Cartel Agreement

A cartel agreement is an arrangement among competing firms to coordinate their behaviour, typically by fixing prices, limiting output, or dividing markets. Cartels are a form of collusion that restricts competition, and they are generally prohibited by competition law because they harm consumers.

Forms of Collusion

Cartel agreements can take several forms. Price fixing involves agreement on the prices to be charged. Output restrictions limit the quantity produced, raising prices through scarcity. Market allocation divides customers or territories among the participants, reducing competition in each segment.

Other forms include bid rigging, in which firms coordinate their bids in procurement auctions, and the exchange of competitively sensitive information, which can facilitate coordination. The forms of collusion vary, and cartels often combine several practices.

Conditions for Stability

Cartels are difficult to sustain because each member has an incentive to cheat, undercutting the agreed price to gain market share. The stability of a cartel depends on factors including the number of firms, the transparency of prices, the frequency of interaction, and the severity of punishment for deviation.

Fewer firms make coordination easier, since monitoring and enforcement are simpler. Transparent prices make deviations easier to detect, supporting stability. Repeated interaction allows firms to punish deviators through price wars, and the threat of punishment deters cheating.

Detection and Enforcement

Competition authorities detect cartels through a range of methods, including investigations triggered by complaints, leniency programmes that offer reduced penalties to firms that report cartels, and the analysis of market data for patterns suggestive of collusion. Leniency programmes have proved effective in uncovering cartels.

Enforcement involves the imposition of fines, which may be based on turnover, and, in some jurisdictions, criminal penalties for individuals. Damages actions by injured parties provide an additional deterrent. The design of enforcement balances the deterrence of collusion against the costs of investigation and the risk of penalising legitimate conduct.

Effects

Cartels raise prices and restrict output, transferring income from consumers to producers and generating deadweight loss. The effects depend on the coverage and the stability of the cartel, and on the availability of substitutes. International cartels can affect markets across many countries, and their prosecution requires cooperation among authorities.

The analysis of cartels informs competition policy and the design of enforcement. It also informs the understanding of market structure and of the conditions under which competition is likely to be effective, contributing to the assessment of mergers and of other market developments.

Cartel Stability

The stability of a cartel depends on the balance between the gains from collusion and the incentive to deviate. Each member gains from the higher price that collusion sustains, but each also has an incentive to undercut the agreed price to gain market share.

The sustainability of collusion depends on the frequency of interaction, the transparency of prices, the number of firms, and the severity of punishment for deviation. Repeated interaction allows firms to punish deviators, and the threat of punishment can deter deviation.

Factors Facilitating Collusion

Several factors facilitate collusion. A small number of firms makes coordination and monitoring easier. Homogeneous products simplify agreement on price. Transparent prices allow deviations to be detected. Stable demand and cost conditions reduce the scope for disagreement.

Barriers to entry protect the cartel from new competitors, and excess capacity allows firms to punish deviators by expanding output. The presence of these factors increases the likelihood of collusion and informs the assessment of markets by competition authorities.

Detection Methods

Competition authorities use a range of methods to detect cartels. Leniency programmes offer reduced penalties to firms that report cartels, creating an incentive to defect from the agreement. The analysis of market data, including price patterns and bid behaviour, can reveal anomalies suggestive of collusion.

Investigations use documentary evidence, testimony, and economic analysis to establish the existence and the effects of a cartel. The use of these methods has increased the detection and prosecution of cartels, though the challenge of proving collusion remains.

International Cooperation

International cartels affect markets across many countries, and their prosecution requires cooperation among authorities. Networks of competition authorities, including the International Competition Network, facilitate the exchange of information and the coordination of enforcement.

The design of international cooperation addresses the challenges of different legal frameworks, of confidentiality, and of the allocation of cases. The effectiveness of cooperation informs the assessment of the international competition regime and of proposals for reform.

See also

• Monopoly Power
• Competition Policy
• Market structure