What is a cartel (in economics)?

Cartel is an arrangement/organisation among producers or business firms to exert control over market by influencing price of the product or setting production targets. The main purpose of cartels is to maximize profit, or to avoid losses among the member firms.

Usually, a cartel will be working in a specific industry for example, cement cartels. A well known cartel in the international market is the OPEC (Organization of Petroleum Exporting Countries) that tries to control international price of crude by setting production targets. Unlike in the case of cartels formed by business firms, OPEC is comprised of countries. An undesirable feature about cartels is that they restrain competition among the producers in an industry.

How cartel works?

Cartels are usually found in a market form called oligopoly. Under oligopoly, there is only limited number of firms (say seven or eight). Since there are only few firms (oligopoly is also called ‘among the few’) one firm’s action has tremendous implication on sales and profit conditions of other firms.

Suppose one firm makes a price cutting or additional advertising or other sales activities, it will influence the sales turnover of other firms. This means there is high degree of interdependence among the oligopoly firms.  

Cut throat competition by oligopoly firms in the form of price cutting, sales activities and advertising will be disastrous for the firms themselves. Too much price cutting to win customers, advertising to outsmart rivals etc ultimately leads to the losses of several firms and perhaps their exit from the industry. Hence to avoid such ‘wastes’ related to excess competition, oligopolists engage in different types of collusion or understanding between them.

Cartel is one such collusive engagement. It is an informal association among the firms. Under cartel, the firms agree sometimes about the total output to be produced by each firm, the price charged by the firms or sharing of markets. In this way they avoid competition, reduce costs and perhaps get more profits.

An undesirable outcome of cartel formation is that they eliminate competition and thus is not good for consumers. They tacitly charges high price. It is often accused that cement industry in India behave like a cartel. Different measures by the government and other bodies are not able to break cement cartels in the country.

Recently the Competition Appellate Tribunal (COMPAT) has made a verdict on cement cartelization. Cartels are illegal entities. Competition Commission in India has the responsibility to check cartelization activities.