Cartel: Definition & Economics

Instructor: Allison Tanner
What affects the prices of goods and services? How does this affect the consumer? This lesson discusses the impact of corporate relationships known as cartels and their economic influence on consumers.

Cartel

Imagine you are the owner of an oil field. Chances are, you want to make as much profit as possible. Lower gas prices mean fewer profits, while higher prices mean greater profits. In an effort to increase profits, you make a deal with a neighboring oil field to reduce the amount of oil each of you produces each day. This partnership is known as a cartel.

A cartel is a collaboration between two or more companies who attempt to manipulate the prices of goods or services. The cartel forms because the companies are hoping to work together to control the market. We often see a cartel develop when there are a small number of companies who offer the product and each company often owns a large share of the good, such as with oil or gold. Through this collaboration, the companies who form the cartel are able to control prices by taking various measures to drive up the cost of goods or services.

Private Versus Public

There are two primary types of cartels that are formed - private and public.

Private cartels are those formed between member companies. In a private cartel, the members are interested in increasing their own benefits. Think of the example above where you wanted to make more profits so you made a deal with a neighboring oil field - this would be a private cartel.

Private cartels are often considered a violation of laws known as antitrust laws. Antitrust laws are regulations put in place by governments to increase the fairness of trading and production of goods or services. When private cartels are developed, they often violate these legal stipulations.

Public cartels are often encouraged by governments and are not subject to antitrust laws. These cartels are often formed in an effort to help the producers of the product or service and the global population. For example, instead of private cartels being developed, the major countries have joined the Organization of Petroleum Exporting Countries, better known as OPEC. This organization assists in controlling the amount of oil that is produced in an effort to stabilize oil prices.

Economic Influence

Let's say you and your neighboring oil field ignore the legal implications of a private cartel and develop an agreement between yourselves and another oil field. While the increase in profits will certainly have significant economic benefits for you and your company, it will likely harm consumers.

Consumers can be negatively impacted by cartel actions such as:

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