Science Fair Project Encyclopedia
A cartel is a group of producers whose goal it is to fix prices, to limit supply and to limit competition. Cartels are prohibited by antitrust laws in most countries; however, they continue to exist nationally and internationally, formally and informally.
In general, cartels are economically unstable in that there is a great incentive for members to cheat and to sell more than the quotas set by the cartel (see also game theory). This has caused many cartels that attempt to set product prices to be unsuccessful in the long term . However, once a cartel is broken, the incentives to form the cartel return and the cartel may be re-formed. Publicly-known cartels that do not follow this cycle include the De Beers diamond cartel, and by some accounts, the Organisation of Petroleum Exporting Countries (OPEC).
Price fixing is often practiced internationally. When the agreement to control price is sanctioned by a multilateral treaty or protected by national sovereignty, no antitrust actions may be initiated. Examples of such price fixing include oil whose price is controlled by OPEC. Also international airline tickets have prices fixed by agreement with the IATA, a practice for which there is a specific exception in antitrust law.
International price fixing by private entities can be prosecuted under the antitrust laws of most countries. Examples of prosecuted international cartels are lysine, citric acid, graphite electrodes, and bulk vitamins. (source: http://agecon.lib.umn.edu/cgi-bin/pdf_view.pl?paperid=5488&ftype=.pdf)
De Beers has long controlled diamond production and prices from its stronghold in South Africa, often by violence. Recently they have been implicated in sectarian violence in several African countries, including Sierra Leone and Cote d'Ivoire. As its name implies, OPEC is organised 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. De Beers has faced strong criticism recently, see articles on blood diamonds, and may be expected to face competition from artificial diamonds in the next few years.
Many trade organizations , especially in industries dominated by only a few major companies, have been accused of being fronts for cartels:
- People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
- Adam Smith, The Wealth of Nations, 1776
Exactly the same applies to trade unions, which usually act like cartels with similar benefits and drawbacks.
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