Cartel facts for kids

A cartel is when different companies that used to work on their own secretly agree to team up. Their main goal is to make more money or to keep their sales steady. They do this by setting the price of goods (things they sell) or by limiting how much they produce.

Imagine a group of friends selling lemonade. If they all agree to sell their lemonade for the same high price, even if it's not worth it, that's like a cartel. They stop competing with each other.

Cartels are different from a monopoly. In a monopoly, only one company controls everything. In a cartel, there are a few companies that decide to work together. Cartels are generally bad for everyone else, especially for customers, because they often make prices too high. Cartels usually happen in markets where only a few big companies control most of the sales. This is called an oligopoly.

Besides sellers forming cartels, buyers can also team up. They might do this to push down the price of something they want to buy. Another type of cartel is called a bidding ring. This happens when companies that want to win a contract (like building a new school) secretly agree on who will win. They make sure the winning bid is higher than it should be. Then, they might even share the extra money they made. Bidding rings are often seen with construction companies trying to get government projects.

What Are Cartels and Why Do They Form?

The famous thinker Adam Smith once said in 1776: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." This means that when people who do the same job get together, they often end up talking about how to make more money by charging higher prices.

Studies have looked at hundreds of cartels over the last 200 years. They found that cartels usually make prices go up by about 25%. Cartels that involve companies from different countries raised prices even more, by about 28%. Cartels only working within one country raised prices by about 18%. Very few cartels (less than 10%) failed to make prices higher.

Why Cartels Are Hard to Keep Going

Even though cartels can make a lot of money, they are often hard to set up and keep working. This is because each company in the cartel might want to charge a slightly different price.

Once a cartel is formed, it's often unstable. This is because there's a big reason for members to "cheat." A company might secretly sell its products for less than the agreed price, or sell more than its allowed amount. This helps that one company make more money, but it hurts the cartel.

It's hard for cartel members to know if others are cheating on prices. So, successful cartels often agree on how much each company can produce. They also share information to make sure everyone is following the rules. They might even have ways to punish members who produce too much. Because of this cheating, many cartels that try to set prices don't last very long. Studies show that most cartels that are found out last only about 5 to 8 years.

However, even if a cartel breaks up, the companies might try to form it again later. One well-known group that acts like a cartel and has lasted a long time is the Organization of the Petroleum Exporting Countries (OPEC). They control a lot of the world's oil supply.

Price Fixing Around the World

Price fixing often happens between companies in different countries. Sometimes, governments even agree to these price controls through special agreements. When this happens, it's usually not against the law in those countries. For example, the price of oil is partly controlled by OPEC countries. Also, the prices of international airline tickets are often set by an agreement with the IATA. There are special laws that allow this.

However, if private companies from different countries fix prices without government approval, they can get into trouble. More than 100 countries have laws against this kind of behavior, called "antitrust laws." Some examples of international cartels that have faced legal action include those involving lysine, citric acid, graphite electrodes, and bulk vitamins.

Images for kids

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  Headquarters of the Rhenish-Westphalian Coal Syndicate, Germany (at times the best known cartel in the world), around 1910

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  The printing equipment company American Type Founders (ATF) explicitly states in its 1923 manual that its goal is to "discourage unhealthy competition" in the printing industry.

See also

In Spanish: Cartel (economía) para niños