Cartel Agreements Are Difficult To Maintain Because

Drug trafficking organizations, especially in South America, are often referred to as “drug cartels.” These organizations meet the technical definition of agreements. They are loose related groups that establish rules among themselves to control the price and supply of a good, namely illicit drugs. Perhaps the best-known and most effective cartel in the world is OPEC, the Organization of the Petroleum Exporting Countries. In 1973, OPEC members reduced their oil production. As it was known that Middle Eastern crude oil had few substitutes, OPEC members` profits rose. From 1973 to 1979, the price of oil rose by $70 a barrel, an unprecedented figure at the time. However, in the mid-1980s, OPEC began to weaken. The discovery of new oil fields in Alaska and Canada has given rise to new alternatives to Middle Eastern oil, leading to lower OPEC prices and profits. Around the same time, OPEC members also began cheating to try to increase individual profits. An agreement is an agreement between competing companies to work together to make higher profits. Cartels usually occur in an oligopolistic industry where the number of sellers is small and the products traded are homogeneous. The members of the cartel can agree on these issues: price fixing, total industry production, market share, customer allocation, allocation of territories, supply agreements, creation of joint sales agencies and profit sharing.

Game theory suggests that cartels are inherently unstable because the behavior of cartel members is a prisoner`s dilemma. Any member of a cartel would be able to obtain a higher profit, at least in the short term, by breaking the agreement (a greater quantity produced or sold at a lower price) than if it complied. However, if the cartel collapses because of defectors, companies would return to competition, profits would decrease and everything would be worse off. Under non-concerted agreements, companies would seek to improve their production or product in order to gain a competitive advantage. In an agreement, these companies have no incentive to do so. In Germany, cartel, often supported and implemented by the government, was the most common form of monopolistic organization in modern times. German cartels are usually horizontal combinations of producers – companies that produce competing products. A strong impetus for the formation of cartels came from the growing desire of German industry to dominate foreign markets in the decade leading up to World War I.

Customs protection has kept domestic prices high and allowed companies to sell at a loss abroad. International agreements, usually between companies that hold monopolistic positions in their own countries, were first concluded between the First and Second World Wars. Most of these cartels, especially those involving German companies, were dismantled during World War II, but some continued to persist. Subsequently, some steps were taken in the chemical and related fields to revive some of the old cartels.