A cartel is an association of independent firms or individuals for the purpose of exerting some form of restrictive or monopolistic influence on the production or sale of a commodity. The most common arrangements are aimed at regulating prices or output or dividing up markets. Members of a cartel maintain their separate identities and financial independence while engaging in common policies.
Properties of cartels
If someone thinks a cartel has restricted its production and the previous production level was the proper one and served consumers better, he may take advantage of the high prices and underbid the cartel. As Ludwig von Mises points out, "Certainly those engaged in the production of steel are not responsible for the fact that other people did not likewise enter this field of production. ... If somebody is to blame for the fact that the number of people who joined the voluntary civil defense organization is not larger, then it is not those who have already joined but those who have not."
One criticism of cartels is that they collude with one another. Murray Rothbard criticizes these terms for being emotive. What is really occurring is cooperation. For what is the essence of a cartel action? Individual producers agree to pool their assets into a common lot, this single central organization to make the decisions on production and price policies for all the owners and then to allocate the monetary gain among them. But is this process not the same as any sort of joint partnership or the formation of a single corporation?
The main criticism of cartels seems to be their size, but as Rothbard points out, "We do not know, and economics cannot tell us, the optimum size of a firm in any given industry. The optimum size depends on the concrete technological conditions of each situation, as well as on the state of consumer demand in relation to the given supply of various factors in this and in other industries."
Restriction of production
Producers restrict production whenever they discover an inelastic demand curve, meaning they can produce less and ask for a higher price. This means that it is possible that the producer simply misidentified the proper amount of production in his initial calculations, and now the restriction is merely a correction of his miscalculations. There is nothing inherently immoral or wrong about asking for a higher price and producing less. In fact, it is what all producers engage in. Consumers have no right to a certain amount of goods, and the producer is still subject to market forces. He cannot keep raising the price without making the demand curve elastic.
The whole concept of "restricting production," is a fallacy when applied to the free market. In the real world of scarce resources in relation to possible ends, all production involves choice and the allocation of factors to serve the most highly valued ends. In short, the production of any product is necessarily always "restricted." Such "restriction" follows simply from the universal scarcity of factors and the diminishing marginal utility of any one product. But then it is absurd to speak of "restriction" at all.
There are other reasons to restrict production may be restricted, and "withhold" goods from the market. It may be for speculative purposes. If the owner of merchandise expects that the price of his commodity will be higher in the next period than in the present, he will hold off sales, in the hope of gaining greater profit, but this will imply fewer sales right now.
An entrepreneur with low time preference is likely to "bide his time", and not allow himself to be rushed into premature sales; his optimal pattern of sales will call for "withholding" goods from the market now, and selling more and more as time goes on. He, too, benefits financially from his "withholding" pattern of exchange, for his subsequent sales are worth relatively more to him than to the high time preference person, since he discounts the future less heavily.
Conservation is yet another reason for selling less of a natural resource than might otherwise be sold. The owner who is motivated to conserve his resource will refuse to sell it all in the present period. He will "hold back" some of it. The owner does not try to maximize his sales in the present period; rather, he tries to maximize his return over the whole period during which the good is sold. He will only sell it all right away if he calculates that this is the best method of maximizing his profit. It is impossible to distinguish the conservationist motivation for withholding the sale of resources from the "monopolistic" one (if there is such a thing).
A desire for leisure can bring about a similar result. Muhammad Ali may choose to fight only three times per year even though he would certainly be able to contract for 52 bouts in a year, or even more, were he so disposed. Now one reason for this behaviour might be a vicious attempt On part to "defy the orders of the consumers for his Own advantage", to "infringe (upon) the supremacy of the consumers and the democracy of the market", and to "defy the supremacy of the consumers and substitute the -private interests of the monopolist for those of the public". But another explanation, much more plausible, is that Ali won't fight 52 times a year because he would start to get very tired, and would probably begin to lose. Another possibility, a very strong one, indeed, is that Ali has a taste for leisure, and, earning so much money from his ringside exploits, he can afford to give in to this taste.
Still another alternative explanation for "monopolistic withholding" is that producers are also consumers, and may derive pleasure from less production. An owner of forests may refuse to cut them down, not out of a desire to balk the "use of a scarce resource to the fullest extent compatible with the pattern of other consumer's tastes for wood in the market'" but because he enjoys the vista of a virgin forest.
It is usually not rational for a dominant firm to attempt to eliminate all of its competitors through severe price-cutting since this practice is inherently expensive and uncertain, especially if the market is easily open to new supply. Even if a dominant firm were to succeed temporarily and eliminate some of its rivals, competitors would likely return when and if prices were increased to profitable levels. How, then, are dominant firms to profit from predation and how are consumers to be injured by price reductions?
