A cartel is an agreement or arrangement between competing firms in an industry to control the production, distribution, and pricing of goods or services, with the primary goal of maximizing profits and reducing competition. Typically, cartels are formed by a small number of companies that control a significant share of the market. These firms may collaborate to fix prices, limit supply, allocate markets, or engage in anti-competitive practices.
Cartels can be found in various industries, such as oil, pharmaceuticals, agriculture, and telecommunications. The most well-known example of a cartel is the Organization of the Petroleum Exporting Countries (OPEC), which coordinates the policies of its member countries regarding oil production and pricing.
While cartels can be beneficial for the participating firms by ensuring higher profits and reducing competition, they can have several negative consequences for the overall economy and consumers, including:
- Higher prices: By colluding to fix prices, cartels can artificially inflate the cost of goods or services, resulting in higher consumer prices.
- Reduced consumer choice: By allocating markets and limiting competition, cartels can reduce the variety of products or services available to consumers, potentially leading to lower quality and fewer options.
- Inefficiencies: Cartels can result in inefficient allocation of resources, as firms may focus on maintaining their cartel agreement rather than improving their products, services, or production processes.
- Stifled innovation: Reduced competition within a cartel can discourage firms from investing in research and development, as they may have little incentive to innovate or improve their products or services.
- Unfair advantages: Cartels can create an uneven playing field, making it difficult for new entrants or smaller firms to compete, ultimately leading to market consolidation and monopolies.
Due to these negative consequences, cartels are considered illegal and anti-competitive under many countries' antitrust or competition laws. Regulatory authorities, such as the European Commission's Directorate-General for Competition and the United States' Federal Trade Commission, actively investigate and prosecute companies suspected of engaging in cartel activities. Penalties for participating in a cartel can include fines, criminal charges, and damage to a company's reputation.