Cartels

A cartel typically consists of a voluntary and temporary agreement among firms in the same industry to follow common policies instead of competing with each other. These policies can include agreements on prices, market shares, quota systems (limiting production to certain quantities), and conditions of credit. From the perspective of these firms, the main reason for the voluntary formation of cartels is to avoid excessive competition that can lead to price wars that decrease profits for all firms in an industry. This is a departure from the conventional understanding that a competitive market of unfettered supply and demand is the most efficient and fair way of establishing prices and quantities of production. While prices and quantities of production are variable under conditions of free competition, cartels may adapt production to meet demand quotas. Because of this, they can also be used as tools of industrial policy by governments.

The use of cartels was established in Germany at the end of the 19th century. During this period, for example, the coal cartel of Westfalia-Renania formed in 1893 and acted as a sales agent for the majority of mines in Ruhr. Later, in 1925, German chemical companies merged to form IG Farben. It is estimated that there were 3,000 or so cartels in Germany in the 1930s, which the Nazis used to control the German wartime [Page 268]economy. Cartels have also existed in other countries, such as Austria, England, Switzerland, France, Italy, Scandinavia, and Japan, often as a result of government policies aimed at providing incentives for corporate development.

After World War II, cartels fell out of favor with many theorists. Presently, there seems to be a consensus in many camps that cartels are neither efficient nor fair. The adverse implications for social welfare include unused production capacity, higher prices for consumers, and the maintenance of inefficient companies to the detriment of efficient ones. Even so, it is important to note that forms of noncompetition have long existed in market economics. Besides cartels, these include monopolies, oligopolies, trusts, vertical integrations (consolidations of supply chains), and zaibatsus or industrial groups that once dominated the Japanese economy. Furthermore, cartels are generally thought to be unstable in that member firms have incentives to cheat on agreements and sell more than the production quotas set by their cartels.