Economics
Cartels
Cartels are groups of independent businesses that join together to regulate the production, pricing, and marketing of a particular product or service. They aim to reduce competition and increase their collective profits by setting prices and output levels. Cartels are often illegal and can lead to market inefficiencies and consumer harm due to their ability to manipulate prices and restrict supply.
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10 Key excerpts on "Cartels"
eBook - PDFFighting Cross-Border Cartels
The Perspective of the Young and Small Competition Authorities
- Pierre Horna(Author)
- 2020(Publication Date)
- Hart Publishing(Publisher)
Collusion has been defined as follows: ‘an agreement among a group of firms, called a cartel, designed to limit competition among the participants. If all firms in the cartel follow the agreement, buyers will face higher prices, giving the cartel members profits above the normal competitive level’. 17 In this sense, when Definition of Cross-Border Cartels 15 18 For a comprehensive assessment on why collusion is profitable and how it is implemented in practice see Marshall and Marx (2012). 19 See more at Clarke and Evenett (2003). 20 It seems that in the EU, the ‘object box’ is being expanded to additional restrictions of competition besides the three most obvious. See the discussion in: Whish and Bailey (2015: 125). 21 cf Lande and Marvel (2000). 22 Ezrachi (2016: 159–61). 23 See a comprehensive assessment of price-fixing in Kaplow (2013). 24 Ezrachi (2016: 166). 25 See more in Jones and Sufrin (2016). 26 According to EU case law, quotas have been very numerous in recent years. See Whish and Bailey (2015: 570, fn 244). 27 Indeed, there are some agreements that could be beneficial to competition, such as joint produc-tion, R&D agreements, standardisation. Whish and Bailey (2015: 569). companies agree not to compete, in order to increase the combined profits of the whole group, while reducing output, competition will be substantially restrained and no productive efficiency advantage (such as a better use of resources, or costs saving) will occur. 18 This is why horizontal collusive practices are one of the main focuses of competition (or antitrust) law around the world. 19 There are commonly three major types of collusive practice: price-fixing agreements, quantity-fixing agreements, and market allocation, 20 whereby the cartelists maximise their profits directly at the expense of consumer welfare. 21 1. Price-fixing agreements take place between competitors, whether explicitly or implicitly, when they jointly set the prices at which they market their products.
- Ko Unoki(Author)
- 2019(Publication Date)
- Routledge(Publisher)
Sir Alfred Mond, the organizer and head of the British chemical trust Imperial Chemical Industries (ICI), defined a cartel as being “a combination of producers for the purpose of regulating…production, and…prices” that does not give up the separate identity of the different enterprises, and does not usually last more than a limited time. 2 The European Parliament and Council defined the term cartel as being an “agreement or a concerted practice” between more than two competitors that has as its objective the coordination of their respective competitive behavior in the market such as fixing or coordinating purchase or selling prices or other conditions, the sharing of intellectual property rights, the allocation of production or sales quotas, and the division of markets and customers through agreements such as bid rigging, restricting imports or exports, or coordinated anticompetitive actions against other competitors. 3 Such aforementioned acts of Cartels including price fixing and market allocation that “have as their object or effect the prevention, restriction, or distortion of competition” within the European Union (EU) are prohibited under Article 101 paragraph 1 of the Treaty on the Functioning of the European Union (TFEU). 4 In the Japanese Antimonopoly Act (AMA) the term “cartel” is not specifically mentioned
eBook - ePub- F.J.L. Somers, K.E. Davis-Ost, J.E. Frencken, E. Heuten(Authors)
- 2019(Publication Date)
- Routledge(Publisher)
