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A cartel is a group of independent market participants who collude with each other in order to improve their profits and dominate the market. Cartels are usually associations in the same sphere of business, and thus an alliance of rivals. Most jurisdictions consider it anti-competitive behavior and have outlawed such practices. Cartel behavior includes price fixing, bid rigging, and reductions in output. The doctrine in economics that analyzes cartels is cartel theory. Cartels are distinguished from other forms of collusion or anti-competitive organization such as corporate mergers.
The word cartel comes from the Italian word cartello , which means a "leaf of paper" or "placard". The Italian word became cartel in Middle French, which was borrowed into English. Its current use in Mexican and Colombian drug-trafficking world comes from Spanish cartel. In English, the word was originally used for a written agreement between warring nations to regulate the treatment and exchange of prisoners.
Cartels have existed since ancient times.Guilds in the European Middle Ages, associations of craftsmen or merchants of the same trade, have been regarded as cartel-like. Tightly organized sales cartels in the mining industry of the late Middle Ages, like the 1301 salt syndicate in France and Naples, or the Alaun cartel of 1470 between the Papal State and Naples. Both unions had common sales organizations for overall production called the Societas Communis Vendicionis [Common Sales Society].
Laissez-faire (liberal) economic conditions dominated Europe and North America in the 18th and 19th centuries. Around 1870, cartels first appeared in industries formerly under free-market conditions.Although cartels existed in all economically developed countries, the core area of cartel activities was in central Europe. The German Empire and Austria-Hungary were nicknamed the "lands of the cartels". Cartels were also widespread in the United States during the period of robber barons and industrial trusts.
The creation of cartels increased globally after World War I. They became the leading form of market organization, particularly in Europe and Japan. In the 1930s, authoritarian regimes such as Nazi Germany, Italy under Mussolini, and Spain under Franco used cartels to organize their corporatist economies. Between the late 19th century and around 1945, the United States was ambivalent about cartels and trusts. There were periods of both opposition to market concentration and relative tolerance of cartels. During World War II, the United States strictly turned away from cartels. After 1945, American-promoted market liberalism led to a worldwide cartel ban, where cartels continue to be obstructed in an increasing number of countries and circumstances.
Cartels have many structures and functions that ideally enable corporations to navigate and control market uncertainties and gain collusive profits within their industry. A typical cartel often requires what competition authorities refer to as a CAU (Contact, Agreement or Understanding).Typologies have emerged to distinguish distinct forms of cartels:
A survey of hundreds of published economic studies and legal decisions of antitrust authorities found that the median price increase achieved by cartels in the last 200 years is about 23 percent.Private international cartels (those with participants from two or more nations) had an average price increase of 28 percent, whereas domestic cartels averaged 18 percent. Less than 10 percent of all cartels in the sample failed to raise market prices.
In general, cartel agreements are economically unstable in that there is an incentive for members to cheat by selling at below the cartel's agreed price or selling more than the cartel's production quotas. Many cartels that attempt to set product prices are unsuccessful in the long term because of cheating punishment mechanisms such as price wars or financial punishment.Empirical studies of 20th-century cartels have determined that the mean duration of discovered cartels is from 5 to 8 years and overcharged by approximately 32%. Within the industries that have operating cartels, the median number of cartel members is 8. Once a cartel is broken, the incentives to form a new cartel return, and the cartel may be re-formed. Publicly known cartels that do not follow this business cycle include, by some accounts, OPEC.
Cartels often practice price fixing internationally. When the agreement to control prices is sanctioned by a multilateral treaty or protected by national sovereignty, no antitrust actions may be initiated.OPEC countries partially control the price of oil, and the International Air Transport Association (IATA) fixes prices for international airline tickets while the organization is excepted from antitrust law.
Drawing upon research on organizational misconduct, scholars in economics, sociology and management have studied the organization of cartels.They have paid attention to the way cartel participants work together to conceal their activities from antitrust authorities. Even more than reaching efficiency, participating firms need to ensure that their collective secret is maintained. It has also been argued that the diversity of the participants (e.g., age and size of the firms) influences their ability to coordinate to avoid being detected.
