Question

Theoretically speaking, suppose you, for some unknown reasons, decide to change a career path after a no-deal Brexit to become a consultant for the head of an underground enterprise, in which it plans to form a cartel with another operation ring in neighbouring region. The combined turnover would easily exceed €100 million in its first year together. The problem is, however, forming a cartel is difficult, not least maintaining it. Answer the following:

a. Why would it be difficult to form and maintain a cartel in general?

b. Explain in detail what the various challenges are, in this particular case, in order to succeed.

c. What will you give advice in order to successfully execute the project? Motivate. d. Give examples of two successful cartels in history. Are they still active? If not, what happened to them? What went wrong?

Answer 1

a) Cartels are generally difficult to form and maintain because of several factors affecting the formation of cartel .

As we know that cartels are generally formed in oligopoly, factors like product type , number of firms, availability of substitutes  etc are to be considered .

b) Challenges are

:Availability of substitutes : If there is existence of substitutes in the market, oligopoly cartels might be difficult to form and regulate.

Number of firms :If the number of firms in the cartel are less , it is easy to maintain and regulate the firms and maintain oligopoly.

Also once the cartel is formed , it is difficult to regulate because there are chances of members resorting to cheating in increasing production outside the cartel for increased profits. This is because the members are regulated to limit their production to maintain stability in prices and supply

c) The main advice to cartels is that once formed , the policies should be such that they should not favour any one member and should be trustworthy with severe regulations and fines  on cheating in case of non compliance which would reduce the cheating of members.

d)Two successful cartels in the history have been OPEC and De Beers Diamond mines. OPEC was formed in 1960s with the motive to regulate the prices and supply oil and gasoline in the world market . And De Beers diamond mines were formed to regulate worldwide supply of diamond.

In the current scenario , OPEC has lost its power due to the non cartel companies having substitutes or supply of oil thereby reduciong the prices of oil and affecting the cartel . Many country members had wanted to increase the production outside the cartel in order to increase profits because the oil supply from non cartel countries.  De Beers has been quite successful because of the fact of low availability of substitutes But in recent years , the cartel has reduced control over several African countries, also because of having synthetic diamonds in future , this cartel would be more affected.

(You can comment for doubts )