Cartel

A cartel is an agreement among firms that would otherwise compete, or among countries that produce the same commodity, to coordinate prices, output, customers or territories rather than compete for them. By acting together, members try to earn the higher prices and profits of a monopoly while remaining separate businesses.

Private business cartels are illegal in most countries and are treated as the most serious breach of competition law, often as a crime. Groups of sovereign producers, the best known being the Organization of the Petroleum Exporting Countries (OPEC), sit largely outside national antitrust law. Cartels are most likely in an oligopoly or a duopoly, where a few firms can monitor each other. The word also describes organized drug-trafficking groups, but that usage is separate from the economic meaning.

Imagine the four bakeries in a town meeting in secret and agreeing that none will sell a loaf for less than a set price, or that each will serve only its own neighborhood. Customers find bread more expensive everywhere and have nowhere cheaper to go. The bakeries earn more without baking any better.

The weak point is temptation. Each baker knows that if it quietly sells a little below the agreed price, it will win extra customers while the others keep their prices high. If one cheats and the others find out, the deal falls apart. Cartels are a constant balancing act between the gains of sticking together and the gains of breaking ranks.

• Price fixing. Members agree minimum prices, price increases or discount limits.
• Output restriction. Members agree production quotas, reducing supply to push prices up.
• Market sharing. Members divide customers, products or regions so they do not compete.
• Bid rigging. Members decide in advance who will win a tender, with others submitting deliberately high "cover" bids; it is common in public procurement.
• Wage fixing and no-poach deals. Employers agree not to hire each other's staff or to cap pay, a buyer-side cartel that creates monopsony power.

To survive, a cartel needs a way to detect cheating and punish it, for example through shared sales data, regular meetings or the threat of a price war. This is a direct application of game theory: each member is in a repeated prisoner's dilemma where the short-term gain from cheating must be weighed against the long-term loss if the agreement collapses. Without enforcement, the stable Nash equilibrium is for every member to cheat.

Economists have long noted that cartels are unstable. The agreed price is above each member's marginal cost, so every member gains by selling more at that price. Cartels are easier to sustain when there are few members, products are similar, demand is stable, prices are visible and entry is hard. They weaken when demand falls, new producers enter or members have very different costs. Higher prices also encourage buyers to find substitutes over time, because demand becomes more elastic in the long run.

OPEC illustrates both sides. Founded in Baghdad in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, it gained great influence over oil prices in the 1970s, but quota cheating, new non-OPEC supply and member departures have repeatedly limited its power. Since 2016, OPEC has coordinated output with other producers, including Russia, through the OPEC+ arrangement.

• Lysine (1990s). Archer Daniels Midland and Asian producers fixed the price of an animal-feed additive; ADM paid a $100 million US criminal fine in 1996, and executives were jailed.
• Vitamins (1999). Roche and BASF led a global vitamins cartel; Roche alone paid a $500 million US criminal fine.
• Trucks (2016). The European Commission fined five truck makers a total of €2.93 billion for coordinating prices over 14 years.
• Foreign exchange (2019). The European Commission fined several banks about €1.07 billion for sharing information and coordinating trading in the foreign exchange market through chatrooms.

Under Section 1 of the US Sherman Act, price fixing, bid rigging and market allocation are illegal per se, without any need to prove harm, and are prosecuted as crimes carrying fines of up to $100 million for companies and up to 10 years in prison for individuals. The European Union prohibits cartels under Article 101 of the Treaty on the Functioning of the European Union, and the United Kingdom has a criminal cartel offence. Most authorities run leniency programs that give immunity to the first member to confess and cooperate, which has made cartels far riskier to run. The US Department of Justice adopted its program in 1978 and expanded it in 1993; the European Commission followed in 1996.

A few economists have argued that some cartels, such as crisis cartels during deep slumps, stabilize industries with high fixed costs. Most economists and enforcers reject this, citing evidence that cartels raise prices well above competitive levels and impose rent-seeking costs. Debate continues on whether exporters' associations and state-backed commodity producer groups should be treated differently.

• European Commission: Cartels
• US Department of Justice: Antitrust Division Leniency Program