Collusive Agreements or Cartels in Various Industries

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Recommended: Governments role in the economy

Agreeing with other industry members what price to charge is known as collusion. Collusion is defined as “Action in concert without any formal agreement… [it] is common when anti-monopoly legislation makes explicit agreements illegal or unenforceable. Its existence is [sometimes] extremely difficult to prove” Black et al (2012). Within this analysis, I will explain what collusion is, the different types, why firms may enter into this agreement, then outline a past example and finally explain why this silent or spoken agreement may break down. Collusive agreements or cartels may however be created by governments to protect and positively influence markets, examples of this are the US sugar manufacturing cartel (operating between 1934-74) and OPEC which is still in operation today.

Collusive behaviour exists only within an Oligopoly market structure as a result of the extreme mutual interdependency of firms. Some examples of markets where oligopolies may be found are the Tobacco industry, soft drinks and gas distribution. Parkin et al (2008). An oligopoly is defined as “a few sellers [that] dominate the market… [it] might have dozens or even hundreds of individual firms but most of them are unimportant in the industry; a small number of them…dominate the industry.” California State University Department of Economics. (2014) there are two unique characteristics within oligopoly not witnessed in any other market structure; they are mutual interdependence and repeated interaction. Others include a “high concentration ratio, either a homogenous or differentiated product or both high and low barriers to entry” Dawson, Chris (2013).

“Mutual interdependence exists when the actions of one firm [have] a major impact on the other firms in ...

... middle of paper ...

...that this was the sole reason for this collusive agreement to break down.

Conclusion
In conclusion, the temptation for a firm to enter into a cartel or collusive agreement may not only be to fuel rising profits and sales. Some organisations may enter into these agreements not with the sole intention of boosting profits, this is clearly seen through the creation of OPEC which aids both consumers and producers development and stability. However seen above by the BA and Virgin Atlantic scandal this is the most common use for this agreement. The negative side of these types of agreements that are purely selfish and only help the producer are clear to see. Furthermore, the reason is clear as to why this agreement broke down, as the key component to any agreement is trusts and this is what Virgin broke, there was no foreseeable way this collusive agreement to continue.

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