The definition and agreements in cartels

A cartel forms when companies in the same industry collaborate to reduce competition through official arrangements. This cooperation allows members to control aspects of the market that would otherwise be competitive.

Types of cartel agreements

• Output restrictions - Members agree on the amount each can produce, limiting total supply to keep prices high.
• Price setting - Firms fix the selling price of their goods or services, preventing undercutting and maintaining higher charges.
• Other limitations - Additional rules might include dividing market territories or restricting innovation to protect shared interests.

How cartels maximise profits

Cartels function by mimicking the behaviour of a single dominant firm in a market with no competition. This approach enables them to influence supply and demand to their advantage.

Cartels adopt methods similar to those used in markets with one major player. By reducing overall output, cartels can drive up prices, leading to greater revenue per unit sold. Agreements prevent price reductions or aggressive marketing that could erode earnings. This collective strategy helps sustain elevated profit levels over time.

OPEC as a prominent cartel example

The Organisation of the Petroleum Exporting Countries (OPEC) represents a key instance of a cartel in the global energy sector. It consists of nations that coordinate to influence the crude oil market.

Key features of OPEC

• Membership details - OPEC includes 13 countries that are major exporters of crude oil. Recent changes involve the Republic of the Congo becoming a member in 2018, Qatar leaving in 2019, and Ecuador departing in 2020.
• Extended alliances - OPEC+ incorporates non-member countries, such as Russia and Kazakhstan, to broaden its reach and impact.
• Production and reserves - Together, OPEC and OPEC+ account for approximately 50% of global oil output. They also hold around 80% of the world's proven crude oil reserves and substantial natural gas reserves.
• Influence on prices - The cartel can affect both immediate and long-term market prices by adjusting production levels.
• Role of key players - Saudi Arabia holds considerable sway within the group due to its large production capacity.

OPEC's structure demonstrates how cartels can operate across borders to manage a vital commodity.

Factors influencing cartel power and stability

Cartels can wield significant influence, but their strength and longevity depend on various internal and external elements. Over time, challenges can erode their control.

Reasons for declining cartel power

Several developments can weaken a cartel's dominance:

• Advances in production - Innovations like hydraulic fracturing for shale oil or deep-sea extraction increase supply from outside sources.
• Rise of new competitors - Independent suppliers entering the market reduce the cartel's share and pricing power.
• Shifts in demand - Changes in buyer habits, such as reduced usage due to efficiency improvements, lower overall consumption.
• Alternative options - Growth in substitute technologies, like renewable energy sources, diminishes reliance on the cartel's product.

For example, OPEC's control has lessened since the 1970s, when it nearly monopolised global oil supply.

Threats to cartel stability

Cartels face risks that can lead to breakdown:

• Internal conflicts - Members may start price competitions to capture more market share, undermining group agreements.
• Uneven costs - Differences in production expenses among members can result in some gaining more from fixed prices than others, causing resentment.
• Lack of leadership - Without a strong central figure or country to enforce rules, coordination falters.
• Regulatory barriers - In regions like the European Union and the United States, cartels are prohibited because they limit competition and disadvantage consumers.

Long-term survival often requires high obstacles to new entrants, such as substantial startup costs or complex regulations.

Market structure and integration in cartel-dominated industries

Industries where cartels operate often feature concentrated power among a small number of large firms. This setup influences how companies organise and expand.

Characteristics of cartel-influenced markets

• Oligopolistic nature - Sectors like oil retailing function with a few dominant players, leading to interdependent pricing and strategies.
• High entry barriers - Substantial fixed expenses, such as those for exploration and infrastructure, along with risks like unsuccessful drilling, favour large-scale operations.

Forms of integration in these industries

Firms in such markets frequently pursue growth through combining operations:

• Horizontal integration - Companies at the same stage of production merge or ally, often building on existing vertical structures (where firms control multiple stages from raw materials to sales).
• Vertical integration - This involves controlling different levels of the supply chain, which can strengthen cartel positions by enhancing efficiency and control.