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What are Cartels?

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Introduction

ECONOMICS 2 TITLE: CARTELS WORDS: 1300 Cartels are usually happen in an oligopoly market, where a few large firms dominate the market. A cartel is when two or more of these firms make a formal agreement to collude, to try and limit competition between them. This can be done in a few ways. Members may have fixed prices that they sell their goods, this may be low to increase sales and stop new entrants or high as the will dominate the market. Cartel members also agree on such factors as market share and advertising expenditure. Quotas are another way firms collude, the member firms will set quotas on the amount a firm will produce (production quota) and sell (sales quota). But how do the firms agree on each members quota? The normal method would be to divide the market between the members according to their current market share. So basically the firms involved in a cartel act as one firm (a monopoly) Why would companies want to do this? Well, to capture the benefits of a monopolist. Diagram 1 shows the benefits that arise from forming and maintaining a cartel. ...read more.

Middle

So firms have an incentive to from a cartel but they also have an incentive to break that agreement, which could mean even if the cartel was allowed to succeed chances it would not be effective for long. Roche of Switzerland and Belgium interbrew are two examples of cartels. They were found to be trying to fix the prices of food additive and beer. Total fines on these firms reached �25 million. An investigation concluded that Interbrew, that brews Stella Artois, and Alken Maes, another Belgian brewer, had shared markets, fixed prices and exchanged information between 1993 and 1998. Interbrew admitted some of the charges and is expected to be fined about Euros 45m. Danone, the French food group that owned Alken Maes at the time of the offences, should receive a similar penalty. Alken Maes is now owned by Scottish & Newcastle of the UK. Some smaller brewers could also be fined. Another example, which happened two weeks ago, was where 13 pharmaceutical companies received a record fine of Euros 462 for trying to control the price of vitamins. So who is there to stop cartels? Well a lot of people say the government. ...read more.

Conclusion

Two years ago OFT where given the power to impose big fines on firms operating cartels, however only two fines have been imposed and are being negotiated. These laws are no being watered down due to demand from industry groups. Four month after announcing that operating a cartel would carry a strong jail sentence with no fine option, the department of trade and industry said it will allow offenders off with a fine. So is there need for these regulations and will they work? I believe that these regulations, if not stronger ones are needed. As if firms where allowed to dominate the market then they would be able to charge high prices for there goods, which is not good for consumers. These laws have the potential to work if they stick to strong measures instead of watering them down. As right now there is a bigger gain to be had by firms who form cartels. Even if they are found guilty they would be able to pay the fine and continue to carry on. And if a director was put in jail they would properly only get 2 years at the most and then when thay got out would no doubt have a large payment from the firm for going to jail and could walk back into there job if desired. ...read more.

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