Lower prices, for whatever reason and for whatever length of time, are extremely proconsumer and are never to be regretted. Would critics of predation rather have dominant firms fix prices and not ever reduce them, or not respond to lower costs or the lower prices of rivals?
Consumers, of course, can always decide whether they prefer the lower prices of the dominant firm or not. If they prefer lower prices, then they buy more from the dominant firm; if they don't, then they continue to support the higher-priced rivals of the dominant firm. Either way, there is nothing whatever to be regretted about lower prices either initiated by (or matched by or undercut by) dominant firms. No antitrust regulation is justified.
Weaknesses of cartels
Analysis demonstrates that a cartel is an inherently unstable form of operation:
- If pooling resources is more profitable, then the cartel will merge into one company.
- If it proves to be less profitable, the individual members of the cartel will break off.
- If it doesn’t break from within, an outsider, noticing the enormous profitability, will enter the market, and this dooms the cartel.
Particularly likely to be restive under the imposed joint action will be the more efficient producers, who will be eager to expand their business rather than be fettered by shackles and quotas to provide shelter for their less efficient competitors. If the cartel does not break up from within, it is even more likely to do so from without. To the extent that it has earned unusual monopoly profits, outside firms and outside producers will enter the same field of production.
Examples of cartels
Rothbard considered international diamond cartel De Beers the most successful cartel in history, far more successful than the OPEC. It was maintained and has only prospered because it was enforced by the government of South Africa, which was the major center of world diamond production. But even its power was eroded over time, as that of the OPEC and other cartels. However, after the late 1990s outrage over "blood diamonds," a new cartel was organized and given regulatory authority through the United Nations. In this way can the price of diamonds stay relatively high.
The SEC created in 1975 a designation for credit-raters: Nationally Recognized Statistical Rating Organization (NRSRO.) The SEC rule created a cartel of 3 firms: Standard & Poor's Credit Market Services, Moody's Investors Service, and Fitch, Inc. — these being the only firms that qualified for use by broker-dealers for satisfying another of the SEC's rules on net capital. This has led to more regulation of the credit rating agencies.
A commonly mentioned cartel is the Phoebus lightbulb cartel from the 1930's. It is often used to illustrate the concept of "planned obsolescence" (intentional reduction of quality or durability).
Cartels are very difficult to sustain on the market, even if they are to each firm's advantage, unless the governments enforces the cartel. The Federal Reserve System is an example of such a cartel.
- Encyclopædia Britannica. cartel (economics), Encyclopædia Britannica Online, referenced 2010-07-19.
- Murray N.Rothbard. Man, Economy and State (pdf), Chapter 10 Monopoly and Competition, p.629-754. Referenced 2010-07-16.
- Walter Block. "Austrian Monopoly Theory - A Critique" (pdf), Journal of Libertarian Studies, Vol. I. No.4, pp. 271-279. Referenced 2010-07-20.
- D.T. Armentano. "A Politically Incorrect Guide to Antitrust Policy", Mises Daily, September 15, 2007. Referenced 2010-07-20.
- Murray Rothbard. "Are Diamonds Really Forever?" from Making Economic Sense, Chapter 91. Referenced 2010-07-20.
- E. C. Pasour, Jr. "The International Political Economy of Coffee: From Juan Valdez to Yank's Diner. (pdf), The Review of Austrian Economics, Vol. 4, 1990, pp. 241-48. Referenced 2010-07-20.
- Pierre Lemieux. "The Oil Price Mirage", Mises Daily, August 23, 2005. Referenced 2010-07-20.
- Sreevathsa Karanam. "How the Cartels Ensure Diamonds Last Forever", Mises Daily, January 17, 2011. Referenced 2011-01-17.
- Michael Rozeff. "Who Captures Whom? The Case of Regulation", Mises Daily, September 28, 2006. Referenced 2010-07-20.
- Murray N. Rothbard. The Case Against the Fed (pdf), p.53-58, referenced 2010-07-20.
- Cartel at Wikipedia
- Cartels by Andrew R. Dick at The Concise Encyclopedia of Economics
- The Bankers' Cartel by David Gordon, August 2009
- The Lawyer Cartel by George C. Leef, November 1998
- Is the Vitamin Cartel a Threat? A Case Study of Antitrust Failure by Yumi Kim, June 2007
- Cartels as Efficient Productive Structures (pdf) by Pascal Salin, 1996
- Visa Cartel? by Llewellyn H. Rockwell Jr., October 1998
- Government & Big Business by Christopher Mayer, July 2000
- A History of Privilege by William L. Anderson, January 1999
- Research shows that under certain market conditions, price cartels arise naturally without collusion by Israel Curtis, January 2012
- The Myth of the Free Market Cartel (video) by Murray N. Rothbard, 1984