71
See also: Effects of limited competition 90–91 ■ Monopolies 92–97 ■ The competitive market 126–29 ■ Markets and social
outcomes 210–13 ■ Game theory 234–41
may be more beneficial to their
profit levels: cooperation. If they
choose this route and can agree
not to undercut one another, they
can act collectively like a monopoly
and dictate the terms of the market
to their own benefit.
Forming cartels
This sort of cooperation between
firms is known by economists
as “collusion.” The price fixing
that results makes markets less
efficient. Scottish economist Adam
Smith (p.61) recognized the
importance of self-interest in free
markets but was suspicious enough
of the motives of suppliers to warn:
“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.”
Collaborations between
producers have existed for as
long as there have been markets,
and businesses in many areas
of commerce have formed
associations to their mutual benefit.
In the US in the 19th century
these restrictive or monopolistic
practices were known as “trusts,”
but the word “cartel” is now used
to describe such collaborations,
which operate on a national or
international level. The word has
gained a negative connotationTHE AGE OF REASON
Meetings of merchants
end in conspiracies
to raise prices.Where a market has only
a few suppliers...... they may decide to
collude, forming a cartel.despite being a notable feature of
the German and US economies
in the 1920s and 1930s.
In the 20th century the US and
the European Union (EU) used
legislation to discourage collusion.
However, cartels among producers
remain a feature of market
economies. Collaborations might be
a simple agreement between two
firms, such as when Unilever and
Procter & Gamble colluded to fix
the price of laundry detergent in
Europe in 2011, or they can take
the form of an international trade
association, such as the
International Air Transport
Association (IATA). The IATA’s
original function was to set prices
for fares, which led to accusations
of collusion, but it still exists as a
representative organization for the
airline industry. Cartels can even
be formed through cooperation
between governments of countries
producing a particular commodity,
as happened in the case of
the Organization of Petroleum
Exporting Countries (OPEC), ❯❯British Airways was fined $546
million for collusion in 2011, after
Virgin Atlantic admitted that the
two companies had met six times
to discuss proposed price rises.Cartel members can
set prices high and
production low, and enjoy
increased profits.The market is
transformed into a
virtual monopoly and
competition disappears.