aim by reducing supply until the desired price level is reached. Under ideal conditions, producer collaboration should aim at max- imizing the joint profits of its members. In terms of Figure 10.1, this would be achieved by reducing supply from Q 1 , the competitive equi- librium, to Q 3 , given by the intersection between the collaborating group’s marginal cost and marginal revenue. Any output above this level would be unprofitable, because the marginal cost of that output exceeds the marginal revenue. This is the standard profit maximiza- tion rule applied by a perfect monopoly. The criterion for successful producer collaboration employed here involves the cruder rule of rev- enue maximization, which disregards the costs saved by production cuts. Under this criterion, output would be reduced from Q 1 to Q 2 , the latter determined by the marginal revenue of the producer group being equal to zero.
eBook - ePubRegulating Cartels in India
Effectiveness of Competition Law
- Sudhanshu Kumar(Author)
- 2022(Publication Date)
- Routledge India(Publisher)
2202.3.9.3 Agreement to limit or control production or supply
Markets are guided by the economic principle of demand and supply, which basically determines prices. However, when market participants join hands to control production or supply in order to create artificial scarcity, prices can be pushed up. This is a profit maximization technique adopted by members of a cartel. The Organization of the Petroleum Exporting Countries (OPEC) is a prime example of an output-restricting cartel. Price is thus fixed by the “market demand curve at the level of output chosen by the cartel”. In a cartelized market, the behaviour of a few players is akin to a monopolist to produce less and charge more. In terms of effect, these arrangements are similar to price fixing agreements where the reduction in output leads to an increase in prices. Cartels of this nature prevent the natural expansion of more efficient market players and do not allow them to achieve economies of scale. Competition is lessened, and consumers pay higher prices.221 Restrictions with respect to input capital investment, installed capacity, or output with respect to quantity, fixed quota and so on are employed to achieve the desired result. Restriction may also be with respect to technical development, like the imposition of restrictions for the usage of a particular machinery or manufacturing process.These types of cartels are generally not very stable as there is a strong incentive to cheat. Profit can be maximized if the output is increased beyond what is agreed. Thus, there is always an element of sanction associated with such arrangements. Further, the decision on output restriction is not simple. In a market with identical players, there may be a distribution of output. However, in markets with players of different sizes, which is mostly the case, output division is complex. While the smaller players may want output division equally, it may not be agreed by larger firms, relying on historical data of output, which again might not be agreeable to newer firms that would advocate division on the basis of productive capacity. The arrangement entered between players is in the form of pooling whereby the business units which sell in excess of their quota make payments to the pool to compensate the market players who sell below their quota.
- Sanjukta Paul, Shae McCrystal, Ewan McGaughey(Authors)
- 2022(Publication Date)
- Cambridge University Press(Publisher)
Competition Law as Collective Bargaining Law 91 5.4.2 The Continued Relevance of Cartels Saying that price leadership is the only current legal form of private horizontal market govern- ance does not preclude the possibility that private actors are governing markets illegally. In fact, there is extensive documentation of price fixing and cartels among significantly sized firms, many of which are large corporations governing market prices in very concentrated markets. 98 Given its illegality, the extensive evidence of price fixing and cartels in the recent past suggests even more yet-to-be-discovered price fixers and cartels governing markets as of this writing. For our purposes, what is relevant is the presumption that these markets are governed legally emerges from the price leadership exemption. Cartels, especially cartels in concentrated markets, function under the cloak of the price leadership exemption. If both implicit and explicit price coordination across firm boundaries were illegal, stable market prices would be prima facie evidence of illegal coordination. This is recognized by at least some commentators on competition law. In Legitimacy in EU Cartel Control, Ingeborg Simonsson states that “[A] prohibition on tacit collusion involves saying that a company ought to ignore its rivals’ behaviour. A problem with a prohibition against tacit collusion is how to design an appropriate remedy: if companies are to ignore each other’s behaviour then courts become involved in active price control, for which they are unsuited.” 99 Simonsson is, without acknowledging as much, recognizing that competition law allocates coordination rights to firms and that these firms require the price leadership exemption so that they can implicitly coordinate prices (“tacitly collude”) between firms. Since stable market prices are taken as prima facie evidence of legal implicit coordination, illegal activity is able to hide under the per se legality of implicit price coordination.
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