Cartel

1 Origin

This article is about the legal term. For other uses, see
Cartel (disambiguation).

The term cartel originated for alliances of enterprises

roughly around 1880 in Germany.[4] The name was
adopted into the English language during the 1930s. Before this, other, less precise terms were common to denominate cartels, for instance: association, combination,
combine or pool.[5] In the 1940s the name cartel gained an
anti-German bias, being the economic system of the enemy. Cartels were the economic structure the American
antitrust campaign struggled to ban globally.[6]

In economics, a cartel is an agreement between competing rms to control prices or exclude entry of a new competitor in a market. It is a formal organization of sellers
or buyers that agree to x selling prices, purchase prices,
or reduce production using a variety of tactics.[1] Cartels
usually arise in an oligopolistic industry, where the number of sellers is small or sales are highly concentrated and
the products being traded are usually commodities. Cartel members may agree on such matters as setting minimum or target prices (price xing), reducing total industry output, xing market shares, allocating customers, allocating territories, bid rigging, establishment of common
sales agencies, altering the conditions of sale, or combination of these. The aim of such collusion (also called
the cartel agreement) is to increase individual members
prots by reducing competition. If the cartelists do not
agree on market shares, they must have a plan to share
the extra monopoly prots generated by the cartel.

2 Private vs. public cartels

A distinction is sometimes drawn between public and private cartels. In the case of public cartels, the government
may establish and enforce the rules relating to prices, output and other such matters.

One can distinguish private cartels from public cartels.

In the public cartel a government is involved to enforce
the cartel agreement, and the governments sovereignty
shields such cartels from legal actions. Inversely, private cartels are subject to legal liability under the antitrust
laws now found in nearly every nation of the world. Furthermore, the purpose of private cartels is to benet only
those individuals who constitute it, public cartels, in theory, work to pass on benets to the populace as a whole.

Shipping conferences are examples of public cartels. In

many countries, depression cartels have been permitted
in industries deemed to be requiring price and production stability and/or to permit rationalization of industry
structure and excess capacity. In Japan for example, such
arrangements have been permitted in the steel, aluminum
smelting, ship building and various chemical industries.
Public cartels were also permitted in the United States
during the Great Depression in the 1930s and continued to exist for some time after World War II in industries such as coal mining and oil production. Cartels also
played an extensive role in the German economy during the inter-war period. International commodity agreements covering products such as coee, sugar, tin and
more recently oil (OPEC) are examples of international
cartels with publicly entailed agreements between dierent national governments. Crisis cartels have also been
organized by governments for various industries or products in dierent countries in order to x prices and ration
production and distribution in periods of acute shortages.

Competition laws often forbid private cartels. Identifying and breaking up cartels is an important part of the
competition policy in most countries, although proving
the existence of a cartel is rarely easy, as rms are usually not so careless as to put collusion agreements on
paper.[2][3]

Several economic studies and legal decisions of antitrust

authorities have found that the median price increase
achieved by cartels in the last 200 years is around 25%.
Private international cartels (those with participants from
two or more nations) had an average price increase of
28%, whereas domestic cartels averaged 18%. Fewer
Murray Rothbard considered the Federal Reserve as a
than 10% of all cartels in the sample failed to raise market
public cartel of private banks.
prices.
In contrast, private cartels entail an agreement on terms
and conditions that provide members mutual advantage,
but that are not known or likely to be detected by outside
parties. Private cartels in most jurisdictions are viewed as
violating antitrust laws.[2]
1

4 LONG-TERM UNSUSTAINABILITY

Domestic vs. international cartels

A further distinction can be made between domestic and

international cartels. The later category of agreements
poses additional challenges for law enforcement agencies
(otherwise known as competition authorities) and private
plaintis because of transnational nature of such agreements. These challenges encompass assertion of jurisdiction over foreign members of a cartel, collection of
evidence located abroad, and enforcement of judgments
against foreign parties (particularly challenges if they do
not have any assets in the forum).
Export cartels are a special case of international cartels.
Virtually all jurisdictions implicitly or explicitly allow for
cartels which focus their operations elusively on foreign
markets, without aecting the domestic economy.[7] Although international cartels are widely condemned, that
condemnation does not encompass export cartels.[8]

Long-term unsustainability

Game theory suggests that cartels are inherently unstable,

as the behaviour of members of a cartel is an example of
a prisoners dilemma. Each member of a cartel would be
able to make more prot by breaking the agreement (producing a greater quantity or selling at a lower price than
that agreed) than it could make by abiding by it. However,
if all members break the agreement, all will be worse o.

