A Cartel Is a Collusive Agreement among

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Drug trafficking organizations, especially in South America, are often referred to as „drug cartels.” These organizations meet the technical definition of agreements. These are loosely related groups that set rules between themselves to control the price and supply of a good, namely illegal drugs. A cartel is a formal collusive agreement between companies with the aim of increasing their profits. Cartels are illegal in the United States because cartel is a form of collusion. The success of the deal depends on two things: (1) how the companies work together and (2) the potential for monopoly power (inelastic demand). In the midst of controversy in the mid-2000s, concerns about retaliation and potential negative repercussions on U.S. companies led to the U.S. Congress` attempt to punish OPEC as a blocked illegal cartel. Despite the fact that OPEC is considered a cartel by most, OPEC members have claimed that it is not a cartel at all, but an international organization with a legal, permanent and necessary mission. Watch this video to get an explanation of the collusion and learn more about why cartels often collapse. If the companies were able to agree, they could divide the market into stocks and collectively produce the monopoly amount by restricting production. This would lead to the monopoly price and the companies would make monopoly profits. However, in such circumstances, there is always an incentive to „cheat” the deal by producing and selling more production.

If other companies in industry limited production, one company could increase its profits by increasing production, to the detriment of the other companies in the collusive agreement. We will discuss this possibility in the next section. Once established, cartels are difficult to maintain. The problem is that cartel members will be tempted to cheat on their production limitation agreement. By producing more production than it promised, a cartel member can increase its share of the cartel`s profits. Therefore, there is a built-in incentive for each cartel member to cheat. Of course, if all members cheated, the agreement would stop making monopoly profits and companies would no longer be encouraged to stay in the agreement. The problem of fraud has plagued both the OPEC cartel and other cartels, which may explain why there are so few cartels. The Organization of the Petroleum Exporting Countries (OPEC) is the largest cartel in the world.

It is a group of 14 oil-producing countries whose task is to coordinate and unify the oil policies of their member countries and to ensure the stabilization of oil markets. OPEC`s activities are legal because U.S. trade laws protect them. For example, game theory may explain why oligopolies struggle to maintain collusive agreements to make monopolistic profits. While companies collectively would do better to cooperate, each sole proprietorship has a strong incentive to cheat and underlist its competitors to increase its market share. Because the incentive to defect is strong, companies can`t even make a collusive deal if they don`t think there`s a way to effectively punish defectors. A cartel is a group of companies that have made an explicit agreement to reduce production in order to increase the price. Cartel = An explicit agreement between members to reduce production in order to increase the price. How did this soap opera end? Following an investigation, French antitrust authorities fined Colgate-Palmolive, Henkel and Proctor & Gamble a total of 361 million euros ($484 million). A similar fate befell the ice cream makers. Ice packs are a commodity, a perfect replacement, usually sold in 7 or 22 pound bags. No one cares about the label on the bag.

By agreeing to divide the ice cream market, control large geographical areas and set prices, ice cream manufacturers have moved from perfect competition to a monopoly model. According to the agreements, each company was the sole supplier of bag ice cream for a region; there have been long-term and short-term profits. According to the court, „these companies illegally conspired to manipulate the market.” The fines totaled about $600,000 – a hefty fine given that an ice pack is sold for less than $3 in most parts of the United States. Cartels have an adverse effect on the consumer, since their activity aims to increase the price of a product or service above the market price. However, their behavior also has a detrimental effect in other respects. Cartels deter new entrants and act as a barrier to entry. The lack of competition due to price fixing leads to a lack of innovation. A collusive agreement or cartel leads to a circular flow of incentives and behaviors. When companies in the same sector act independently, they are each encouraged to collude or collaborate to make higher profits.

If firms can jointly determine monopoly production, they can share the profit level of the monopoly. When companies act together, there is a strong incentive to cheat on the deal in order to get higher individual profits at the expense of other members. The business world is competitive and, therefore, oligopolistic companies will strive to maintain collusive agreements as much as possible. These types of strategic decisions can be understood significantly with game theory, the subject of the next two chapters. Oligopolistic companies join a cartel to increase their market power, and members work together to jointly determine each member`s level of production and/or the price each member will charge. By cooperating, cartel members can behave like a monopolist. For example, if every company in an oligopoly sells an undifferentiated product like oil, the demand curve that each company faces is horizontal relative to the market price. However, if oil-producing companies form a cartel like OPEC to determine their production and price, they will face together a downward market demand curve, just like a monopolist. In fact, the cartel`s decision to maximize profits is the same as that of a monopolist, as shown in the figure. The cartel members choose their combined production at the level at which their combined marginal incomes correspond to their combined marginal costs.

The cartel price is determined by the market demand curve at the level of production chosen by the cartel. The benefits of the cartel correspond to the surface of the rectangular box, which is labeled abcd in the figure. Note that a cartel, like a monopolist, chooses to produce less production and charge a higher price than would be the case in a completely competitive market. The outcome of this situation is uncertain. If the two prisoners are able to reach an agreement and „collusion” or act cooperatively, they both choose NOT to confess, and they each receive three years in prison, in the lower right result of the figure (PageIndex{1}). This is the cooperation agreement: (((text{NOT, NOT}) = (3,3)). However, once prisoners are in this outcome, they are tempted to „cheat” the agreement by opting for a CONFESSION and reducing their own sentence to a single year at the expense of their partner. How should a prisoner proceed? One option is to look at all possible outcomes, depending on what the other prisoner chooses.

Cartels have a negative impact on consumers, as their existence leads to higher prices and low prices. The Organisation for Economic Co-operation and Development (OECD) has made the detection and prosecution of cartels one of its priority policy objectives. In doing so, it identified four main categories that define the behaviour of cartels: price agreements, production restrictions, market sharing and bid-rigging (collusive bidding). .

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