The scientific analysis of cartels is based on cartel theory. It was pioneered in 1883 by the Austrian economist Friedrich Kleinwächter and in its early stages was developed mainly by German-speaking scholars.These scholars tended to regard cartels as an acceptable part of the economy. At the same time, American lawyers increasingly turned against trade restrictions, including all cartels. The Sherman act, which impeded the formation and activities of cartels, was passed in the United States in 1890. The American viewpoint, supported by activists like Thurman Arnold and Harley M. Kilgore, eventually prevailed when governmental policy in Washington could have a larger impact in World War II.
Because cartels are likely to have an impact on market positions, they are subjected to competition law, which is executed by governmental competition regulators. Very similar regulations apply to corporate mergers. A single entity that holds a monopoly is not considered a cartel but can be sanctioned through other abuses of its monopoly.
Prior to World War II, members of cartels could sign contracts that were enforceable in courts of law except in the United States. Before 1945, cartels were tolerated in Europe and specifically promoted as a business practice in German-speaking countries.In U.S. v. National Lead Co. et al., the Supreme Court of the United States noted the testimony of individuals who cited that a cartel, in its versatile form, is
a combination of producers for the purpose of regulating production and, frequently, prices, and an association by agreement of companies or sections of companies having common interests so as to prevent extreme or unfair competition.
The first legislation against cartels to be enforced was the Sherman Act 1890, which also prohibits price fixing, market-sharing, output restrictions and other anti-competitive conduct.Section 1 and 2 of the Act outlines the law in regards to cartels,
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.
Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100 million if a corporation, or, if any other person, $1 million, or by imprisonment not exceeding ten years, or by both said punishments, in the discretion of the court.
In practice, detecting and desisting cartels is undertaken through the use of economic analysis and leniency programmes. Economic analysis is implemented to identify any discrepancies in market behaviour between both suspected and unsuspected cartel engaged firms. A structural approach is done in the form of screening already suspicious firms for industry traits of a typical cartel price path. A typical path often includes a formation phase in which prices decline, followed by a transition phase in which prices tend to rise, and end with a stationary phase in which price variance remains low.Indicators such as price changes alongside import rates, market concentration, time period of permanent price changes and stability of companies' market shares are used as economic markers to help supplement the search for cartel behaviour. On the contrary, when aiming to create suspicion around potential cartels, a behavioural approach is often used to identify behavioural collusive patterns, to initiate further economic analysis into identifying and prosecuting those involved in the operations. For example, studies have shown that industries are more likely to experience collusion where there are fewer firms, products are homogeneous and there is a stable demand.
Leniency programmes were first introduced in 1978 in the US, before being successfully reformed in 1993.The underlying principle of a leniency program is to offer discretionary penalty reductions for corporations or individuals who are affiliated with cartel operations, in exchange for their cooperation with enforcement authorities in helping to identify and penalise other participating members. According to the Australian Department of Justice, the following 6 conditions must be met for admission into a leniency program:
The application of leniency programme penalties varies according to individual countries policies and are proportional to cartel profits and years of infringement. However, typically the first corporation or individual to cooperate will receive the most reduced penalty in comparison to those who come forward later.The effectiveness of leniency programmes in destabilising and deterring cartels is evidenced by the decreased formation and discovery of cartels in the US since the introduction of the programmes in 1993. Some persecuted examples include:
Today, price fixing by private entities is illegal under the antitrust laws of more than 140 countries. The commodities of prosecuted international cartels include lysine, citric acid, graphite electrodes, and bulk vitamins.In many countries, the predominant belief is that cartels are contrary to free and fair competition, considered the backbone of political democracy. Maintaining cartels continues to become harder for cartels. Even if international cartels cannot be regulated as a whole by individual nations, their individual activities in domestic markets are affected.
Unlike other cartels, export cartels are legal in virtually all jurisdictions, despite their harmful effects on affected markets.
