Cartel vs Collusion
Competition exists in any marketplace that has more than one market player. Competition is seen to be positive and healthy to the economy as it encourages companies to offer better products to the market, lower costs to offer products at competitive prices, and continuously improve their performance, which is ultimately beneficial to the consumer. There are, however, a number of illegal and unfair practices that companies utilize in order to achieve an unfair advantage by cooperating together to achieve mutual benefit. Cartels and collusion are such illegal arrangements made between firms in the same industry. Despite the many similarities between these two unfair competitive practices, there are a few differences between cartel and collusion which are clearly highlighted in the article below.
What is Cartel?
A cartel is an agreement of cooperation formed between competitors in a specific industry. A cartel will get together to set prices and control levels of production with the aim of gaining mutual benefit. Cartels are made up of companies in the same industry that traditionally compete against each other, but who have realized that it is mutually profitable for all players in the marketplace to work in cooperation to control market conditions. Members of a cartel will restrict levels of production and output thereby creating high demand for the product and pushing prices higher beyond the equilibrium prices. Antitrust laws in place in most countries of the world make such cartels illegal as they wipeout any fair competition and encourage unethical trade practices. Despite these laws, powerful cartels still exist in the corporate world. Organization of Petroleum Exporting Countries (OPEC) controls the production, distribution, and prices of oil around the world. The De Beers diamond company is another popular international cartel that controls the global diamond market. The activities of such large international cartels are not healthy for the global economy as it not only eliminates fair competition but also results in artificially inflated prices.
What is Collusion?
Collusion is a secretive agreement between two or more organizations, formed with the aim of gaining illegal mutual benefits. An example of collusion would be two companies that operate in the same industry secretively agree on a scheme to fix prices, thereby eliminating competition between the two firms. Collusion will be mutually beneficial to the firms that form the alliance as it will allow them to exercise control over a large share of the market and thereby inflate prices, control supply, and earn large profits. Collusion is considered to be illegal and unfair competitive practices under antitrust laws. Other examples of collusion include agreeing not to compete in certain products or services.
What is the difference Between a Cartel and Collusion?
Competition within a marketplace is seen to be healthy and beneficial not only to the consumer but also to the overall economic health. There are, however, a number of illegal practices that firms have adopted to gain an unfair advantage. Two such practices are the formation of cartels and collusions. Both cartel and collusion are agreements between market players in the same industry who are traditionally competitors to one another, and have decided to cooperate with one another in order to gain a higher mutual benefit. Both cartel and collusion engage in unfair, illegal trade practices such as fixing prices, controlling production, deciding which products to compete against, etc. The main difference between cartel and collusion is that a cartel is more organized and is a formal arrangement such as the OPEC, whereas collusion is informal in nature and involves firms secretively fixing prices and agreeing not to compete in certain areas of the market. Collusion may also occur between firms when a company merely decides to follow a price leader in the market and decide to set their price at the same level. Despite the fact that cartel is illegal the sheer size of these organizations makes them hard to regulate and control. Collusion is also illegal under antitrust laws; however, the secretive nature of these agreements makes them very hard to detect. For example, a supermarket selling a box of matches at the same price as another supermarket is not illegal unless it could be proven that the supermarkets had a secret agreement to fix the prices of match boxes at the same level.
Summary:
Cartel vs. Collusion
• A cartel is an agreement of cooperation formed between competitors in a specific industry.
• Cartels are made up of companies in the same industry that traditionally compete against each other, but who have realized that it is mutually profitable for all players in the marketplace to work in cooperation to control market conditions.
• Members of a cartel restrict levels of production and output thereby creating high demand for the product and pushing prices higher beyond the equilibrium prices.
• Collusion is a secretive agreement between two or more organizations, formed with the aim of gaining illegal mutual benefits.
• An example of collusion would be two companies that operate in the same industry secretively agree on a scheme to fix prices, thereby eliminating competition between the two firms.
• The main difference between cartel and collusion is that a cartel is more organized and is a formal arrangement such as the OPEC, whereas collusion is informal in nature and involves firms secretively fixing prices and agreeing not to compete in certain areas of the market.