A cartel is a formal (explicit) agreement between two or more producers of a good or service to control prices or exclude competition. In economics, cartels usually occur in oligopolies, where there are a small number of sellers and usually involve homogeneous products. Cartels can be contrasted with trade associations, which are informal arrangements that do not seek to fix prices or exclude competition. Coalitions of firms sometimes act as a cartel, such as the Organization of Petroleum Exporting Countries (OPEC).
There are various types of cartels, depending on how the market structure changes when the cartel is formed. The two most common types are price-fixing cartels and output-restricting cartels. In a price-fixing cartel, the members of the cartel agree to sell their product at the same price, which is usually above the equilibrium price. In an output-restricting cartel, the members of the cartel agree to restrict output in order to keep prices high.
The main reason cartels are able to exist and maintain control over prices is because they are able to act as a single entity in the market. By acting as a single entity, cartels are able to reduce competition and increase prices. The main way cartels reduce competition is by setting output quotas for each member of the cartel. By doing this, cartels limit the amount of product each firm can produce, which reduces the amount of product available in the market. This, in turn, allows cartels to raise prices and increase profits.
There are several factors that make it difficult for cartels to exist and function effectively. First, it is difficult for cartels to coordinate the actions of all their members. This is because each firm in the cartel has its own interests and goals, which may not be aligned with the goals of the cartel as a whole. Second, even if a cartel can coordinate the actions of its members, it is still difficult to maintain control over prices. This is because firms in the cartel may cheat on their output quotas or engage in price wars with each other in order to gain market share. Finally, cartels often face government intervention, which can take the form of antitrust laws or other regulations. Government intervention can make it difficult for cartels to operate, and can ultimately lead to the dissolution of the cartel.
Cartels are a controversial topic in economics. Some economists argue that cartels are beneficial because they allow firms to cooperate in order to reduce costs and increase efficiency. Other economists argue that cartels are harmful because they reduce competition and lead to higher prices for consumers.