What Is a Cartel?

A cartel is an organization created from a formal agreement between a group of producers of a good or service to regulate supply in order to regulate or manipulate prices. In other words, a cartel is a collection of otherwise independent businesses or countries that act together as if they were a single producer and thus can fix prices for the goods they produce and the services they render, without competition.

Key Takeaways

  • A cartel is a collection of independent businesses or organizations that collude together in order to manipulate the price of a product or service.
  • Cartels are competitors in the same industry and seek to reduce that competition by controlling the price in agreement with one another.
  • Tactics used by cartels include reduction of supply, price fixing, collusive bidding, and market carving.
  • In the majority of regions, cartels are considered illegal and promoters of anti-competitive practices.
  • The actions of cartels hurt consumers primarily through increased prices and lack of transparency.
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Cartel

Understanding a Cartel

A cartel has less command over an industry than a monopoly — a situation where a single group or company owns all or nearly all of a given product or service's market. Some cartels are formed to influence the price of legally traded goods and services, while others exist in illegal industries, such as the drug trade. In the United States, virtually all cartels, regardless of their line of business, are illegal by virtue of American antitrust laws.

Cartels have a negative effect on consumers because their existence results in higher prices and restricted supply. The Organization for Economic Cooperation and Development (OECD) has made the detection and prosecution of cartels one of its primary policy objectives. In doing so, it has identified four major categories that define how cartels conduct themselves: price-fixing, output restrictions, market allocation, and bid-rigging (the submission of collusive tenders).

Disadvantages of a Cartel

Cartels operate at a detriment to the consumer in that their activities aim to increase the price of a product or service over the market price. Their behavior, however, is also adversely impactful in other ways. Cartels discourage new entrants into the market, acting as a barrier to entry. Lack of competition due to price fixing agreements lead to a lack of innovation. In non-collusive agreements, companies would seek to improve their production or product to gain a competitive edge. In a cartel, these companies don't have an incentive to do so.

The World's Biggest Cartel

The Organization of Petroleum Exporting Countries (OPEC) is the world's largest cartel. It is a group of 14 oil-producing countries whose mission is to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets. OPEC's activities are legal because U.S. foreign trade laws protect it.

Amid controversy in the mid-2000s, concerns over retaliation and potential negative effects on U.S. businesses led to the blocking of the U.S. Congress' attempt to penalize OPEC as an illegal cartel. Despite the fact that OPEC is considered by most to be a cartel, members of OPEC have maintained it is not a cartel at all but rather an international organization with a legal, permanent, and necessary mission.

Illegal Activities

Drug trafficking organizations, especially in South America, are often referred to as "drug cartels." These organizations do meet the technical definition of being cartels. They are loosely affiliated groups who set rules among themselves to control the price and supply of a good, namely illegal drugs.

The best-known example of this is the Medellin Cartel, which was headed by Pablo Escobar in the 1980s until his death in 1993. The cartel famously trafficked large amounts of cocaine into the United States and was known for its violent methods.