3. Production costs of each member

4. Behavior of demand
5. Frequency of sales and their characteristics

4.1 Number of rms in industry

The fewer the number of rms in the industry, the easier
for the members of the cartel to monitor the behaviour of
other members. Given that detecting a price cut becomes
harder as the number of rms increases, the bigger are
the gains from price cutting.
The greater the number of rms, the more probable it is
that one of those rms is a maverick rm; that is, a rm
known for pursuing aggressive and independent pricing
strategy. Even in the case of a concentrated market, with
few rms, the existence of such a rm may undermine the
collusive behaviour of the cartel.[10]

4.2 Characteristics of products sold

Cartels that sell commodities are more stable than those

that sell dierentiated products. Not only do homogeneous products make agreement on prices and/or quantities easier to negotiate, but also they facilitate monitoring.
If goods are homogeneous, rms know that a change in
their market share is probably due to a price cut (or quantity increase) by another member. Instead, if products are
The incentive to cheat explains why cartels are generally dierentiated, changes in quantity sold by a member may
dicult to sustain in the long run. Empirical studies of be due to changes in consumer preferences or demand.[10]
20th century cartels have determined that the mean duration of discovered cartels is from 5 to 8 years. However,
one private cartel operated peacefully for 134 years be- 4.3 Production costs
fore disbanding.[9] There is a danger that once a cartel is
broken, the incentives to form the cartel return and the Similar cost structures of the rms in a cartel make it eascartel may be re-formed.
ier for them to co-ordinate, as they will have similar maxWhether members of a cartel choose to cheat on the imizing behaviour as regards prices and output. Instead,
agreement depends on whether the short-term returns to if rms have dierent cost structures then each will have
cheating outweigh the long-term losses from the possible dierent maximizing behaviour, so they will have an inbreakdown of the cartel. (The equilibrium of a prisoners centive to set a dierent price or quantity. Changes in
dilemma game varies according to whether it is played cost structure (for example when a rm introduces a new
only once or repeatedly.) The relative size of these two technology) also give a cost advantage over rivals, making
[10]
factors depends in part on how dicult it is for rms to co-ordination and sustainability more dicult.
monitor whether the agreement is being adhered to by
other rms. If monitoring is dicult, a member is likely
to get away with cheating (and making higher prots) for 4.4 Behavior of demand
longer, so members are more likely to cheat and the cartel
will be more unstable.
If an industry is characterized by a varying demand (that
There are several factors that will aect the rms ability is, a demand with cyclical uctuations), it is more dicult
for the rms in the cartel to detect whether any change in
to monitor a cartel:[10]
their sales volume is due to a demand uctuation or to
cheating by another member of the cartel. Therefore, in
1. Number of rms in the industry
a market with demand uctuations, monitoring is more
2. Characteristics of the products sold by the rms
dicult and cartels are less stable.[10]

4.5

Characteristics of sales

If each rms sales consist of a small number of highvalue contracts, then it can make a relatively large shortterm gain from cheating on the agreement and thereby
winning more of these contracts. If, instead, its sales
are high-volume and low-value, then the short-term gain
is smaller. Therefore, low frequency of sales coupled
with high value in each of these sales make cartels less
sustainable.[10] When the demand of the product is uctuating, parties that are in a cartel are less interested to
remain in the cartel, because they are not able to make
regular prot.

5
5.1

Antitrust law
General view

International competition authorities forbid cartels, but

the eectiveness of cartel regulation and antitrust law in
general is disputed by economic libertarians.[11]

5.2

United States

The Sherman Antitrust Act of 1890 outlawed all contracts, combinations and conspiracies that unreasonably
restrain interstate and foreign trade. This includes cartel
violations, such as price xing, bid rigging, and customer
allocation. Sherman Act violations involving agreements
between competitors are usually punishable as federal
crimes.[12]

5.3

European Union

The EU's competition law explicitly forbids cartels and

related practices in its article 81[13] of the Treaty of
Rome. Since the Treaty of Lisbon came into eect, the
81 EC is replaced by 101 TFEU. The article reads:
1. The following shall be prohibited as
incompatible with the common market: all
agreements between undertakings, decisions
by associations of undertakings and concerted
practices which may aect trade between
Member States and which have as their
object or eect the prevention, restriction or
distortion of competition within the common
market, and in particular those that:
(a) Directly or indirectly x purchase or selling prices or any other
trading conditions
(b) Limit or control production,
markets, technical development, or
investment

