Question

Provide an example of cartel and explain what facilitated the formation of this cartel or what made the Cartel break down.

Answer 1

Cartel is a form of oligopoly where few companies or countries work together and influence market prices by control of production and sale of a product. They basically generate the entire supply of the product.

One of the most famous cartel is Organization of Petroleum Exporting Countries (OPEC).

Formation: This cartel was created in Baghdad , Iraq in 1960. Founding countries include Iraq,Iran, Venezuela, Saudi Arabia and Kuwait. It was done to make the oil market stable.They coordinated the policies in order to ensure fair price for exported oil and to maintain a steady supply to the market. Thus the formation of this cartel was facilitated.

Problems faced by OPEC: Cartel requires the firms to trust not to change their prices or output for their own profit. OPEC suffers from coordination problems. They, like any other cartel, have the urge to compete among themselves. Thus quotas were imposed to ensure limitations. However the OPEC countries sometimes themselves break this quota to maximise their own profit. This is the very reason Ecuador and Gabon broke away from their membership of OPEC.