What is a cartel in business?
A cartel is when some companies that sell the same thing agree to work together to make more money. They do this by deciding to charge higher prices or make less of the thing they sell.
The companies in a cartel are usually in the same industry. An industry is a group of companies that make or sell similar things. For example, the oil industry has companies that find oil, get it out of the ground, and sell it. The car industry makes and sells cars and trucks.
How cartels work
The companies in a cartel make a deal with each other. The deal can be written down or just talked about. In the deal, they agree on things like:
- The lowest price they will charge for what they sell
- The most amount of stuff each company can make
- Which company will sell in which area
By agreeing to charge high prices, the companies in the cartel can make a lot more money. If they agree to make less stuff, there will be less of it to buy. When there’s less of something that people want, the price usually goes up.
The companies also sometimes agree to divide up the places they sell their stuff. Each company gets its own area and the others agree to stay out. That way they don’t have to compete with each other.
Why cartels are bad
Cartels are usually against the law in most countries. There are a few big reasons why:
Cartels hurt regular people
When cartels charge high prices and make less stuff, regular people have a harder time affording things they need. For example, if there was a cartel of companies that make bread, they could make bread cost a lot more. Some people might not be able to afford it.
Cartels are unfair to other companies
Cartels don’t let other companies compete fairly. If you wanted to start a new company to make bread, you probably couldn’t charge lower prices than the bread cartel. You’d have a hard time getting customers and making money.
In a fair market, companies have to compete with each other. They have to make better stuff and charge lower prices to get people to buy from them instead of other companies. Cartels don’t allow this fair competition.
Cartels make the economy work less well
An economy works best when companies are competing and innovating. Competition pushes companies to make better products, come up with new ideas, and keep prices low.
When cartels stop competition, the whole economy can suffer. There’s less reason for the cartel companies to make better stuff or charge fair prices. Over time, this can make the whole economy less efficient and innovative.
The challenges of running a cartel
Running a cartel isn’t easy, even though the companies make a lot of money at first. There are a few big challenges:
Companies cheat on the deal
After a while, some companies in the cartel might start breaking the rules they agreed on. They might charge a little less than the price they agreed to, so they can get more customers. Or they might make more stuff than they were supposed to.
It’s hard for the cartel to catch companies that cheat like this, especially if there are a lot of companies in the cartel. The more companies there are, the harder it is to keep an eye on all of them.
New companies come in
High cartel prices attract new companies to the industry. New companies can come in and charge less, stealing customers away from the cartel.
The cartel has to constantly watch out for new competitors coming into their market. If too many new companies come in, it can break the cartel’s power.
The government tries to stop them
Governments usually don’t like cartels. They often have special groups of people whose job is to look for cartels and stop them.
These government groups can fine companies a lot of money or even send company leaders to jail. The threat of getting caught by the government makes it harder to run a cartel.
Examples of famous cartels
There have been a lot of famous cartels throughout history. Here are a couple examples:
OPEC
The Organization of the Petroleum Exporting Countries (OPEC) is probably the most famous cartel today. It’s a group of 13 countries that produce a lot of the world’s oil.
OPEC countries work together to decide how much oil to produce. By controlling the supply of oil, they can have a big impact on oil prices around the world.
The Phoebus Cartel
Back in the 1920s and 30s, a group of companies that made light bulbs formed the Phoebus Cartel. They agreed to limit the life of light bulbs to around 1,000 hours, even though they could make bulbs that lasted much longer.
By making light bulbs that burnt out quickly, they could sell more and make more money. This is an example of a cartel making a product worse on purpose to make more money.
Final Thoughts
Cartels are agreements between companies to limit competition and raise prices. They can lead to big profits for the companies involved, at least for a while.
But cartels cause a lot of problems. They hurt consumers, stifle innovation, and make the economy less efficient. They’re also illegal in most places.
Despite the challenges, cartels still happen today. Companies are often tempted by the lure of easy profits. But history shows that most cartels eventually fail, either because of cheating, new competition, or government action.
In the end, competition, not collaboration, is what makes markets work best for everyone. When companies have to compete, consumers get better products at fairer prices, and the whole economy is better off.
