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Cartels - more than a rip-off?

Fifty years ago, oil producing countries established the OPEC cartel. The organisation soon became the symbol of the cartel model. Are cartels intrinsically bad?

Outside view of the headquarters of the Organization of Petroleum Exporting countries (OPEC)in Vienna. (Photo: AP Photo/Ronald Zak)

OPEC headquarters in Vienna: Austria pays the rent

Half a century ago Iran, Iraq, Kuwait, Saudi Arabia and Venezuela created the Organization of Petroleum Exporting Countries (OPEC) - an organization that quickly became the modern symbol of the cartel model that many governments around the world have outlawed.

Cartels weren't always illegal in Germany, however. In 1905, the country had 385 officially registered cartels, formed between a total of 12,000 companies. After World War I, the number of cartels rose even higher – to 3,500 – making Germany "a kingdom of cartels." It was only after World War II that numerous policymakers and economists expressed concerns about the threat cartels posed to the very foundations of a free market economy by essentially undermining the competition needed to supply people with goods and services at reasonable prices. In 1957, Germany introduced its first cartel laws – very much against industry opposition.

"Cartels usually serve their founders' interests," said Daniel Zimmer, director of the Institute for Trade and Commercial Law at the Bonn University and a member of the German monopoly commission, which supervises free competition on behalf of the German government. "The founders agree on higher prices or on reducing supply and, in the end, consumers have a disadvantage. That's why cartels are basically banned."

Professor Dr. Daniel Zimmer (Photo: German Monopoly commission)

Cartel expert Daniel Zimmer says there are exceptions to every ban

Even with laws in place, companies have continued their price-fixing activities. According to the Federal Cartel Authority in Bonn, detecting such arrangements between companies helps prevent damage worth 500 and 750 million euros annually. These are conservative calculations, based on the assumption that companies agreeing to fix prices set them about 10 percent higher than the market price. Studies have revealed, however, that cartels can easily add another 25 percent to market prices.

Cartel ban - with exceptions

In theory, cartels should not exist in the first place because of a self-destructive element inherent in them: Companies able to sell their goods at a higher price are inclined to increase supply to make yet more profit. But greater supply translates into lower prices, despite cartel arrangements.

The most prominent example is OPEC, which currently consists of 12 oil-producing nations. Critics point out that member states have seldom adhered to negotiated production quotas, and that market prices have rarely matched the cartel's targets, giving the group a reputation for being a toothless tiger.

Emir of Kuwati Sheikh Sbah Al-Ahmaed Sbah at the opening session of the OPEC summit in Riyadh, Saudi Arabia, on 17 November 2007. (Photo: dpa)

Critics say OPEC members rarely meet their own targets

Are there cartels that serve a good purpose? "Cartels are banned in principle, but principles can come with exceptions," Zimmer said. "There are exceptions to all cartels that allow principles to be broken under strict conditions."

He cited research and development (R&D) as an example of where fixing arrangements could help save resources because companies wouldn't necessarily need to "reinvent the wheel" every time they launch a new project. "European Competition Protection Law foresees exceptions from the cartel ban wherever arrangements serve to promote technical or economic progress or help improve the production of goods or consumer supply."

A key requirement, however, is that savings achieved through the arrangements must actually benefit consumers. "You have to rely on forecasts to determine whether this is the case, but forecasts are tied to market conditions," Zimmer said. In highly competitive markets, he added, benefits gained through a "rationalising cartel" would more likely be passed on to the next market level than in markets with less competition.

Is a "good cartel" possible?

Wheat field (Photo: dpa)

Could cartels help secure global food supply?

One could think of "good cartels" in which arrangements between companies help guarantee supply of agricultural products, for instance. A current example: speculation has fueled wheat and cocoa prices - a development that has nothing to do with real scarcity. To combat this trend, Russian minister of agriculture, Alexej Gordejew, has lobbied for the foundation of a so-called "crop-OPEC".

Bonn-based agricultural economist Joachim von Braun thinks along the same lines, but avoids the term "cartel" because of its negative connotation. He prefers the term "international crop reserve bank." This body would be run by a club of crop-exporting countries interested in promoting a functioning global food supply system. By adjusting price fluctuations, they would spoil speculators' appetites to tamper with the market.

Cartel expert Zimmer believes current laws would not, in principle, ban such arrangements. "If countries agree to buy and sell crops together, this activity would have to be viewed, initially, under cartel laws. Whether such activity should be banned or viewed as an exception to the rule would then have to be assessed in detail."

Author: Rolf Wenkel (nh)
Editor: John Blau

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