Cartel Agreement Example


A cartel is a group of producers who work together to protect their interests. Cartels arise when a few large producers decide to cooperate on aspects of their market. Once formed, cartels can consolidate prices for members, avoiding price competition. In this case, the cartels are also called price rings. They may also limit the production put on the market, for example. B with OPEC and oil production quotas, and establish rules for other aspects of members` behavior. The establishment of rules is particularly important in oligopolistic markets, as expected in game theory. One of the main attractions of agreements for producers is that they set rules that members follow, which will reduce the risks that would exist without the agreement. The Organization of the Petroleum Exporting Countries (OPEC) is the largest cartel in the world. It is a group of 14 oil-producing countries who have the task of coordinating and standardizing the oil policy of their member states and ensuring the stabilization of oil markets. OPEC`s activities are legal because U.S. trade laws protect them.

One of the cartel members, ABB, headquartered in Switzerland, had escaped a fine for being a “whistleblower” and providing the Commission with decisive evidence. The scientific analysis of cartels is based on cartel theory. It was developed in 1883 by the Austrian economist Friedrich Kleinw├Ąchter and developed in its early stages mainly by German-speaking scholars. [21] These scholars tended to view cartels as an acceptable part of the economy. At the same time, U.S. lawyers have increasingly opposed trade restrictions, including all deals. The Sherman Act, which hindered the education and activities of cartels, was passed in the United States in 1890. The American view, supported by activists like Thurman Arnold and Harley M. Kilgore, finally came to the fore when Washington`s government policy could have a greater influence on World War II.

Federal cartel laws, particularly the Sherman Act, make cartels and collusive activities illegal in the United States. One of the most well-known cartels in the world is the Organization of the Petroleum Exporting Countries (OPEC). Cartels are most effective when demand for the proceeds of the cartel is not very price sensitive. That is why agreements are more effective in the short term; In the long run, prices often become elastic, as consumers find cheaper substitutes for the product. In addition, demand volatility generally leads to differences of opinion within agreements on production and capacity limits. In addition, equity fund members are often in strong incentives to defraud their agreements, which can lead to new litigation and difficulties in maintaining unity of agreements. Cartels do not last long, even in areas where barriers to entry are low. In such sectors, the threat posed by potential competitors generally reduces the profits that can be achieved through collusive behaviour.

While new producers may join an agreement, this often makes it more difficult to communicate, negotiate and enforce when membership increases. Perhaps the best-known and most effective cartel in the world is OPEC, the Organization of the Petroleum Exporting Countries. In 1973, OPEC members reduced their oil production. As it was known that Middle Eastern crude oil had few substitutes, OPEC members` profits rose. From 1973 to 1979, the price of oil rose by $70 a barrel, an unprecedented figure at the time. However, in the mid-1980s, OPEC began to weaken. The discovery of new oil fields in Alaska and Canada has given rise to new alternatives to Middle Eastern oil, leading to lower OPEC prices and profits. Around the same time, OPEC members also began cheating to try to increase individual profits.

The formation of cartels increased worldwide after the First World War. They have become the first form of market organization, particularly in Europe and Japan. In the 1930s, authoritarian regimes like Nazi Germany, Italy under Mussolini, and Spain under Franco used cartels to organize their corporate economies.

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