cartel agreements has not always been as negative as it is nowadays. In current neoclassical cartel theory, Cartels are seen as a variation on monopolies; however, this has not always been the case. Frederich Kleinwachter argued in a publication in 1883 that Cartels were an extension of the medieval guilds and stabilised an industry by adjustment of supply and demand and the prevention of a monopoly. During the Great Depression of the 1930s, Cartels were even encouraged by government to stop price-cutting. Cartels flourished in various industries, especially during decolonisation. Before the Second World War a substantial part of world trade was controlled by Cartels. From the 19th century until the 1980s, Cartels were part of international business. It was only after the Second World War that Adam Smith’s view on Cartels as ‘a conspiracy against the public’ became more widely shared. Today, it is generally accepted that collusion will increase prices and reduce general consumer welfare and that these disadvantages outweigh potential positive effects such as quality and efficiency improvements.Oligopoly markets are more susceptible to this form of horizontal cooperation than any other type of market. Bidding markets are typical areas for collusion . In bidding markets, companies have to place a sealed bid (in a closed envelope) to obtain an order or contract. The idea is that the contract is awarded to the company that places the lowest bid. If competitors agree on who will place the lowest bid, this is called bid-rigging. Bid-rigging is regular practice in some industries and has already led to several convictions, such as in the Dutch building industry in the late 1990s.In some cases, governments have unwittingly aided Cartels by demanding price transparency. The Danish Competition Council decided in 1993 that prices of ready-mixed concrete should be transparent and made known to the general public. Soon after the prices were published, they exhibited little discrepancy and increased rapidly. It became very easy for cartel members to detect which companies were cheating on the collusion agreement. The price transparency regulation aided the cartel in keeping prices higher than marginal costs.UNILATERAL EFFECTSIt is also possible that unilateral effects will lead to concentration and price increase. Unilateral effects are non-coordinated effects that can occur in a market without cooperation between competitors. These unilateral effects are similar to the effects of cartel agreements. For example, the market’s leading electricity supplier decides to increase prices during peak hours by reducing production capacity during those peak hours. Its competitors will most likely follow suit.
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.
- 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.
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.
- Sanjukta Paul, Shae McCrystal, Ewan McGaughey(Authors)
- 2022(Publication Date)
- Cambridge University Press(Publisher)
from a combination of the coordination rights that came with incorporation and the coordin- ation rights that came with the control over a trade association. 5.3.2.2 Cartels Cartels are organizations of producers that involve not just explicit price coordination, but explicit coordination over quantities produced and the market share to individual firms, whether geographically or otherwise. The line between trade associations and Cartels is not bright: trade associations have often functioned as Cartels or as organizations through which cartel partici- pants have congregated. And, especially in more hostile legal environments, Cartels have tended to be more informal or to operate clandestinely through legitimated forms of coordination. Among competition lawyers, especially in the USA, Cartels are uniquely associated with crimin- ality and conspiracies against the public. But this is a historically and geographically parochial notion. In some times and places, coordination rights between competitors were explicitly and exclusively allocated to firms which registered as Cartels with competition law authorities. In these circumstances it is easier to see that governments have a monopoly over coordination rights that they franchise to “private” actors in a variety of ways. 78 There is extensive literature discussing Cartels in the nineteenth century, the emergence of “cartel registers” in the twentieth century and the fluctuating attitudes towards Cartels over this long stretch of history in Europe. 79 Even in the United States, Cartels have been legal. And depending on the strength of the enforcement mechanisms that Cartels had access to, they can last long periods of time. The Aluminum cartel, for example, arguably lasted an entire century and was an international cartel.
