What is a cartel and how does it affect businesses? In simple terms, a cartel refers to an organisation comprising of several individuals, companies or even governments that agree to cooperate to increase their respective market power by controlling prices, limiting production and dividing up markets. This definition takes us straight into the workings of two main types of cartels; horizontal and vertical.
Horizontal Cartels – Unifying Markets
A horizontal cartel is one that involves competitors colluding together in one particular market or industry. A classic example of a horizontal cartel is the Organization of Petroleum Exporting Countries (OPEC). The OPEC was created to serve the purpose of stabilizing the production and flow of oil from its members in order to keep prices high and maintain economic stability. The OPEC’s monopoly on the supply and price of petroleum has been controversial, but the organization has largely been successful in unifying the market and increasing their respective market power.
Vertical Cartels – Altering Production and Supply Chains
A vertical cartel is when producers or distributors actually join forces together in order to control the supply or production of a product, improving their market power. A famous vertical cartel example is the International Airline Transport Association (IATA). The IATA mainly serves as an agreement between airlines to fix tariffs for cargo and passenger rates, as well as international route rights between airlines. This type of cartel is incentivizing to members as it has enabled them to sustain better profits while allowing them to avoid unnecessary competition.
Cartels & Antitrust Regulation in the Modern Day
Cartels continue to exist and operate today, albeit with much more scrutiny from the competition and regulatory authorities. Since the formation of the European Union, one of the primary objectives of their internal market is to break the power of cartels who continue to dominate the market. Many countries have also implemented competition laws to protect free interaction and collaboration within and across markets. As such, cartels must not only adhere to their own country’s laws, but must also form in accordance with global antitrust laws to ensure no consumer harm.
The Lingering Impact of Cartels
In the age of globalization, it’s essential that businesses are aware of the regulations associated with cartels as they can have a great impact on their industry. Despite the presence of antitrust regulations, cartels still remain an integral part of the economy, particularly in markets like oil, aluminum, diamond and banking and continue to have a great influence on the global market. By understanding the definition of a cartel and how they are likely to impact industry, businesses can better protect their profits and the sustainability of their market.