Question

Find and provide example of Cartel as a type of Oligopoly. Has any cartel ever existed in all times in any country?
a)   Define Oligopoly and briefly describe its main conditions
b)   Define Cartel and briefly describe the main aims of cartel
c)   Describe and explain the outcomes of Cartel related to 2 areas:
d1) outcomes for sellers (good/bad, gain/loss)
d2) outcomes for consumers (good/bad, gain/loss)

Answer 1

a) Oligopoly is a type of market in which there are few sellers of a single commodity and they have some market power as a group.

The main conditions of oligopoly are-

• There may be many firms in an oligopoly, but there are only few large firms which produce maximum share of output.
• There are high barriers to entry in this market because group of firms have market power and hence they control the market.
• The product in this type of market may be either homogenous or differentiated but similar.

b) A cartel may be defined as a group of firms ( producers or suppliers of same good) that come together to form a group to control the price of the product by controlling the supply.

The main aims of forming a cartel may be-

• To decrease the competition in the market.
• To earn maximum profit possible.
• To raise the price of the product.
• To control the supply of the product.
• To share the technology among themselves.

c) The outcomes of forming a cartel is different for consumers and producers of the good.

• For sellers of the goods, the outcomes of formation of cartel is very good. This is because as a cartel they have market powers and can control the price of the product and hence earn maximum profit, which is their gain from cartel.
• For the consumers of the product the formation of cartel is bad. This is because after the formation of the cartel they have to pay a higher price for the product which is their loss.

Since formation of cartels are not good for consumers so government tries to restrict the formation of cartels but they still exist in one form or the other. We can take the example of OPEC, the group of Oil exporting Nations, they also somewhat act like a cartel to form oligopoly in oil market and control prices by limiting supply.