What exactly is a cartel? Many of you may be familiar with the term “cartel”. A cartel is generally a collection of independent producers whose purpose is to set prices, perform supply chain management of goods, and limit competition.
According to Richard Posner (1992), a legal expert, a cartel is an agreement or a competition contract between sellers to regulate the selling price. The goal is to raise prices while limiting production. Posner’s definition of a cartel emphasizes the moral issue.
In addition, according to Paul A. Samuelson and William D. Nordhaus (2001), a cartel is a group of separate enterprises that produce comparable products. These firms collaborate to raise prices and limit production. The goal is to reduce output and raise pricing.
It turns out that practically all countries have antitrust laws that restrict this group. Typically, business actors will do this in order to obtain market power. Power maker allows you to set your own rates by limiting the number of products available on the market.
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Purpose and Impact of the Cartel on Business
Based on general explanations and from experts, we can see that the purpose of this cartel is a form of anti-competitive behavior. Its purpose is to limit competition among members. By forming a collective agreement, they act into an enterprise, as if monopolize.
The parties make a profitable agreement between them, especially regarding the determination of prices, quantities and marketing areas. However, such conspiracy activities or actions can have an impact in the form of gains and losses for a business or business.
Advantages of cartels
- Operations that can establish a working relationship between each company and its workers tend to be more profitable, because wage increases are easier to obtain.
- Each member is better positioned to compete in the open market, so the risk of dismissal is minimal.
- The company is able to minimize the risk of loss due to low sales because production or sales are regulated and the amount is guaranteed by using sales management system.
- The existence of a cartel monopoly in the market puts it in a good place to face competition.
- You can apply rationalization to keep the selling price stable.
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Disadvantages of cartels
- Every entrepreneur faces challenges in preparing themselves to innovate and develop their business because they are bound by existing regulations and sanctions.
- Cartel operations may involve minimal innovation among entrepreneurs, as companies are already able to generate certain profits and tend to be stable.
- In principle, the cartel will cause price instability which in the long run will affect the purchasing power of consumers.
- Efforts to control the price of cartel products will trigger inflation which can harm the public.
- The benefits obtained by each group member tend to be larger and long term.
Seven Types of Cartels
Next up, we will discuss several types of cartels that you may need to know.
1. Price Cartel
Cartel is an agreement to determine the cost of goods sold by its member producers. Usually, the specified price is the minimum selling price for a product.
As a result, each producer who is a member of the cartel is prohibited from selling their products at a price less than the previously price.
2. Term Cartels
A conditional cartel is a cartel that regulates specific requirements in commercial or commercial operations, such as sales requirements, quality standards, commodities, gold standards, and transportation standards.
Basically this type of agreement is made to present product variations and characteristics so that there is no competition between each producer.
3. Customer assignment cartel
Specific customers are assigned to each member. Thus, all customers are divided amongst the members to ensure appropriate flow of revenue. Each member shall maintain the dignity of allocation & should not grab customers of other members.
4. Quota cartel
This tis the determination of production volume which is carried out to check the availability of a product in the market. In fact, each member of the cartel will be able to produce a certain number of goods.
If a cartel member produces or produces less than the specified amount, he will receive a bonus. On the other hand, if a cartel member increases the amount of production beyond the stipulated amount, they will be subject to sanctions.
5. Zonal cartel
They allocate the geographical locations of the country to each member in the cartel. Members should ensure to operate on their specific territory.
6. Syndicate cartel
Here, few members unite to sell jointly & reduce the cost of production. Such cartels intend to achieve economies of scale.
7. Super cartel
These are international collaborations at the highest levels. Cartels in the home country reach an agreement with cartels in the foreign country.
Reasons Why Cartels are illegal
Cartels are immoral and illegal because the not only cheat consumers and other businesses, they also restrict healthy economic growth by:
- Increasing prices for consumers and businesses through artificially inflating input and capital costs across the supply chain, including the cost of buildings and equipment rent, interest and decreased opportunities over the life of an asset.
- Reducing innovation and choices by protecting their own inefficient members who no longer have to compete so don’t bother to invest in research and development.
- Reducing investment by blocing new industry entrants that might invest in opportunities.
We may conclude that the cartel is a type of conspiracy activity from a number of producers. by a number of producers. As a result, Indonesia outlaws this practice since it might lead to economic inequity in all aspects of people’s life.
However, this cartel action will not result in a large and wealthy corporation because people’s purchasing power would eventually decline.
So, as a business owner, compete in the market by improving the quality of your products and services for customers. Also, use a competent accounting system to handle your finances.
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