CARTELS

Definition: A cartel is a group of formally independent producers whose goal is to increase their collective profits by means of price fixing, limiting supply, or other restrictive practices. In other words it can be said that an association in which producers of a similar or identical product try to obtain a monopoly over the sale of the product is known as a cartel. Moreover it should be noted that a single entity that holds a monopoly by this definition cannot be a cartel, though it may be guilty of abusing said monopoly in other ways. Cartels usually occur in oligopolies, where there are a small number of sellers and usually involve homogeneous products. As mentioned above cartels are formed to control, manipulate and regulate prices. This is done for the purpose of improving the profitability of the firms involoved.this can be further explained by a simple example. Now, it is evident that men do not practise their trades and professions in complete isolation from each other, but, on the contrary, show a lively desire to establish close contacts with their fellows in the same Trade. At all times this has been so. True, one cobbler regards another cobbler as an Opponent because he may take away his customers or, as we say, enter into competition with him; but, in spite of this, the most varied relationships exist between and with all other cobblers. For instance, they have a very extensive sphere of common Interests, as against the tanneries, the leather factories, the leather merchants, the producers and the merchants of all other materials they may need, the boot-and-shoe shops, the consumers and finally the Government that regulates their trade. With a view to the common defense of these interests the cobblers form associations of the most varied Character. Advantages and Disadvantages: Cartels like other economic structures have advantages and disadvantages at the same time. Some of them are as follows: Cartels advantages claimed by cartel supporters are that They protect the weaker participating firms Do away to an extent with limitations on trade resulting from high tariffs Distribute risks and profits equitably Stabilize markets Reduce costs And thus by these factors cartel prove to be a protecting body for consumers. However cartels have certain disadvantages too. They are Cartels drive the competing firms out of existence, Reduced volume of trade Raised prices to consumers Protected inefficient members from competition Increase inflation level and decrease purchasing power They are generally unstable They always have incentive to cheat

Cartels as Exploitive Structures: Cartels prove to be exploitive in many circumstances. Ad that is the reason why the existence of cartels is in opposition to classic theories of economic competition and the free market, and they are forbidden by law in many nations. Cartels exploit consumers by price fixing and try to maximize their profit instead of offering relieve to the consumer. They have nearly same explorative effects as monopoly have on an economy. A survey of hundreds of published economic studies and legal decisions of antitrust authorities found that the median price increase achieved by cartels in the last 200 years is 25%. Private international cartels (those with participants from two or more nations) had an average price increase of 28%, whereas domestic cartels averaged 18%. This depicts the effect of rising prices of cartels.i found this cartoon a good depiction of cartels adverse effects on market.

Benefit of Cartels: However cartels also benefit the economy when the other side of the picture is observed. In Germany, by the outset of World War II, nearly all industry was controlled by cartels closely supervised by the government. The U.S. government legalized export associations in 1918 and has it participated in agreements regulating production and international trade in foodstuffs, rubber, and other commodities. Because they imply the agreement and supervision of several governments, cartels in international trade are usually felt to be less harmful than those that tend to create monopolies in the home market for participants. Moreover they motivate producers to create and better there products to earn profit. However cartels are not that advantageous as they have more harmful for the consumers. On the contrary they increase the income of producers and the members of the cartel which is assumed to be a positive effect on economy. Example: Many trade organizations, especially in industries dominated by only a few major companies, have been accused of being fronts for cartels.Although cartels are usually thought of as a group of corporations, some consider labor unions to be cartels, as they seek to raise the price of labor (wages) by preventing competition.An example of a new international cartel is the one created by the members of the Asian Racing Federation and documented in the Good Neighbour Policy signed on September 1, 2003.