An oligopoly is a market form wherein a market or industry is dominated by a small group of large sellers (oligopolists). For example, it has been found out that insulin and the electrical industry are highly oligopolist in the US.
In the United States, antitrust law is a collection of federal and state government laws that regulate the conduct and organization of business corporations and are generally intended to promote competition and prevent monopolies. The main statutes are the Sherman Act of 1890, the Clayton Act of 1914 and the Federal Trade Commission Act of 1914. These Acts serve three major functions. First, Section 1 of the Sherman Act prohibits price fixing and the operation of cartels, and prohibits other collusive practices that unreasonably restrain trade. Second, Section 7 of the Clayton Act restricts the mergers and acquisitions of organizations that may substantially lessen competition or tend to create a monopoly. Third, Section 2 of the Sherman Act prohibits monopolization.
Price fixing is an anticompetitive agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand.
Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always considered illegal. It can be used to attain objectives forbidden by law; for example, by defrauding or gaining an unfair market advantage. It is an agreement among firms or individuals to divide a market, set prices, limit production or limit opportunities. It can involve "unions, wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties". In legal terms, all acts effected by collusion are considered void.
Anti-competitive practices are business or government practices that prevent or reduce competition in a market. The debate about the morality of certain business practices termed as being anti-competitive has continued both in the study of the history of economics and in the popular culture. Anti-trust laws differ among state and federal laws to ensure businesses do not engage in competitive practices that harm other, usually smaller, businesses or consumers. These laws are formed to promote healthy competition within a free market by limiting the abuse of monopoly power. Competition allows companies to compete in order for products and services to improve; promote innovation; and provide more choices for consumers. Some business practices may be pro-competitive, economic methodological tests and empirical legal cases are used to test whether business activity constitutes as anti-competitive behavior.
Competition law is a law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as anti-monopoly law in China and Russia. In previous years it has been known as trade practices law in the United Kingdom and Australia. In the European Union, it is referred to as both antitrust and competition law.
Decartelization is the transition of a national economy from monopoly control by groups of large businesses, known as cartels, to a free market economy. This change rarely arises naturally, and is generally the result of regulation by a governing body with monopoly of power to decide what structures it likes.
In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service to increase economic profit. In other words, market power occurs if a firm does not face a perfectly elastic demand curve and can set its price (P) above marginal cost (MC) without losing sales. This indicates that the magnitude of market power is associated with the gap between P and MC at a firm's profit maximising level of output. Such propensities contradict perfectly competitive markets, where market participants have no market power, P = MC and firms earn zero economic profit. Market participants in perfectly competitive markets are consequently referred to as 'price takers', whereas market participants that exhibit market power are referred to as 'price makers' or 'price setters'.
Ultra-imperialism, or occasionally hyperimperialism and formerly super-imperialism, is a potential, comparatively peaceful phase of capitalism, meaning after or beyond imperialism. It was described mainly by Karl Kautsky. Post-imperialism is sometimes used as a synonym of ultra-imperialism, although it can have distinct meanings.
The lysine price-fixing conspiracy was an organized effort during the mid-1990s to raise the price of the animal feed additive lysine. It involved five companies that had commercialized high-tech fermentation technologies, including American company Archer Daniels Midland (ADM), Japanese companies Ajinomoto and Kyowa Hakko Kogyo, and Korean companies Sewon America Inc. and Cheil Jedang Ltd. A criminal investigation resulted in fines and three-year prison sentences for three executives of ADM who colluded with the other companies to fix prices. The foreign companies settled with the United States Department of Justice Antitrust Division in September through December 1996. Each firm and four executives from the Asian firms pleaded guilty as part of a plea bargain to aid in further investigation against ADM. The cartel had been able to raise lysine prices 70% within their first nine months of cooperation.
