Cartel

When rivals stop competing and start cooperating to fix prices and carve up the market, they form a cartel, the most direct and most illegal assault on competition.

A cartel is a formal agreement among competing firms to coordinate their behaviour, typically by fixing prices, restricting output, or dividing markets, in order to act collectively as a monopoly would. It is among the most serious offences in competition law, because it directly replaces competition with collusion to the detriment of customers.

Acting as one

The purpose of a cartel is to capture monopoly profits without the market actually being a monopoly. By agreeing to fix prices, limit production, or allocate customers and territories among themselves, the colluding firms suppress the competition that would otherwise drive prices down, and share the resulting spoils. The market looks like it has several competitors, but they behave as a single monopolist, raising prices and restricting output at the customers' expense, which is exactly the harm competition is meant to prevent.

Why cartels are unstable

Cartels are inherently unstable, because each member has a strong incentive to cheat. Once the others restrict output and hold prices high, any single firm can profit by quietly producing more or shaving its price to win extra sales, undercutting the very agreement it signed. This temptation, the prisoner's dilemma at the heart of collusion, constantly threatens to unravel the cartel, which is why cartels devote effort to monitoring and enforcing the agreement among themselves, and why many collapse in mutual cheating and price wars.

The response of the law

Because cartels are so directly harmful, competition law treats them with particular severity, typically as illegal in themselves, without need to prove specific harm. Enforcement is difficult, since cartels operate in secret, so authorities use tools designed to crack them, notably leniency programmes that offer the first member to confess immunity from penalties, exploiting the same distrust among members that makes cartels unstable. The threat that a co-conspirator will defect to the regulator is one of the most effective deterrents.

A cartel is the starkest form of anti-competitive conduct, rivals conspiring to behave as a monopoly and fleece their customers. Its internal instability, the constant temptation of members to cheat, is both its inherent weakness and the lever competition authorities use to detect and dismantle it, which is why secret collusion, though tempting, is a precarious as well as an unlawful enterprise.