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Sometimes for businesses, acting together to dominate and influence a particular market is much easier, and more lucrative than working separately. The formation of a cartel usually hinges on this kind of thinking.
Formally defined, a cartel is an organization created from an agreement between a group of producers of a good or service to regulate supply in an effort to control or manipulate prices.
In other words, a cartel is a collection of otherwise independent businesses—or countries—that act together as if they were a single producer and thus are able to fix prices for the goods they produce and the services they render without competition.
Some cartels are formed to influence the price of legally traded goods and services, while others exist in illegal industries, such as drugs and ammunitions (Drug trafficking organizations, especially in South America, are often referred to as “drug cartels.”). Though having less command over an industry than a monopoly, cartels have a negative effect for consumers because their existence results in higher prices and restricted supply. The Organization of Petroleum Exporting Countries (OPEC) is the world’s largest cartel.
It is a grouping of 14 oil-producing countries whose mission is to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets.
Despite the fact that OPEC is considered by most to be a cartel, members of OPEC have maintained it is not a cartel at all but rather an international organisation with a legal, permanent and necessary mission.
In fact, OPEC’s activities are protected by United States foreign trade laws.
Identifying and breaking up cartels is an important part of the competition policy overseen by antitrust watchdogs in most countries, although proving the existence of a cartel is rarely easy, as firms are usually not so careless as to put agreements to collude on paper.
The Organization for Economic Cooperation and Development (OECD) has made the detection and prosecution of cartels one of its priority policy objectives. In so doing, it has identified four major categories that define how cartels conduct themselves: price fixing, output restrictions, market allocation and bid rigging (the submission of collusive tenders).
The desire to form cartels is strong. As the famed economist Adam Smith puts it, “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.”
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