(c) Share markets or sources of supply

(d) Apply dissimilar conditions to
equivalent transactions with other
trading parties, thereby placing
them at a competitive disadvantage;
(e) Make the conclusion of contracts subject to acceptance by
the other parties of supplementary
obligations that, by their nature
or according to commercial usage,
have no connection with the subject
of such contracts
2. Any agreements or decisions prohibited
pursuant to this article shall be automatically
void.
3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of:
- Any agreement or category of
agreements between undertakings
- Any decision or category of decisions by associations of undertakings
- Any concerted practice or category of concerted practices that improve the production or distribution
of goods, or promotes technical or
economic progress, while allowing
consumers a fair share of the resulting benet, and that does not:
(a) Impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives
(b) Aord such undertakings the possibility of
eliminating competition
in respect of a substantial
part of the products in
question
Article 81 explicitly forbids price xing and limitation/control of production, the two more frequent carteltypes of collusion. The EU competition law also has regulations on the amount of nes for each type of cartel and
a leniency policy by which, if a rm in a cartel, is the rst
to denounce the collusion agreement it is free of any responsibility. This mechanism has helped a lot in detecting
cartel agreements in the EU.

6 Examples
Many trade organizations, especially in industries dominated by only a few major companies such as ISPs like

7 SEE ALSO

Comcast or Medicom, have been accused of being fronts

for cartels. These companies operate in an ologolpoly
business structure and have been subjected to numerous
reviews by the FCC and the Justice Department.
De Beers is well known for its monopoloid practices
throughout the 20th century, whereby it used its dominant
position to manipulate the international diamond market.
The company used several methods to exercise this control over the market: Firstly, it convinced independent
producers to join its single channel monopoly, it ooded
the market with diamonds similar to those of producers
who refused to join the cartel, and lastly, it purchased and
stockpiled diamonds produced by other manufacturers in
order to control prices through supply.[14] As recently as
the mid-1980s, De Beers controlled almost 90% of global
rough diamond supply, but beginning in the 1990s, the
emergence of new competition reduced De Beers market
share to less than 40%. While De Beers still sets nonnegotiable prices of their own diamonds, they no longer
have the market share to x the global diamond market
as a whole.[15]

from commercial bookmakers and bet exchanges so

as to maintain higher prots for themselves.
The most recent example of a cartel was between
Unilever and Procter & Gamble who were found
guilty of price xing washing powder in eight European countries. The case that was conducted by
the European Commission after a tip o from German company, Henkel. The resulting penalty was a
315 million ne, split between Unilever (104m)
and Procter & Gamble (211m)[18]

7 See also
Competition law
Bid rigging
British Valve Association
Business oligarch

Some have argued that even the suppliers of credit can

form a cartel to raise the price of credit (the interest
rate)[16] or gain political power.[17] This has come to
pass in 2012 with the Libor scandal, where several banks
formed a cartel to manipulate the benchmark interest rate
that all banks use to loan each other money.

Collusion

Other examples:

Drug cartel

Organization of the Petroleum Exporting Countries

(OPEC): As its name suggests, OPEC is organized
by sovereign states. It cannot be held to antitrust enforcement in other jurisdictions by virtue of the doctrine of state immunity under public international
law. However, members of the group do frequently
break rank to increase production quotas.
The International Match Corporation (IMCO) of
Ivar Kreuger in the 1920s.

Competition regulator
Content cartel
De Beers

Economic regulator
Federal Reserve
Industrial organization
IATA
Labour union
Monopoly

The Phoebus cartel (1924-39) was a cartel of,

among others, Osram, Philips, and General Electric
to control the manufacture and sale of light bulbs.

Monopsony

The International Copper Cartel, ICC (1935-38).

The voting members were: Anaconda Copper,
Kennecott Utah Copper, Roan Antilope (Mufulira),
Rhokana (Rhodesia) and Katanga, while the non
voting members were Bor (Yugoslavia) and Rio
Tinto (Spain).

Organized crime

The lysine cartel, A.K.A lysine price-xing conspiracy (199295) was an organized eort to raise the
price of the animal feed additive lysine.

