There is a reason that Parker Brothers never produced a popular board game based on the behavior and economics of cartels. Cartel behavior is significantly more complicated than the every-man-for-himself pursuit of monopoly and riches in Monopoly. To ‘play’ cartel, one must delve into experimental economics, game theory, and probability.
We hear about cartels and their power over American markets, but why do they exist, and how do they operate? In economics, if an entire industry is made up of only a few firms, it can be the source of a cartel. The point of a cartel is to eliminate competition among producers in the industry, and instead act as a single firm. By colluding, members of a cartel agree to restrict output, in order to increase scarcity and raise market price for all.
Even with the right industry structure—a small number of firms producing all output for the market—cartels often fail to meet their objectives. Only if output and price agreements are honored by every cartel member will all firms sell at the higher cartel price. This is a big ‘if.’ To keep a cartel together, the cartel must be able to police members to prevent cheating, and to compel compliance in the event cheating is detected.
Cheating by competing is the biggest enemy of cartel power. Cheating means producing more than the allowed quota, and undercutting the official cartel price. The extra sales for the cheater make price competition lucrative and worthwhile, even with the risk of detection or prosecution. Most cartels fall apart because the temptation to cheat is too appealing to resist. One firms are competing independantly, the cartel’s effectiveness is ended.
Enforcing cartel agreements may be possible, unless the cartel is organized illegally. In the United States, privately organized cartels generally violate federal antitrust statutes; suspected violators are prosecuted by the U.S. Justice Department.
In contrast to the illegal status of most cartels, some cartel memberships have been legal and mandatory. Cartels that were once created by U.S. government agencies in the trucking and airlines are examples. By dictating fares and rates, and dividing routes among firms, regulators eliminated competition among the various providers in these industries.
Perhaps the most well-known cartel is neither private nor created by a government agency; it’s an association of governments-as-producers themselves. Representatives from countries in the Organization of the Petroleum Exporting Countries, or OPEC, meet to try to agree on petroleum output quotas and pricing goals; typical cartel behavior. As always, the idea is to limit supply and keep price high.
How successful is OPEC as a cartel? A lot of factors make it less effective than you might think. Substitutes for petroleum-based energy, non-OPEC petroleum, domestic crude, and significant cheating on production quotas have frequently broken down OPEC’s production targets and price influence.
The degree to which any cartel—including international energy producers—holds economic sway over U.S. consumers can be dramatically affected by domestic policies, as in energy. These energy policies include domestic exploration and production, not just energy conservation. And given climbing prices and international uncertainty, the approach to domestic energy production policy may be changing.
North Carolina (and a number of other states) are looking at offshore oil and other energy possibilities that currently remain untapped. At this point, North Carolina is rethinking restrictive environmental strategy, in an attempt to balance environmental concerns against energy needs and rising prices. The North Carolina House recently voted to allow offshore oil exploration. Legislators elsewhere are considering similar measures. Interest in offshore drilling, oil sands, and areas now closed to mining are under reconsideration as well, and access is gaining support.
The good news about high prices for imported products is that they inspire development of untapped domestic resources, or cause us to rethink unwillingness to investigate those possibilities. If higher prices attract supply and competition with existing producers, in cartels or other restricted supply situations, consumers benefit.