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What Is Meant by a Cartel?

Relevant Topics

This question pertains to Microeconomics, focusing on Market Structures, Anti-Competitive Behaviour, and Oligopoly.

Definitions:

Cartel: A cartel is a formal or informal agreement between firms in an industry to restrict competition by fixing prices, limiting output, dividing markets, or colluding on business practices to maximise collective profits.

Detailed Explanation:

Cartels typically emerge in oligopolistic markets, where a small number of firms dominate and have an incentive to coordinate actions rather than compete.

Key Characteristics of Cartels:

Price Fixing:Firms agree to set high prices rather than competing, reducing consumer choice.

Output Restrictions: Limiting production keeps prices artificially high.

Market Sharing: Firms divide regions or customers to avoid direct competition.

Bid Rigging: Firms collude to manipulate the outcome of public tenders and contracts.

Why Cartels Form:

To increase profits by reducing competition.

To reduce uncertainty in the market.

To prevent price wars that lower industry revenue.

Why Cartels Are Harmful:

Higher Prices for Consumers: Reduced competition leads to higher prices than in a competitive market.

Lower Market Efficiency: Firms have no incentive to innovate or improve efficiency.

Consumer Welfare Loss: Reduced output and higher prices lead to deadweight loss in the economy.

Legal and Regulatory Issues:

Most cartels are illegal under competition law, as they restrict free market competition.
Regulatory bodies like the Competition and Markets Authority (CMA) in the UK and the European Commission impose heavy fines on firms found guilty of collusion.

Recent: 

OPEC (Oil Cartel): The Organisation of the Petroleum Exporting Countries (OPEC) sets oil production targets to influence global prices.

EU Truck Cartel (2016): Major truck manufacturers were fined €2.9 billion for price-fixing over 14 years.

Summary:

A cartel is an anti-competitive agreement between firms to fix prices, limit output, or divide markets, often leading to higher prices, inefficiency, and reduced consumer welfare. Although cartels increase profits for firms, hey are illegal in most economies due to their negative effects on market competition and economic efficietncy.

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