A Cartel Usually Has a Collusive Agreement to

In non-collusive agreements, companies would try to improve their production or product in order to gain a competitive advantage. In a cartel, these companies have no incentive to do so. Cartels have an adverse effect on the consumer, since their activity aims to increase the price of a product or service above the market price. However, their behavior also has a detrimental effect in other respects. Cartels deter new entrants and act as a barrier to entry. The lack of competition due to price fixing leads to a lack of innovation. Drug trafficking organizations, especially in South America, are often referred to as “drug cartels.” These organizations meet the technical definition of agreements. These are loosely related groups that set rules between themselves to control the price and supply of a good, namely illegal drugs. Assessing the role of competition and collusion in the formation of cartels Game theory suggests that cartels are inherently unstable because the behavior of cartel members is a prisoner`s dilemma. Each member of the cartel would be able to make a higher profit, at least in the short term, if it broke the agreement (produced a larger quantity or sold it at a lower price) than if it joined it. However, if the cartel collapses because of the defectors, the companies would return to competition, profits would fall and everything would be worse. If the oligopolists individually pursued their own interest, they would produce a total quantity greater than the monopoly quantity and demand a price lower than the monopoly price, thus making a lower profit.

The promise of greater profits encourages oligopolists to cooperate. However, the collusive oligopoly is inherently unstable, as the most efficient companies will be tempted to break ranks by lowering prices to increase their market share. Companies in an oligopoly can increase their profits through collusion, but collusive deals are inherently unstable. The Organization of the Petroleum Exporting Countries (OPEC) is the largest cartel in the world. It is a group of 14 oil-producing countries whose task is to coordinate and unify the oil policies of their member countries and to ensure the stabilization of oil markets. OPEC`s activities are legal because U.S. trade laws protect them. A cartel is an agreement between competing companies in order to make higher profits. Cartels usually occur in an oligopolistic industry where the number of sellers is small and the products traded are homogeneous.

The cartel members can agree on these issues: price agreements, total industry production, market share, customer division, territories division, tender agreements, creation of joint sales agencies and distribution of profits. A cartel dominates an economic sector less than a monopoly – a situation in which a single group or firm owns all or substantially the entire market for a particular product or service. Some cartels are trained to influence the price of legally traded goods and services, while others exist in illegal industries such as drug trafficking. In the United States, virtually all cartels, regardless of industry, are illegal due to U.S. antitrust laws. Whether cartel members choose to cheat the agreement depends on whether the short-term proceeds of the fraud outweigh the long-term losses resulting from the eventual collapse of the cartel. It also depends in part on how difficult it is for companies to verify whether the agreement is being respected by other companies. If monitoring is difficult, a member is likely to get away with fraud for longer; Members would then be more likely to cheat, and the cartel would be more unstable.

In the midst of controversy in the mid-2000s, concerns about retaliation and potential negative repercussions on U.S. companies led to the U.S. Congress` attempt to punish OPEC as a blocked illegal cartel. Despite the fact that OPEC is considered a cartel by most, OPEC members have claimed that it is not a cartel at all, but an international organization with a legal, permanent and necessary mission. Cartels have a negative impact on consumers, as their existence leads to higher prices and low prices. The Organisation for Economic Co-operation and Development (OECD) has made the detection and prosecution of cartels one of its priority policy objectives. .