Standard Oil

The Asian Racing Federation. Widely viewed as

having created an international cartel due to its endorsement of the Good Neighbour Policy in 2003
in an eort to defend themselves from competition

Tacit collusion

OPEC

Phoebus cartel
Price xing
Robber baron

State cartel theory

Trust
Zaibatsu

References

[1] Sullivan, Arthur; Steven M. Sherin (2003). Economics:

Principles in action. Upper Saddle River, New Jersey
07458: Pearson Prentice Hall. p. 171. ISBN 0-13063085-3.

9 Bibliography
Bishop, Simon and Mike Walker (1999): The Economics of EC Competition Law. Sweet and Maxwell.
Connor, John M. (2008): Global Price Fixing: 2nd
Paperback Edition. Heidelberg: Springer.

[2] Khemani, R. S. and D. M. Shapiro (1993): Glossary of

Industrial Organisation Economics and Competition Law.
Compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Aairs, OECD, 1993. Downloadable oecd.org.

Dick, Andrew R. (2008). Cartels. The Concise

Encyclopedia of Economics (2nd ed.). Library of
Economics and Liberty. ISBN 978-0865976658.
OCLC 237794267.

[3] Economics A-Z. Glossary of Economic Terms done by

The Economist

Freyer, Tony A.: Antitrust and global capitalism

19302004, New York 2006.

[4] The rst publication on this topic was: Friedrich Kleinwchter, Die Kartelle. Ein Beitrag zur Frage der Organisation der Volkswirtschaft, Innsbruck 1883.

Hexner, Ervin, The International Steel Cartel,

Chapel Hill 1943.

[5] Ervin Hexner, The International Steel Cartel, Chapel Hill

1943, 8, pp. 3235.

Kleinwchter, Friedrich, Die Kartelle. Ein Beitrag

zur Frage der Organisation der Volkswirtschaft, Innsbruck 1883.

[6] Tony A. Freyer, Antitrust and global capitalism 1930

2004, New York 2006; Wyatt C. Wells, Antitrust and the
Formation of the Postwar World, New York 2002.

Levenstein, Margaret C. and Valerie Y. Suslow.

What Determines Cartel Success?" Journal of Economic Literature 64 (March 2006): 4395.

[7] Marek Martyniszyn, Export Cartels: Is it Legal to Target

Your Neighbour? Analysis in Light of Recent Case Law,
15(1) Journal of International Economic Law 181 (2012).

Liefmann, Robert: Cartels, Concerns and Trusts,

Ontario 2001 [London 1932]

[8] Organization for Economic Co-operation and Development: Recommendation of the Council Concerning Effective Action Against Hard Core Cartels, March 1998

Martyniszyn, Marek, Export Cartels: Is it Legal to

Target Your Neighbour? Analysis in Light of Recent Case Law, Journal of International Economic
Law 15(1) (2012): 181-222.

[9] The India-Pakistan-Bangladesh-Ceylon Conferences was

founded in 1875 and ended October 2008, under pressure
from the Competition Commission of India. India shipping conference agrees to cease operations. Journal of
Commerce Online (May 1, 2008).
[10] Bishop and Walker (1999).
[11] Regulation Magazine Vol. 12 No. 2
[12] Antitrust Enforcement and the Consumer U.S. Department of Justice
[13] Eur-lex.europa.eu
[14] De Beers#Diamond monopoly
[15] Diamond Investing FAQ, Mining.com, February 18,
2014.
[16] Anthony O'Hara, Phillip (1999). Anthony O'Hara,
Phillip, ed. Encyclopedia of political economy: A-K AK
(illustrated, reprint ed.). London; New York: Routledge.
p. 348. ISBN 978-0-415-18717-6.
[17] Easterly, William (JulyAugust 2012), Cartel of Good
Intentions (PDF), Foreign Policy (131): 4049
[18] BBC News, Unilever and Procter & Gamble in price xing
ne.

Stocking, George W. and Myron W. Watkins. Cartels in Action. New York: Twentieth Century Fund
(1946).
Stigler, George J., The extent and bases of
monopoly, in: The American economic review, Bd.
32 (1942), pp. 122.
Stigler, George J., The theory of price, New York
1987, 4th Ed.
Tirole, Jean (1988): The Theory of Industrial Organization. The MIT Press, Cambridge, Massachusetts.
Wells, Wyatt C.: Antitrust and the Formation of the
Postwar World, New York 2002.

10 External links
Price-Fixing Overcharges
BBC.co.uk

11

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Text

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