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A cartel, in business terms, is an agreement, written or unwritten, between producers to fix prices, share out markets or set their production levels, in order to restrain competition and to raise profits. A cartel is used to regulate markets and fix prices as a monopolist would. Adam Smith believed that the temptation to create cartels to maximize profits was so naturally strong that he viewed all business contracts with the deepest suspicion, and wrote that ‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices’. In the US, cartels are outlawed by anti-trust legislation, but, at times, US firms have had permission to participate in international cartels, and in particular cartels which are government-sponsored commodity agreements.
Cartels became especially popular during the depression years of the 1920s and 1930s. In Germany, for instance, several steel companies formed the Rührstahl cartel and the three biggest chemical firms in the world at the time, Bayer, BASF and Hoechst, merged into a holding company called I.G. Farben (later to become notorious for its work on chemical weapons).
Success of cartels has been sporadic because of forces that tend to undermine them, particularly international ones. For example, one or more members will find it advantageous to shave price a bit and ignore quotas in order to sell more and reap even greater benefits from prices that are still artificially high. There is not much fear of market sanctions from the other cartel members because the latter have no way of imposing them. Buyers are happy to get even slightly lower prices, and suppliers of equipment are glad to support the expanded output. TF
See also monopoly. |
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