A cartel is a grouping of producers that work together to protect their interests. Cartels are created when a few large producers decide to co-operate with respect to aspects of their market. Once formed, cartels can fix prices for members, so that competition on price is avoided. In this case cartels are also called price rings. They can also restrict output released onto the market, such as with OPEC and oil production quotas, and set rules governing other aspects of the behaviour of members. Setting rules is especially important in oligopolistic markets, as predicted in game theory. A significant attraction of cartels to producers is that they set rules that members follow, thus reducing risks that would exist without the cartel.
The negative effects on consumers include:
(i) Higher Prices
Cartel members can all raise prices together, which reduces the elasticity of demand for any single member.
(ii) Lack of Transparency
Members may agree to hide prices or withhold information, such as the hidden charges in credit card transactions.
(iii) Restricted Output
Members may agree to limit output onto the market, as with OPEC and its oil quotas.
(iv) Carving up a market
Cartel members may collectively agree to break up a market into regions or territories and not compete in each other’s territory.
The World’s Biggest Cartel
The Organization of Petroleum Exporting Countries (OPEC) is the world’s largest cartel. It is a grouping of 14 oil-producing countries whose mission is to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets. OPEC’s activities are legal because U.S. foreign trade laws protect it.
Amid controversy in the mid-2000s, concerns over retaliation and potential negative effects on U.S. businesses led to the blocking of the U.S. Congress attempt to penalize OPEC as an illegal cartel. Despite the fact that OPEC is considered by most to be a cartel, members of OPEC have maintained it is not a cartel at all but rather an international organization with a legal, permanent and necessary mission.