Cartels

Stephen Mertz

February 13, 2017

MBA 833, Spring 2017

Discussion #4

        A cartel is a “formal organization set up by a group of firms that produce and sell the same product for the purpose of exacting and sharing monopolistic rents” (Johnson).  Cartels seek to reap the monopolistic rewards by limiting output, which forces the price above the point the market would settle at if the members remained in competition with each other.  Essentially cartel members agree upon a price for the product and none of the other members within the cartel are allowed to sell at a lower price.  Often times, cartel members agree to local monopolies via geographic markets.  Cartels need to restrict the total production of the product they are selling below the level the market would decide, in other words, they produce at levels where the marginal cost is below the price they are asking.  For a cartel to be successful the firms within the cartel need to trust that the other firms will not lower their prices, creating a larger market share and profits. Cartels also need to operate in a manner in which an international court cannot take action upon them.  Even though cartels may be known commodities, they have no legal ties to one another which makes punishing cartels or disbanding them near impossible.  Countries like the United States and other capitalist nations view cartels as unenforceable in the court system and treat them as illegal because they promote restraints on trade which has negative effects on the consumer.

        If McDonald’s, Burger King and Wendy’s conspired with each other to raise the price of a hamburger, then they would be classified as a cartel by the government.  However, if the employees of McDonald’s, Burger King and Wendy’s agreed to raise wages, standardize working hours and conditions, then they would be awarded protection and applauded for unionizing.  Labor unions are functionally labor cartels.  A labor cartel restricts seeks to the number of workers in an industry to drive up the wages, just as OPEC attempts to cut the supply of oil to the world in order to raise its price (Sherk).  OPEC is a cartel in which many different members are producing oil to sell to the rest of the world.  However, the incentive to cheat all the other members in OPEC is ever-present.  Since the production restraints have artificially increased the price, the members of OPEC each want to produce a little more. Since each member is producing a little more, the production limitations are no longer valid and all the members of the cartel eventually lose.  OPEC’s problem is that it doesn’t control enough of the world’s oil supply to sufficiently control the price of oil.  What this does is cause other producers, such as America’s fracking industry to increase their production and potential profits, which forces the cartel to expand production and bring the price down again (Worstall).

        The NCAA acts as a cartel because all of the schools that are members work together to gain the most benefit.  The real players are the member schools of the “Big 5” conferences.  These include the SEC, Big 12, Pac-12, Big Ten, and ACC.  So why do the smaller schools continue to buy in to the NCAA? These schools cannot afford athletic programs or scholarships without the help of the NCAA, and there is no easy way for a school or conference to simply leave the NCAA.  If colleges left the NCAA and started paying their athletes, the same five conferences would assume their dominance (Pagels).  Every professional sports league that has had a competitor has had one of two outcomes happen: a merger or one of the leagues crumbles.  Likewise with the NCAA, if enough schools were to leave and form their own “league” where the players got paid, it could inevitably bring an end to the NCAA.