Definition: The term ‘cartel’ refers to an arrangement wherein two or more large producer firms comes together, to regulate the supply of the goods and services with the aim of manipulating the prices. And to do so, the producers agree to cooperate with one another, with which they can limit competition and dominate the entire market. It is also termed as price rings.
It is the association of independent participants operating in the same industry, who act in unity, just like a single producer, in order to set a fixed price for the commodity they produce, or services they provide, without competition.
In a cartel, the member firms focus on production as per the limit of output set or decided by the cartel, considering the factors such as market conditions and to govern the distribution of offerings so as to maintain the return or price of the commodity by restrictive trade practices.
In this arrangement, the individual identity and financial independence of the member firms are kept intact, while they are engaged in the agreement.
In other words, cartel implies the alliance of competitors in the same sphere of business.
It involves setting limits of output or capacity, controlling the price, restriction on non-price competition and allocating the market between cartel members either geographically or according to the type of product or agreed terms, so as to limit the entry and create a monopoly.
The purpose is to apply some form of restrictive influence on the manufacturing, supply or sale of the product. The producers are competitors operating in the same industry, who are willing to minimize the competition by regulating the prices while working in union.
Types of Cartel Agreements
- Horizontal Cartel Agreement: When the cartel agreement is made among the competitor firms, it is called a horizontal cartel agreement. The competitors are at the same level of the production chain and operating in the same line of business. Horizontal agreements are said to be anti-competitive if it involves:
- Agreement regarding price
- Agreement regarding quantity
- Agreement regarding bids
- Agreement regarding market share
- Vertical Cartel Agreement: When there is an agreement concerning the actual or potential trading relationship between the sellers, it is called vertical cartel agreement. In this type of agreement, the firms are at different levels of production or supply chain in a different market, i.e. the agreement would be between producer and distributor. It may include
- Tie-in arrangements
- Exclusive supply agreement
- Exclusive distribution agreement
- Refusal to deal
- Resale price maintenance
When it comes to treatment in the court of law, vertical cartel agreements are treated more leniently as compared to the horizontal one because the later reduces competition to a great extent.
Negative Effects of Cartel
In many countries, the formation of a cartel is regarded as unlawful, as it against consumer interest. The negative impact of the cartel on consumers are discussed as under:
- Higher prices: When a cartel is formed, the members raise the prices in unity, which results in the reduction of elasticity of demand for a single producer.
- Lack of transparency: It results in a lack of transparency, as the members do not disclose the prices unless agreed.
- Anti-competitive practice: It disturbs the working of the competitive market and so it promotes anti-competitive practices.
- Restricted supply: Cartel members tend to restrict the supply of the output at times.
- Carving up of market: In carving up of market the members agree to divide the market into different regions and territories and they do not compete in each other’s area.
- Supernormal Profit: If it is successful, then it becomes easy for the firms to make profits, which tends to inhibit innovation.
Typically, cartels encompass a formal or informal agreement between the firms to not compete with one another. It can take place in any industry and at any level, i.e. manufacturing, distribution or retail, irrespective of the commodity or service offered. Such restraints are termed as trade combinations, anti-trust, anti-competitive practices.
These trade practices are often challenged in the court of law on the grounds of using unlawful conspiracies, as they prevent fair competition in the market.