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which was founded in 1960 to
coordinate oil prices among
member countries.
Challenges for cartels
However, there are problems in
setting up and sustaining a cartel,
which focus around prices and trust
between members. Participants in
a cartel cannot simply fix prices.
They also have to agree on output
quotas to maintain those prices and,
of course, the share of the profits.
The fewer the members of a cartel,
the easier these negotiations are.
Cartels are more robust when
there are a small number of firms
accounting for most of the supply.
The second problem is ensuring
that members of a cartel abide by
the rules. Producers are attracted to
collusion by the prospect of higher
prices, but this self-interest is also
the weakness of the arrangement.
Individual members of a cartel
may be tempted to “cheat” by
overproducing and undercutting
their collaborators. In effect, this is
a version of the prisoner’s dilemma
(p.238), in which two prisoners can
each choose either to remain silent
or confess. If both remain silent or
both confess, they will receive light
sentences; but if only one confesses,
he will receive immunity while his
partner in crime will get a heavy
sentence. The best strategy for
each of them is to remain silent (this
incurs the shortest jail term), but the
temptation is to opt for immunity
and confess in the hope that the
other does not. The strategies that
apply here are equally applicable to
cartels, where the rewards for all the
players are greater if they collaborate
than if they compete but are
greatest for any one player who
breaks the agreement, while the
others suffer as a consequence.
In practice, this is what tends to
happen within a cartel, particularly
when the quotas are unequally
divided. The 12 members of OPEC,
for example, meet regularly to agree
on output and prices, but these are
seldom adhered to. The smaller, lessCARTELS AND COLLUSION
wealthy members see the chance
of gaining some extra profit
and exceed their output quota,
introducing an element of
competitiveness and weakening
the power of the cartel as a whole.
It only takes one cheat to undermine
the operation of a cartel, and the
more members in the cartel, the
greater the danger of the rules
being broken.Enforcing agreements
Very often, one of a cartel’s
members—the most powerful in
terms of production—emerges as
an “enforcer.” When the efficacy of
OPEC becomes threatened, for
instance, by a country such as
Angola overproducing to increase
its profits, Saudi Arabia, the largest
member of the cartel, can take
action to stop this. As the largest
producer with the lowest production
costs it can afford to increase
production and lower prices to a
level that will punish or may even
bankrupt the smaller countries,
while only lowering its own profits
in the short term. However, in many
cases, the temptation to cheat and
the reluctance of the enforcer to
reduce its profits eventually lead
to the break-up of cartels.Cartels can arrange price-fixing
by operating as a virtual monopoly. If
no one can offer the consumer a lower
price, the one price offered can be much
higher than production costs, generating
high profits for the cartel.We must not tolerate
oppressive government
or industrial oligarchy
in the form of monopolies
and cartels.
Henry A Wallace
US politician (1888–1965)