Cartels

Cartels

Principles of Microeconomics

Within the United States, there are thousands of firms competing for the largest profits and market share possible. Due to Anti-trust laws however, achieving these goals is a difficult process. The government pays close attention to mergers and collusions between companies in order to protect the public well-being concerning monopolies and companies working together to enjoy monopoly profits. Because monopolies are price makers, they have the power to directly influence the market price for their product. This is inherently inefficient for a mixed economy like that of the United States, and the only time they can legally arise is through government regulation.

An oligopoly refers to a market structure where only a few firms sell similar or identical products. Because the number of competitors in this market structure is small, firms are relatively aware of the actions of other firms. Consequently, the choices any one firm makes will influence the decisions and business processes of the other firms in that market. For firms within an oligopoly, strong incentives to limit competition between them arise. When firms decide to collude on certain business decisions like market share, production levels, prices, or advertising they become what is called a cartel and operate as if they are one monopoly.

In the United States and many other countries, the forming of cartels is illegal since the business and economic implications resemble that of a monopoly too closely. When oligopolies begin to cooperate with each other and form cartels, both the economy and society suffer. Through this reduced competition, prices are not driven down towards marginal cost, reducing consumer surplus in that market. With price fixing, firms within a cartel generally have less incentive to develop new and innovative production methods, which would eventually drive total cost down. This reduction in innovation and...