In economics, a cartel is a group of formerly independent companies who overtly agree to work together. The objectives of cartels are to increase their profits or to stabilize market sales. They do this by fixing the price of goods, by limiting market supply or by other means. Monopolies are not cartels, because in a monopoly there is only one independent company. Cartels are bad for the economy in general and for their customers who are overcharged. Cartels usually occur in oligopolies, where there are a small number of players that control the majority of supply in a market.
Besides the sellers' cartel just described, buyers may also form cartels to suppress the price of a purchased input. Another type of cartel is the bidding ring. In bid rigging potential suppliers form an agreement as to which of them will win a supply contract at a price above the competitive price and, if one of them wins, then agree to a rule for sharing the extra profits among themselves. Bid rigging is most common among construction firms trying to get a government building project.
A survey was done of hundreds of published economic studies and legal decisions of antitrust authorities. It found that the median price increase achieved by cartels in the last 200 years is 25%. Private international cartels (those with participants from two or more nations) had an average price increase of 28%. Domestic cartels averaged 18%. Less than 10% of all cartels in the sample failed to raise market prices.
In general, cartel agreements are difficult to negotiate because potential members typically have different ideal collusive prices. Once formed, cartels tend to be economically unstable, primarily because there is a profit incentive for members to cheat by selling at below the agreed price or selling more than the production quotas set by the cartel (see also game theory). Cheating on prices is difficult for cartel members to observe, so more successful cartels often agree to fix their market quotas, share verifiable information about those shares, and agree in advance on some mechanism to punish members that exceed their quotas. This has caused many cartels that attempt to set product prices to be unsuccessful in the long term. Empirical studies of 20th century cartels have determined that the mean duration of discovered cartels is from 5 to 8 years. However, once a cartel is broken, the incentives to form the cartel return and the cartel may be re-formed. Publicly-known cartels that do not follow this cycle include the Organization of the Petroleum Exporting Countries (OPEC).
Price fixing is often practiced internationally. When the agreement to control price is sanctioned by a multilateral treaty or protected by national sovereignty, no antitrust actions may be initiated. Examples of such price fixing include oil whose price is partly controlled by the supply by OPEC countries. Also international airline tickets have prices fixed by agreement with the IATA, a practice for which there is a specific exception in antitrust law.
International price fixing by private entities can be prosecuted under the antitrust laws of more than 100 countries. Examples of prosecuted international cartels are lysine, citric acid, graphite electrodes and bulk vitamins.
Oligopoly
In economics, an oligopoly is a market form in which the market or industry is controlled by a small number of sellers. Usually, the market has high barriers to entry, which prevents new firms from entering the market or even be able to have a significant market share.
As there are only a few sellers in the market, each seller would take note of the actions made by one another, and thinks about how the other sellers will respond when making decisions As such, there is a possibility in which an oligopoly can come together to make a common decision that allows them to have less competition and charge higher prices for consumers.
In many countries, some country-held companies were privatized. Very often, this privatization lead to oligopolies. In many countries, there are only a handful of companies providing networks for mobile phones. They control the prices for accessing the network. That is why using a mobile phone is often much more expensive than using a land line one.
Trains run by private sectors are much costlier than those run by a government. As a government gives rights to private sectors to get a hold of some other sectors, they take advantage of it.
Market forms
In economics, market structure (also known as market form) describes the state of a market with respect to competition.
Most market forms given below talk about a "homogeneous product". This simply means that they all make the same . They simply want to get the cheapest one, since all kinds of sugars (or soaps) look the same anyway.
The major market forms are:
The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolistic competitors, monopolists, oligopolists, and duopolists exist and dominate the market conditions.
These somewhat abstract concerns usually determine some but not all details of a specific concrete market system where buyers and sellers actually meet and commit to trade.
The correct sequence of the market structure from most to least competitive is perfect competition, imperfect competition, oligopoly, and pure monopoly.
The main criteria by which one can distinguish between different market structures are: the number and size of producers and consumers in the market, the type of goods and services being traded, and the degree to which information can flow freely.
Perfect competition
In economics, perfect competition is a type of market form in which there are many companies that sell the same product or service and no one has enough market power to be able to set prices on the product or service without losing business. As the conditions for perfect competition are strict, there are only a few markets that are considered to be perfectly competitive and this market form only exists to compare with the other market forms.
Generally, a perfectly competitive market exists when every firm in the market are price takers and no one is able to charge a different price without losing business. Specific characteristics of perfect competition includes:
These characteristics are largely impossible to achieve in reality and there are not many markets that are perfectly competitive. For example, it is unlikely that there are absolutely no barriers to entry and exit as there are always costs involved in setting up a new firm. Also, information is always imperfect and it is not possible for buyers to know exactly the price set by all sellers, and sellers are not willing to share their production methods with their competitors. However, the study of perfect competition is important as it is used to compare with the other market forms.
In the short run, a perfectly competitive firm is not productively efficient as the output will not be at where the marginal cost equals to the average cost (MC = AC). However, a perfectly competitive firm will be allocatively efficient as the firm will be producing at the profit-maximising output where MC = MR, which is coincidentally the allocatively efficient point. In the long run, a perfectly competitive firm will be both allocatively and productively efficient.
A model can be used to show the perfectly competitive firm's price and output level for a given product. In the diagram shown, the cost curves of a perfectly competitive market is shown in its long run equilibrium.