Cartel Case Study

An effective economy is an economy that is has laws and regulations that the firms from various economic obstacles and also stimulates growth. Economic growth is linked to competition, as competition leads to more innovation, efficiency and high growth, which will benefit the country. However, if regulations is not effective, it will lead to decreased competitions, increase in monopoly and cartels. These limit the economic growth and decrease the welfare of consumers in the long term if left unchecked. The essay will discuss on a car glass manufacturer Saint Gobain cartel case that occurred in the European Union. The further understand the cartel case one needs to understand what cartel is and its effect on the economy. Collusion and cartels

Cartel is considered illegal in many countries because it gives the collaborating firms an unfair advantage over other competitor thus shielding itself from competitions. This reduces pressure for firms to continually improve its product or finding ways to efficiently produce them. This can bring long term consequence to the other stakeholders, the overall economy, consumer welfare, countries and region as a whole. The chart below further explains the effects on the economy. Since, the cartels works similarly to monopoly, the theory is similar. The left side of the chart shows the short run of the firms in cartel. The profit maximizing price and quantity would be where the marginal cost intersects the marginal revenue line. The price of the monopoly would be the horizontal line that touches the average revenue line. As opposed to perfect competition, the producer and consumer surplus are equal. However, in the case of collusion the producer surplus increases while consumer surplus reduces. The shaded yellow area is the addition gap added to the producer surplus. It is the profit that benefits the

Those factors are a growing market, capacity restraint, information about competitor’s prices, and meeting competition clause. In the situation where the market is growing then there is high chance of firms colluding to form cartels. As market grows, the profit also increases especially if the firms collude with each other. This encourages cartels to form as operating without cartel produce less profit than with cartels. Capacity constraint is another factor because in a competition situation, it is difficult for companies to produce at monopoly output. Therefore, to increase the output, collusion is necessary to supply monopoly output and that leads to higher profit for the firm. Information about rival’s price is also another facilitator because if the firm is able to gain access to its rivals price information, this makes it easier for the firm to monitor the rival to make sure that they follow through with the agreement of the price and output. If the firm deviates from the cartel, then other firms can punish them. Therefore access to rival’s information allows the cartel to function stably. The last factor meeting the competition clauses is also facilitator that ensures stability of collusion. It is contract term between the company and the customer concerning the price. The terms states that if the customer receives better price offer from another