Monday, January 28, 2008

Cartels and Cartel Behavior

Today in class we examined how pricing decisions by firms can alter incentives. Specifically, we examined the OPEC cartel (as well as others). OPEC's mission, according to their website, "is to coordinate and unify the petroleum policies of Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital to those investing in the petroleum industry." Of course, this does not mean that OPEC isn't in the oil business to make money, and one of the problems associated with cartels is that is is difficult to maintain cohesive action. In other words, there is a huge incentive for individual members to cheat on the cartel agreement. This article explains the economics of OPEC nicely and the fact that cheating is very prevalent.

Sometimes the cartels are explicitly condoned by the Federal Government. Take for example the so-called "milk marketing" orders, which are essentially regulations that require certain pricing structures for milk. The CATO Institute has a nice op-ed on the topic here.

The next time you hear the word "cartel" be aware that there are powerful political interests behind the limiting of competition and that these interests may be operating in your backyard.

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