Cartel (economics)
A cartel is a large economic organization formed by suppliers in a specific market to collectively manipulate the price of a commodity, disrupting the competition typically found in free markets. By reaching agreements on pricing strategies—whether to increase, decrease, or offer discounts to select buyers—cartels eliminate competitive pricing mechanisms, which can lead to higher profits for suppliers at the expense of consumers. Notable examples of cartels include the Organization of the Petroleum Exporting Countries (OPEC), which controls oil production and pricing, and De Beers, historically dominant in the diamond market.
OPEC, established in the 1960s, enables oil-producing nations to exert significant control over oil prices and supply, gaining political leverage in the process. Similarly, De Beers once managed over 90% of the global diamond supply by restricting market availability and embedding the gemstone in cultural narratives around love and luxury. While cartels can lead to economic benefits for their members, they often face criticism and legal challenges due to their anti-competitive practices, which can harm consumers and smaller businesses. The complexities surrounding cartels highlight the ongoing tension between market regulation and the pursuit of profit, particularly in key industries pivotal to the global economy.
On this Page
Cartel
Cartels are large economic organizations that work together to manipulate the price of a commodity. In a free market, competition between suppliers regulates price, balancing it between profit margins for the supplier and low prices for the consumer. In a cartel, the major suppliers in a specific market collectively agree on the price of a product. Based on the economic climate at the time, the suppliers may agree to raise the price of the product, lower the price, or offer certain buyers lower prices. This removes competition from the free market system.
Major Cartels
Several modern industries are controlled and regulated by cartels. The most well known of these is the oil industry. Standard Oil, a single economic entity with disproportionately powerful control over the market, first controlled oil production in the United States. In the early 1900s, Standard Oil was labeled a monopoly and was broken up by the U.S. government under anti-trust laws. This opened the market to smaller economic powers.
In the 1960s, several Middle Eastern nations came together to form the Organization of the Petroleum Exporting Countries, also known as OPEC. This powerful cartel, led by the major oil-producing nation Saudi Arabia, is able to manipulate the price of oil by controlling the supply of crude and refined oil released into the market. OPEC has also gained significant political influence over major oil importers by collectively refusing to sell oil to specific countries until its demands are met. In recent years, OPEC’s control has been negatively impacted by the introduction of alternative power sources as well as by American oil reserves and Russian gas reserves.
The diamond industry is also led by a cartel. At one point, De Beers controlled more than 90 percent of the world’s diamond supply. Diamonds are a common, naturally occurring gem mined in specific areas of the world. In the late nineteenth to early twentieth centuries, the De Beers group artificially limited the supply of diamonds entering the market, drastically increasing the gem’s market value. De Beers then began an incredibly successful marketing campaign, linking diamonds with love and displays of wealth.
The cartel exclusively collected diamonds from most of the diamond mines in the world. It then presented these diamonds and fixed prices to specific retailers. De Beers maintained great control over its retailers by selling fewer diamonds to any retailers who enacted policies contrary to those of the cartel. When other corporations attempted to rival the cartel, De Beers drastically increased the number of diamonds available, thereby lowering prices and undercutting competitors.
Bibliography
"Cartel." Investopedia. Investopedia, LLC. Web. 13 Mar. 2016. http://www.investopedia.com/terms/c/cartel.asp
"Cartels." Economics Online. Economics Online Ltd. Web. 13 Mar. 2016. http://www.economicsonline.co.uk/Business‗economics/Cartels.html
Sharma, Rakesh. "3 Types of Businesses Ruled by Cartels." The Cheat Sheet. The Cheat Sheet. Web. 13 Mar. 2016. http://www.cheatsheet.com/business/3-industries-run-by-cartels.html/?a=viewall