What is a Cartel?

Cartel An organization consisting of a series of independent companies producing similar products. Producers acting collectively to increase the price of such products and control their output. Under US antitrust law, cartels are illegal. Monopoly interest groups, monopoly alliances, business alliances, and industry associations (Cartel) are also called cartels, which are one of the forms of monopoly organizations. An enterprise that produces or sells a similar commodity in order to monopolize the market and obtain high profits. It is an alliance formed by entering into agreements on commodity prices, output and sales. Members of this alliance remain productive, commercial and legally independent.

Cartel

(Economic term)

A group of companies that formally collude and work together is called a cartel, and it usually seeks to profit by limiting the output of its members to drive up prices. By far the most famous cartel in the world

Cartel is a transliteration of French cartel, originally intended to be an agreement or an alliance. In order to monopolize the market and obtain high profits, companies producing similar goods have reached agreements on the division of sales markets, regulation of product output, and determination of commodity prices.

Cartel is a formal

1,

To form a cartel in a market, at least the following three conditions are required:

First, cartels must have the ability to raise industry prices. Only if cartels are expected to raise prices and maintain them at high levels will companies be motivated to join. The size of this ability is the same as that faced by cartels

Cartel is like a monopoly when making decisions. According to the demand curve and total cost curve that the entire cartel faces, make MR = MC to determine the optimal total output and corresponding price, and then allocate it among member companies This total output, while instructing member companies to implement the price set by the cartel. The principle of allocating output is the same as the principle of allocating output in multi-factory production: make the marginal cost of each member enterprise equal.

Instability

There are two main reasons for cartel's natural instability:

First, the threat of potential entrants: Once the cartel maintains a high price, it will attract new companies to enter the market, and after the new company enters, it can increase market share by reducing prices. It is not easy to maintain the original high price.

Second, the deceptive motives of cartel internal members: This is a typical "prisoner's dilemma". Given that the production quantity and price of other companies are unchanged, a member company secretly increasing its output will obtain an extra huge The advantage is that it will encourage member companies to secretly increase output. If each member company secretly increases output, it is obvious that the total market supply will increase significantly, and the market price will inevitably fall. If the cartel fails to resolve this problem effectively, it will eventually lead to the collapse of the cartel. In fact, economists have found that the average duration of cartels in the world is about 6.6 years, and the shortest two years have collapsed.

In addition, with the implementation of anti-monopoly laws of various governments, cartels may also be forced to dissolve because of violations of government laws. Because of this, many cartels are international cartels to circumvent domestic anti-trust laws.

This instability can also be analyzed from a game theory perspective. Because (deception, deception) is a Nash equilibrium.

Distribution among manufacturers

Assuming that the cost curves of the two manufacturers are as shown in (a) and (b), then the marginal cost curve of the cartel as a whole can be obtained by summing the marginal cost curves of the two manufacturers in the horizontal direction. Assuming that the demand curve of the entire industry is D, the marginal return curve of the entire industry is MR. In this way, Cartel can determine that its total output is Q1 and the corresponding "monopoly price" is P1 according to the profit maximization criterion of MR = MC. On this basis, cartels will allocate their total output according to the principle of equal marginal cost. Because P1 and Q1 are determined, then TR is determined, so maximizing profits is equivalent to minimizing costs. Therefore, the distribution of total output according to the principle of equal marginal cost can maximize its total profit. The intersection of the curve MR and MC determines the same marginal cost level (horizontal dotted line), and then the intersection of this dotted line with the marginal cost curve of each manufacturer determines the respective output Q1, Q2. The shaded areas are the respective profits of the manufacturers. As you can see, the profits of different manufacturers are different. Driven by their own interests, or dissatisfied with such distribution results, or expecting more profits, the cartel agreement and the corresponding distribution results are unstable. Driven by maximum profits, manufacturers are easily on the road of "betrayal". And once a member violates the agreement, because the number of manufacturers in the market is small, their actions are easily detected by other manufacturers, which causes a "chain reaction" and eventually causes the collapse of the cartel.

Two conditions

(1) A stable cartel organization must be formed on the basis of an agreement between members on price and production levels and compliance with the agreement.

(2) The potential of monopoly power. (This is the most important condition for cartel's success.) If the potential benefits of cooperation are large, cartel members will have greater willingness to solve their organizational problems.

Social evaluation

Evaluation of oligopoly markets

Some economists believe that monopolists provide only a bland life, poor quality, and uncivilized services. A common complaint about monopolies is that monopolists pay little attention to the quality of the products. When AT & T monopolized telephone equipment, consumers for many years had to be content with unclear call quality. Once competitors entered the industry, the colors, styles, and types of auxiliary equipment for telephones increased dramatically. The same is true of the automotive industry, where competitive pressure from abroad has forced American automakers to produce more reliable and safer products. Obviously, oligopoly will raise prices and damage consumer interests and socio-economic welfare. However, oligopoly is conducive to achieving economies of scale and promoting scientific and technological progress, and has a positive effect on economic development.