Cartels are most effective when the demand for the cartel's product is not very price sensitive.
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This is why cartels are more effective in the short term ; over the long term, prices often become elastic as consumers find cheaper substitutes for the product. Also, demand volatility usually leads to disagreements within cartels regarding limits on output and capacity. In addition, the incentive for equity fund members to cheat on their agreements is often high, and this can lead to further disputes and difficulties maintaining cartel unity.
Cartels also do not last long in industries with low barriers to entry. In these types of industries, the threat of potential rivals generally reduces the gains to be had from collusive behavior. Although new producers may join a cartel, when membership levels increase, this often makes communication, negotiation , and enforcement more difficult.
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Members of a cartel maintain their separate identities and financial independence while engaging in common policies. They have a common interest in exploiting the monopoly position that the combination helps to maintain. Combinations of cartel-like form originated at least as early as the Middle Ages, and some writers claim to have found evidence of cartels even in ancient Greece and Rome.
Cartelization is said to provide for distributing fair shares of the total market among all competing firms. Cartels result in a price to the consumer higher than the competitive price.
Cartels may also sustain inefficient firms in an industry and prevent the adoption of cost-saving technological advances that would result in lower prices. Though a cartel tends to establish price stability as long as it lasts, it does not typically last long. The reasons are twofold. Second, even in the unlikely case that the cartel members hold to their agreement, price-cutting by new entrants or by existing firms that are not part of the cartel will undermine the cartel.
In Germany the cartel, often supported and enforced by the government, has been the most common form of monopolistic organization in modern times. German cartels are usually horizontal combinations of producers—firms that turn out competing goods.
What it is:
Tariff protection kept domestic prices high, enabling the firms to sell abroad at a loss. International cartel agreements, normally among firms enjoying monopoly positions in their own countries, were first concluded in the period between World Wars I and II. Most such cartels, especially those in which German firms were partners, were dissolved during World War II , but some continued to exist.
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Later, some steps were taken in the chemical and allied fields to revive some of the old cartel agreements. Formed in the s, OPEC became very effective in the s, when it almost quadrupled the price of oil. Although the agreements among its members have broken down from time to time, few economists dispute that OPEC remains an effective cartel, as it controls the supply and charges, at times, more than double what economists believe to be the competitive price of oil. Its longevity may stem from the fact that OPEC is a combination of governments rather than corporations. We welcome suggested improvements to any of our articles.
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