CARTEL

A cartel is formed when a group of independently owned businesses agrees not to compete with each other in areas such as prices, territories, and production. A cartel agreement is considered a collusive agreement in that the different parties agree not to allow market forces to determine their pricing, production, and other business practices. Rather, the members of the cartel agree on such matters as what price to charge, how much to produce, and which markets to serve. Well-known examples of cartels include the Organization of Petroleum Exporting Countries (OPEC), the Swiss banking cartel, and the International Tin Council. Cartels are particularly widespread in Japan and play a major role in many different industries there.

Such collusive agreements are illegal in the United States under antitrust laws contained in the Sherman Antitrust Act of 1890, the Clayton Antitrust Act of 1914, and the Federal Trade Commission Act of 1914. This body of legislation, known as the antitrust laws, made illegal such practices as restraint of trade, price discrimination, tie-in contracts, acquisition of competitors, and interlocking directorates. These practices were declared illegal only "where their effect may be to substantially lessen competition or tend to create a monopoly."

Historically, cartels have been formed in markets characterized by excess production capacity. At one time or another international cartels have attempted to control the world market in such commodities as steel, oil, rubber, tin, and aluminum, and in chemical products such as linoleum and rayon-involving patents. In the early part of the 20th century the world aluminum industry was effectively controlled by a cartel consisting of four companies from the United States, France, Germany, and Great Britain. At the start of World War II it was estimated that more than 30 percent of international trade was controlled by international cartels.

More recently a large number of cartels appeared in Third World countries following the short-lived success of OPEC in the 1970s. These Third World cartels were formed in order to establish market prices for raw materials that they produced. By the mid1980s most of these cartels had collapsed. Disagreements among cartel members, lack of real power to enforce agreements and production quotas, and a glut of raw materials were among the factors contributing to their demise.

The collapse of international cartels usually follows a familiar pattern. Cartels generally begin by establishing a price for their raw materials or other commodities that is somewhat above their free-market value. In response to such price setting, consumers cut back on their purchases and an oversupply of raw materials results. Soon supply exceeds demand, especially when cartel members fail to agree to cut back production accordingly. As it becomes clear the cartel has lost the power to enforce production quotas, it loses control and prices fall drastically. Such a scenario occurred in the mid-1980s as oil prices plunged, greatly reducing the power of OPEC.

In Japan formal and informal national cartels are accepted as part of doing business there. Operating under a system of managed competition with a great deal of government guidance and intervention, Japanese cartels enjoy acceptance in industries ranging from agriculture and banking to beer manufacturing and barbering. One example is Nokyo, a national umbrella group under which a huge agricultural cartel operates. Because of Nokyo, Japanese consumers pay a much higher price for homegrown rice, for example, than rice sells for on the world market. Nokyo serves to keep out imports, not only in rice but also in farm equipment and supplies. In Japan, cartels are permitted by law, and many of them are supervised by the government.

In Europe, national monopolies in industries such as telecommunications, postal service, air transportation, and energy are in the process of being deregulated by the European Union. With government support these European cartels flourished in a noncompetitive environment, dividing up markets and agreeing not to compete with one another. Competitive pressures from business and the globalized economy, however, have resulted in a European effort to open these industries to outside competition.