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In 1998 two British sugar producers 'British Sugar' and 'Tate & Lyle' were found to be operating a cartel by the European union.

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Introduction

CARTELS ESSAY NICOLA ACTON 13JLB In 1998 two British sugar producers 'British Sugar' and 'Tate & Lyle' were found to be operating a cartel by the European union. A) Explain the circumstances under which a cartel is likely to be successful B) Analyse the economic implications of operating a cartel for producers and consumers in the sugar industry. C) Examine methods by which firms might compete in the absence of a cartel. <A> During the 19th Century and for most of the 20th century British industries were dominated by collective agreement. Firms colluded to restrict competition. By colluding, a firm could gain some monopoly power over their respective markets; as a result they become price makers rather than price takers. A cartel is a group of producers, which have agreed to restrict competition in the market. Essentially, they make agreements about the prices and quantities that will be sold. In markets, which are unregulated by the government, there is a strong tendency for firms to collude and act as if they were one firm. Possibly the most famous cartel today is OPEC. THE SUCCESS OF A CARTEL DEPENDS ON A NUMBER OF FACTORS: Production must be in the hand of relatively few producers, as an agreement has to be reached. This is likely to be easiest in Oligopolies, where only a few firms dominate the market. ...read more.

Middle

Investment is the purchase of capital goods, which are then used to create other goods and services. This makes firms stronger and more efficient and in turn, this will be passed onto the consumer through lower prices. It is important to remember that cartels are extremely illegal. Their movements are monitored by the OFT (Office of Fair Trading) which used to be the Competition Commission. They investigate cases where it is believed that a cartel is in operation. Cartels can be broken down and heavily fined- under the New Competition Act the fine is 10% of turnover. FOR THE CONSUMER: The operation of a cartel will mean an increase in the price of sugar for consumers and also a lack of choice as to whom the consumer can buy their sugar from. This may be viewed as an increase in the price of plain sugar, but this is not the case. Products, which contain sugar, such as chocolate and many processed goods, will also have higher prices. This is because the cost to firms for making the product containing sugar will be higher and this is then passed through the price onto the consumer. On the other hand, if these producers did not increase the price it would mean lower profits for them. The demand curve shows the price that the buyer would be prepared to pay for each unit. ...read more.

Conclusion

More recently, we have seen sugar firms taking a much more involved role. Tate & Lyle sponsors many sport events and both companies have used celebrity chefs such as Gary Rhodes to increase the awareness of their product. THE CONCLUSION OF THE CASE The EU believed that this cartel gave rise to cause for concern from the viewpoint of large companies operating in concentrated markets. The Commission fined British Sugar and Tate & Lyle 39.6m euros (�27.9m) and 7m euros (�4.9m) respectively, for adopting a 'collaborative strategy of higher pricing' on the British markets for industrial white granulated sugar and retail white granulated sugar. Napier Brown and James Budgett were each fined 1.8m euros (�1.3m) for participating in the cartel in the industrial white granulated sugar market. The Commission took account of the fact that Napier Brown and James Budgett, both sugar merchants, were dependent for supplies on British Sugar and Tate & Lyle. Between them, the four companies accounted for 90 per cent of the British white granulated sugar market. The Commission decided that there was a cartel on the basis of an initial meeting between all the firms. The Commission commented that while it did 'not have sufficient evidence that prices to be charged to individual buyers of industrial or retail sugar were jointly fixed, the systematic participation of all the four parties in regular meetings concerning industrial sugar, and of British Sugar and Tate & Lyle concerning retail sugar, led to an atmosphere of mutual certainty as to the participants' intentions concerning their future pricing behaviour'. ...read more.

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