Definition of Cartel: Types, Characteristics, Objectives, and Impact of Cartel

What is a cartel ? In general, the meaning of a cartel is the formation of associations or cooperation between producers with the aim of setting prices at a high level to limit product supply and business competition.

Another opinion said the notion of a cartel is a form of cooperation between several companies aimed at setting prices, overseeing production and sales, and monopolizing certain commodities or industries.

The cartel practice occurs because of business competition in an industry so that the idea of ​​cooperation among several businesses arises to ‘outsmart’ the competition. In other words, the purpose of cartel practice is so that certain parties can control a market.

In practice, cartel actors agree to limit the availability of a product on the market, namely by limiting the amount of production and dividing the sales area. This causes the scarcity of a product, so that the cartel actors can raise prices to get greater profits.

From the explanation of its definition, we know the characteristics of the cartel, namely:

  • There was a conspiracy or conspiracy between business actors to ‘outsmart’ business competition.
  • Efforts by businesses to reduce or even eliminate business competition.
  • There is a market monopoly effort carried out by several business actors.
  • Market control by the cartel causes the price of products on the market to tend to be higher or unstable.

Also read: Understanding Commodities

The Meaning of Cartel According to Experts

In order to better understand the meaning of the cartel, we can refer to the opinions of the following experts:

  1. Paul A. Samuelson and Willam D. Nordhaus

According to Samuelson and Nordhaus, the meaning of a cartel is an organization of independent companies, which produce similar products, which work together to raise prices and limit yields.

The statement was quoted from Economics (2001: 186) which mentions the definition of a cartel “Cartel is an organization of independent firms, producing similar products, that works together to raise prices and restrict outputs” .

  1. Richard Posner

According to Richard Posner , the meaning of a cartel is a contract between competing sellers to set the price of the product they sell (or to limit their expenses) there may be other contracts in the sense that the parties will not sign it unless they hope to make them all better.

The statement is contained in his book entitled ” Economic Analysis of Law ” (2007: 279) which mentions the definition of a cartel as “A contract among competing sellers to fix the price of the product they sell (or, what is the small thing, to limit their out put) is likely any other contract in the sense that the parties would not sign it unless they expected it to make them all better off “ .

Also read: Understanding Economics

Types of Cartel

Referring to its definition, cartel practice is a form of conspiracy carried out by several producers. Based on the scope of cooperation between cartel actors, the following are some types of cartels:

1. Price Cartel

This type of cartel aims to set the price of a product produced by producers who join the cartel. In general, the specified price is the minimum selling price of a product.

In practice, all producers incorporated in the cartel are prohibited from selling their products at prices lower than the price agreed upon. However, each member of the cartel is allowed to sell the product at a higher price, where the risk if not sold in the market will be the responsibility of each.

2. Cartel Terms

Cartel conditions relate to setting certain conditions in trading or business activities. Some of these include, for example, sales requirements, product quality standards, packaging standards, and goods delivery standards .

This type of cartel basically aims to create uniformity of products and their attributes to avoid competition between producers.

3. Rayon Cartel

Rayon cartel means the division of sales territory for each member of the cartel. In this case, each cartel member has a specific area for marketing their products by setting prices in each region.

With this agreement, each member of the cartel is not allowed to market their products to other regions.

4. Contingent Cartel

In this case, the contingent cartel means the determination of production volumes where the aim is to master the availability of products on the market. In practice, each member of the cartel is allowed to produce certain amounts of goods.

If a cartel member produces less than its quota then a prize premium will be given. However, if the production volume is greater than the specified quota, a fine will be imposed.

5. Sales Cartel

The sales cartel is the establishment of a centralized sales office. In other words, each member of the cartel may only sell its products through a single sales office, so as not to cause competition among members.

6. Cartel Pool

The pool cartel is also called the profit sharing cartel. This type of cartel has an agreement on the acquisition and distribution of profits.

The mechanism in this cartel is done by collecting ( pool) gross profit earned cash into the cartel members together. Furthermore, the net profit obtained will be distributed to each member of the cartel proportionally according to the agreement.

Also read: Monopoly Market

The Purpose and Impact of Cartel on Business

From the explanation of the definitions and types, it can be concluded that basically the purpose of cartel practice is to reduce or even eliminate business competition. In addition, the cartel also aims to establish price alignment, division of sales territories and production quantities.

However, business conspiracy practices can have a negative impact and also a good impact on trade. The following are some of the positive and negative effects of cartel practice in the business world:

1. Cartel Negative Impact

  • The company experiences obstacles when it wants to innovate and expand its business because it has been bound by regulations and sanctions.
  • The practice of cartels can result in a lack of innovation among entrepreneurs because the company has earned profits that tend to be stable and certain.
  • This business conspiracy will generally harm the consumer community because cartels dominate the market and tend to increase prices for greater profits.
  • The cartel will create a lack of competition between producers so that the business climate will be less conducive.
  • Cartels generally cause instability in prices that affect people’s purchasing power.
  • The control of product prices by the cartel will trigger inflation that will be detrimental to society at a macro level.
  • Profits earned and enjoyed by cartel members tend to be too large and long-term.

2. Positive Impact of Cartel

  • Cartel practices can make the employment relationship between companies and workers more conducive because wage increases tend to be more easily realized.
  • Cartel members have a better position in free competition so that the risk of termination of employment within the company is minimal.
  • The company can minimize the risk of loss due to the low level of sales because production or sales are regulated and guaranteed in amount.

Also read: Market Competition is not perfect

Why Are Cartel Practices Prohibited?

Basically cartel practices are prohibited in Indonesia and overseen by the Business Competition Supervisory Commission (KPPU). The prohibition is also stated in Law No. 5/1999 concerning Prohibition of Monopolistic Practices and Unfair Business Competition.

However, in reality on the ground there is still a cartel practice to this day. Some cartel cases that have occurred in Indonesia include; the automotive industry, telecommunications, the pharmaceutical industry, cooking oil and even salt.

As mentioned earlier, the conspiracy between business actors with the aim of controlling the market will result in unfair business competition. This will then lead to price volatility and detrimental to the consumer community at a macro level.

 

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