12.2 Cartel

(A) Meaning of Cartel: By Cartel we mean a combination of several firms into a group sharing an identical interest. When a large number of firms or industries join hands they enjoy extra power. They can exert considerable influence on the market conditions. They can charge exorbitantly high prices and exploit consumers. For this reason, cartels are normally banned in various nations. In some implicit or explicit forms cartels do exist in different parts of the world. Generally cartel organizations take undue advantages of the loopholes in the legal provisions. Cartels are theoretically akin to monopolies but in practice are far more menacing and damaging in effect.

The best and most notorious example of cartels in the recent past is that of OPEC - Oil Producing and Exporting Countries. Saudi Arabia and other countries after 1973 formed a cartel. As a result of this petroleum prices rose exorbitantly, twice in the period between 1973 and 1978. The price hike of petroleum products was more than 500 percent during the period. It rose from $6 per barrel to $32 per barrel or more. This caused a tremendous rise in the cost of production all over the world. It led to a prolonged recessionary phase in economic activities. Some other developing countries producing and exporting products such as tobacco and cotton have also thought of forming cartels. This has not been realized so far.

(B) Cartel Equilibrium: Cartel is a monopoly organization. Equilibrium under Cartel and monopoly is identical in nature. Cartel equilibrium has been represented in Figure 48. Average and marginal cost curves are similar to that of the monopolist. Similarly average and marginal revenue curves of a Cartel are downward sloping like those of a monopolist.

The cartel attains equilibrium at point e with MR = MC where quantity sold is Q and price charged is P. The profits of the cartel are of the Size CSRP.

Cartel is a dangerous form of market. It may possibly not survive as long as monopoly. This is because the monopolist is a single producer while a cartel is a group of firms. Rivalry among cartel members and certain underhand practices on their part may cause troubles.