Antonio Sposato classe LMG/01
Facoltà di Giurisprudenza
Università degli studi di Macerata
ECONOMICS
CARTELS AND COLLUSIONS
A cartel is a formal agreement among competing firms and it's a formal
organization where there is a small number of sellers and usually involve homogeneous products or services of legal or illegal
nature (drug cartels).
Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of
customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. The aim of such collusion (also called the cartel
agreement) is to increase individual
members' profits by reducing competition.
CARTELS AND COLLUSIONS
Collusion, instead, is a implicit or explicit agreement (a private cartel) between firms which aim to avoid or limit
competition.
Antitrust laws prohibit collusions, and also forbid mergers that greatly reduce
competition.
Collusion most often takes place within the market structure of oligopoly, where the decision of a few
firms to collude can significantly impact the market as a whole.
PUBLIC CARTELS AND PRIVATE CARTELS
In the public cartel a government is involved to enforce the cartel agreement, and the
government's sovereignty shields such cartels from legal actions.
Inversely, collusions (private cartels) are
subject to legal liability under the antitrust laws now found in nearly every nation of the world.
Furthermore, the purpose of collusions is to
benefit only those individuals who constitute it, public cartels, in theory, work to pass on
benefits to the populace as a whole.
COLLUSION: CONDITIONS
There is only a small number of firms in the industry
The industry has substantial entry barriers
A large number of customers
Total market demand is not too variable
- Low income elasticity of demand
- Demand fairly inelastic with respect to price, interest rates, etc
Firm’s output can be easily monitored
- Easier to control total supply and identify firms who are cheating on output quotas
Price discounts are hard to deliver
- Hard for firms to under-cut their rivals and break the cartel
PUBLIC CARTELS
Usually public cartels are referred as less harmful to the general good and are government-backed, so they result as effective as potentially harmful.
(M. Rothbard)
In the case of public cartels, the government may establish and enforce the rules relating to prices, output and other such matters.
Export cartels and shipping conferences are examples of public cartels.
In Japan, for example, such arrangements have been permitted in the steel, aluminum smelting, ship building and various chemical industries.
PUBLIC CARTELS
International commodity agreements covering products such as coffee, sugar, tin and more
recently oil (OPEC) are examples of international cartels with publicly entailed agreements
between different national governments.
Crisis cartels have also been organized by
governments of various industries or products in different countries in order
to fix prices and ration
production and distribution in periods of acute shortages.
CARTELS: INSTABILITY
Most of cartel arrangements experience difficulties
Falling demand creates excess capacity in the industry (e.g. during an economic downturn)
Entry of non-cartel firms into industry
Exposure of price fixing by Governament agencies
Over-production which breaks the price fixing
- OPEC is one of the best examples – but other international commodity agreements have suffered from similar problems
Prisoner’s Dilemma suggests that collusion breaks down
- Incentive to cheat, because joint-profit maximation doesn’t mean that each firm is maximising profits on their own.
CARTELS: FAVORABLE POINTS OF VIEW
Consumers may gain advantages from:
- Periods of relative price stability
- A reduction of some of the wasteful costs of advertising and marketing if producers co-operate rather than compete with each-other
- Guaranteed supply from the producer cartel
Producer cartel may be successful in raising the price of exported commodities
- May help to fund higher levels of capital investment - Boost to export revenues for countries with a high
dependency on exports of primary commodities
ADAM SMITH: “THE INVISIBLE HAND”
In economics, the invisible hand of the market is a metaphor conceived by Adam Smith to describe the self-regulating
behavior of the marketplace.
The idea of markets automatically channeling self-interest toward socially desirable ends is a central justification for the laissez-faire economic philosophy, which lies behind
neoclassical economics.
In this sense, the central disagreement between economic
ideologies can be viewed as a disagreement about how powerful the
"invisible hand" is.
In alternative models, forces
which were nascent during Smith's life, such as large-scale industry, finance, and advertising, reduce its effectiveness.
SMITH: “THE WEALTH OF NATIONS”
According to Smith, the motivations that determine the economic choices are self-centered objectives for individuals: each pursues its own interest. In the world described by him the economic subjects come in connection with each other only through the
exchange of goods – the “spontaneous order”.
“It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self-interest. We
address ourselves, not to their humanity but to their self-love, and never talk to them of our own
necessities but of their advantages.” – The Wealth of Nations (1776)
THE PRINCIPLE OF “THE INVISIBLE HAND”
According to the principle of “the invisible hand”, given a situation of open market, the interaction of economic agents, each one fallowing only its own self-interest, determines the maximum possible well-being for the entire community.
This principle is a cornerstone of liberal thought. It shows that there is no contradiction between the pursuit of individual achievement and collective welfare, but rather that in a market economy the first is a necessary and sufficient condition for the second.
The mechanism by which it acts is the invisible hand of the price system which are formed on the open
market.
EFFECTS OF “THE INVISIBLE HAND”
Starting from that principle, we can recognize three effects:
It is a process by which a social order is created.
It is a mechanism which allow a balance of the market.
It is a factor that promotes the growth and economic development.
PROCESS CREATING A SOCIAL ORDER
Given the equality before the law and non- interference of the state, the invisible hand
ensures the realization of a social order that meets the general interest: spontaneous convergence of personal interests to the collective interest.
MECHANISM BALANCING THE MARKET
Supply and demand of different markets tend to equalize: the free functioning of a competitive market, as well as the
convergence of the market price to the actual price, tends to disappear any
unbalanced demand or any over-supply.
FACTOR PROMOTING THE GROWTH
The first effect of the invisible hand has an impact on the population through the labor market (in case of excessive population, the salary falls below the
minimum subsistence leading to a reduction of the population and vice versa in case of deficient
population);
The second effect also applies to the savings, a
necessary condition for the accumulation of capital and thus economic growth through greater division of labor (people tend spontaneously to save as eager to improve their condition);
Finally, the third effect also affect the allocation of
capital (investment spontaneously directed towards the most remunerative activities).
