The Role of Cartels in Market Manipulation
A cartel is an agreement, whether formal or informal, among parties engaged in similar or identical trades or services. The goal of a cartel is to control and manipulate the market for mutual benefit by restricting competition. Members collaborate to reduce competition, increase prices, and maximize profits. This often involves businesses joining forces instead of competing independently. The result is a reduction in competition, which can lead to higher prices and increased profits for cartel members.
A cartel may be formed with the intention of:
- Fixing purchase/sale prices. b. Limiting or controlling production, supply, markets, technical development, investment, or provision of services. c. Allocating market areas, sources, or customers in a way that limits competition. d. Engaging in bid rigging or collusive bidding.
These actions are typically aimed at reducing competition and increasing the collective power of the cartel members in the market. It’s important to note that, under Indian law, such an agreement is termed a horizontal agreement, which is considered an anti-competitive agreement and is expressly deemed void under section 3(2) of the Competition Act, 2002.
However, the acts provides exemption for joint ventures that increase efficiency in the production, supply, distribution, storage, acquisition or control of goods or services.
Cartels often operate in secret to avoid detection and legal consequences. Members may use covert means of communication to coordinate their actions.
The primary goal of a cartel is to benefit its members collectively. By cooperating, members seek to increase their profits and gain advantages that they might not achieve through normal competition.
Cartels engage in practices that are anti-competitive and harm consumers by leading to higher prices, reduced product choices, and diminished innovation.
Impact on Consumers and Economic Efficiency
Cartels detrimentally impact consumers and undermine economic efficiency.
A successful cartel raises prices above the competitive level and reduces the quantity of goods produced.
Reduced Choices: By controlling market dynamics, cartels can limit the variety of products available to consumers. This lack of choice diminishes the ability of consumers to find products that best suit their preferences and needs.
Consumers face a choice: either refrain from purchasing the desired cartelized product due to higher prices or unwittingly transfer wealth to cartel operators by paying elevated prices.
Lower Quality: Without competitive pressure, cartels may have less incentive to innovate or improve the quality of their products. This can lead to a decline in product quality as consumers have limited alternatives
Allocative Inefficiency: Cartels can disrupt the allocation of resources by steering production towards less efficient methods or focusing on products that might not be in high demand. This misallocation can hinder the overall efficiency of the economy.
Deadweight Loss: The artificial inflation of prices by cartels often results in deadweight loss, representing a reduction in overall economic efficiency. Resources are not utilized optimally, leading to a loss of potential economic output.
Inhibited Innovation: Cartels may discourage innovation since member firms have reduced pressure to invest in research and development to stay competitive. This lack of innovation can impede long-term economic growth.
Cartels shield their members from the full force of market dynamics, diminishing the pressure on them to control costs and innovate.
Collectively, these dynamics adversely affect the efficiency of a market economy.