The history of competition law refers to attempts by governments to regulate competitive markets for goods and services, leading up to the modern competition or antitrust laws around the world today. The earliest records traces back to the efforts of Roman legislators to control price fluctuations and unfair trade practices. Throughout the Middle Ages in Europe, kings and queens repeatedly cracked down on monopolies, including those created through state legislation. The English common law doctrine of restraint of trade became the precursor to modern competition law. This grew out of the codifications of United States antitrust statutes, which in turn had considerable influence on the development of European Community competition laws after the Second World War. Increasingly, the focus has moved to international competition enforcement in a globalised economy.
George Ward Stocking Sr. was an American economist, who was one of the pioneers of industrial organization and an early writer on international cartels.
The No Oil Producing and Exporting Cartels Act (NOPEC) was a U.S. Congressional bill, never enacted, known as H.R. 2264 and then as part of H.R. 6074. NOPEC was designed to remove the state immunity shield and to allow the international oil cartel, OPEC, and its national oil companies to be sued under U.S. antitrust law for anti-competitive attempts to limit the world's supply of petroleum and the consequent impact on oil prices. Despite popular sentiment against OPEC, legislative proposals to limit the organization's sovereign immunity have so far been unsuccessful. "Varied forms of a NOPEC bill have been introduced some 16 times since 2000, only to be vehemently resisted by the oil industry and its allied oil interests like the American Petroleum Institute and their legion of “K” Street Lobbyists."
Holm Arno Leonhardt -- sometimes abbreviated to Holm A. Leonhardt, born October 12, 1952—is a German scientist in the fields of International Relations and economic history, especially in the realm of cartel history and theory. He was born in Manila (Philippines) the son of Brigitte and Arno Leonhardt. Arno became a German expatriate since 1930, moving up the career ladder from accountant to vice director in the branch office of an American paper machine company in Manila. Brigitte came from a liberal merchant family in Saxony (Germany) holding critical distance to the Nazi regime.
Cartels in the international law of the 17th to the 19th century were a special kind of international treaty. Their purpose was to regulate specific activities of common interest, while the contracting states remained rivals on other fields. Typical for these agreements was that they were to be implemented on an administrative level. Similar to the ‘’cartels’’ for duels and tournaments, these intergovernmental accords represented fairness agreements or gentlemen’s agreements between states.
Cartel theory is usually understood as the doctrine of economic cartels. However, since the concept of 'cartel' does not have to be limited to the field of the economy, doctrines on non-economic cartels are conceivable in principle. Such exist already in the form of the state cartel theory and the cartel party theory. For the pre-modern cartels, which existed as rules for tournaments, duels and court games or in the form of inter-state fairness agreements, there was no scientific theory. Such has developed since the 1880s for the scope of the economy, driven by the need to understand and classify the mass emergence of entrepreneurial cartels. Within the economic cartel theory, one can distinguish a classical and a modern phase. The break between the two was set through the enforcement of a general cartel ban after Second World War by the US government.
Cartel is an ambiguous concept, which usually refers to a combination or agreement between rivals, but – derived from this – also designates organized crime. The main use of ‘cartel’ is that of an anticompetitive association in the economy. In politics, it refers to a temporary alliance of several parties in election campaigns, for example. The scientific analysis of cartels is done by cartel theory.
A compulsory cartel or forced cartel is a cartel that is established or maintained by an administrative order or by a legal directive. The interference of policies on these associations of entrepreneurs of the same trade varied. It ranged from a mere decision to establish a cartel or to maintain an existing one, to a strict state control.
Cartel seats as monuments were the headquarters or other premises of historical, no longer existing cartels in the sense of a group of cooperating, but rivaling enterprises. Often, these associations had been syndicate cartels being an advanced form of entrepreneurial combination because of their tight organization with a common sales agency. The cartel buildings had been used for secretariats, meeting rooms, sales offices, advertising agencies, research departments and further more. Many such historical buildings can still be found in Europe and the United States.
Margaret Levenstein is an American economist who is Director of the Inter-university Consortium for Political and Social Research (ICPSR) and Research Professor at the Institute for Social Research and the School of Information at the University of Michigan. She is a past president of the Business History Conference. Her research focuses on historical firm organization and competition and the evolution of information systems within firms.