How do Cartel formation positively affect trade markets?

A cartel is a group of independent market participants who come together to improve their profits and establish dominance in the market. Cartels are usually associations in the same sphere of business, and thus an alliance of rivals. Most jurisdictions consider this as anti-competitive behavior. Basically, a cartel occurs when two or more firms enter into agreements to restrict the supply or fix the price of a good in a particular industry. A cartel can be considered as a formal type of collusion.

Cartels are considered to be against the public interest. This is because cartels aim to increase the price, distort normal workings of a competitive market, redistribute income in society from consumers to powerful vested interests, it may discourage innovation and efficiency gains, etc.

The simplest way to understand a cartel is through the following example. Consider a scenario like this: there are multiple stationery shops in your area of residence. Each stationery shops sells similar products, or products having no unique features (pen, pencil, colors, etc.) This means that each seller is not getting substantial profits or market share because there is no uniqueness in the products sold by them. Now imagine, if all the stationery shop owners form a cartel or a group, they will be able to determine their output and price.

Read More