- Marian Radetzki, Linda Wårell(Authors)
- 2016(Publication Date)
- Cambridge University Press(Publisher)
These alternatives usually give rise to protracted quarrels as each cartel participant positions itself to maxi- mize its own yield. After the joint supply cut has been implemented, each individual member will have a strong temptation to covertly increase its supply and so benefit from the higher price while letting the others carry the burden of restriction. A close inspection of the participating members’ adherence to the agreement will therefore be needed to prevent it from breaking apart. A few important inferences for the practicability of international commodity Cartels can be drawn from the above. The smaller the group of participating producing or exporting countries needed to attain the required share of world supply, the simpler will it be to reach and maintain a supply restricting action. Agreement will be much easier to reach and administer in a group of four or five than in a group of 12 or more. Similarity among the participants will also facilitate monop- olistic coordination. If they are of equal size, have matching cost struc- tures and levels, pursue similar goals, and operate in comparable social and political environments, an agreement will be easier to reach than when there are great differences within the group. The ease with which output can be cut and supply can be monitored will also affect cartel operation. The cohesion and trust within the collaborating group will benefit from transparency of the burden sharing. Empirical studies of international cartel endeavors in commodity markets have often been simplified by regarding countries instead of producing corporations as participants. Individual producers are not always easy to identify, and the volume of their exports may be hard to quantify. Identification and quantification are much easier to handle at the national level. There are also some more fundamental arguments in favor of treating national governments instead of corporations as car- tel members.
eBook - PDF- Eleanor Fox, Daniel Sokol, Eleanor Fox, Daniel Sokol(Authors)
- 2009(Publication Date)
- Hart Publishing(Publisher)
Chapter XII The Detection of Cartels and the Blending of Law and Economics WILLIAM S COMANOR * I. Introduction While law is about setting rules to promote the welfare of society, economics is about constructing models to explain the behavior of firms and consumers In many circumstances, economic models are useful aids in the rule-setting pro-cess. However, sometimes these models conflict with one another. The question addressed in this paper is how such conflicts can confound the judicial process. This problem is particularly relevant for the judicial determination of cartel activity. There are two competing models which are relevant for determining whether or not a cartel is present. In order to evaluate the observed behavior of firms in a market, we first need to determine how the member firms would be expected to act in the absence of a cartel. But ‘there’s the rub’, for there are two sets of explanations, each based on a different economic model. These two models are associated with the names of Turner and Posner. And each leads to a very different view of cartel detection, which is an important matter for enforcement practices in all jurisdictions. The Turner model presumes that firms which compete with a limited number of rivals will invariably find ways to accommodate each other and reach non-competitive outcomes. 1 As a result, one cannot determine the presence or absence of a cartel largely by examining market outcomes. In contrast, the Posner model finds that firms generally reach competitive outcomes even when there are only a small number of firms in the market. 2 In these circumstances, non-competitive outcomes more likely indicate the presence of a cartel Recently, Judge Posner * Professor of Economics, University of California, Santa Barbara and Los Angeles. I appreciate the very helpful comments on a previous draft by H E Frech.
eBook - PDFJuridification of Social Spheres
A Comparative Analysis in the Areas ob Labor, Corporate, Antitrust and Social Welfare Law
- Gunther Teubner(Author)
- 2012(Publication Date)
- De Gruyter(Publisher)
For companies, prohibitions or mandatory behavior under cartel law are not just a question of legal standards which must be taken into account along with economic and other data. They often deprive companies of options in deci-sion-making which can be of crucial importance, and in extreme cases may mean life or death for the company. This is reflected in the fact that antitrust law difficulties very rapidly go beyond the legal department and become the concern of company management itself. This fact explains why here, more than in many other areas of law, the attempt is made to sound out peripheral areas of legality and discover whether an evasion will be recognized or a violation discovered. The situation is illustrated by the bidding Cartels in the German building industry, which in spite of clear legal prohibitions going back for decades and corresponding efforts to enforce them by the federal cartel office, continue to operate. In addition, there are considerable difficulties of proof, also well illustrated by the bidding cases. Cartel agreements and other restrictive trade practices often come to light only by chance, e.g. when a company manager has not destroyed related memoranda, or an employee leaves a company on bad terms and spills the beans. Above all, entrepreneurial conduct on the market does not clearly reflect whether restrictive trade practices are in use or not. Practi-cally any conduct on the market can be used for restrictive purposes. We must also remember the limited legal, personnel, and financial resources Restrictive Trade Practices and Juridification 315 available to those bodies responsible for the enforcement of antitrust law. International comparison shows striking discrepancies in the setting of political priorities in this area. Without appropriate resources even the best antitrust law will be ineffective.
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