Cartels raise prices well, but their members can rarely resist cheating
Across two centuries of cases, cartels pushed prices up by a median of about 23 percent, and fewer than one in ten failed to lift prices at all. Yet most are fragile. Every member is tempted to undercut the agreed price or quietly sell beyond its quota, and that temptation tears many of them apart.
A cartel is a group of supposedly independent firms that agree not to compete, fixing prices, dividing markets or restricting output to create artificial scarcity. International ones did better than domestic ones, averaging price rises of 28 percent against 18. One study of 20th-century cartels found the discovered ones typically lasted 5 to 8 years, though the pattern was split: many collapsed within a year, others ran five to ten years, and a few survived decades. Outsiders also respond to scarcity by producing more, using the good more efficiently, or developing substitutes.
The word has an unexpected past. It comes from the Italian cartello, a sheet of paper, and from the 1690s English used cartel for written agreements between warring nations on swapping prisoners. The economic meaning arrived through German, first used by railway companies in 1846 for tariff and technical standardisation. Cartel-like arrangements are far older, from medieval guilds to a French and Neapolitan salt syndicate of 1301 and a 1470 alum cartel between the Papal States and Naples.
Attitudes swung sharply. Cartels spread through formerly free markets from around 1870, and central Europe was their heartland, so much so that imperial Germany and Austria-Hungary earned a nickname as cartel country. German-speaking economists, beginning with Friedrich Kleinwachter in 1883, tended to accept them, and before the Second World War cartel contracts were enforceable in court almost everywhere except the United States. America had outlawed restraint of trade with the Sherman Act in 1890, and after 1945 its market liberalism helped spread cartel bans worldwide.
Types vary widely: price cartels, quota cartels, territorial cartels that carve up regions, bid-rigging rings that fix public tenders, and standardisation cartels. The loosest form, tacit collusion, where firms react to the same conditions without talking, is generally legal. Where price fixing is protected by treaty or national sovereignty, as with OPEC's partial control of oil prices, antitrust law cannot reach it.
Source: Cartel
