The following are the advantages and disadvantages of cartels:
Advantages of Cartels
1. Assurance of profits: Since prices charged by cartels are more than the cost of producing and distribution, members are assured of a reasonable profit margin.
2. Monopoly power: Since cartels restrict competition, they are able to enjoy monopoly power. Products can be sold at high prices to maximize profits. Further, different prices can be charged in different markets based on the degree of monopoly.
3. Marketing economies: Since goods are advertised on a common platform, competitive advertising is avoided. Since there is bulk buying of advertising space and time in media, the cost of advertising is also relatively less.
4. Production efficiency: The cartel undertakes the-responsibility of marketing the products. Therefore the manufacturer is free to focus on production and work to achieve efficiency and cost reduction.
5. Ability to withstand business cycles: Since businesses are united, they would able to-withstand the adverse effects of business cycles. They can regulate their output and can influence prices and continue to survive.
6. Economies of scale: The cartel bears the advertisement, sales promotion, handling, packing and transportation of a large volume of output. Therefore it would be able to negotiate lower costs and save on its expenses.
Disadvantages of Cartels
1. Lack of stability: Cartels are voluntary associations and do not have complete control over their members. Members may exit a cartel any time if they feel that their interests are not being served. Therefore they are weak and lack stability.
2. Inability to stabilize demand: Cartels have proved ineffective in preventing fluctuations in demand. They have not been able to stabilize demand to a great extent.
3. Protection to inefficient firms: There is no incentive for efficiency. As cost plus pricing is followed, member units are assured of profits. Firms lack the incentive to improve efficiency and reduce costs.
4. Creation of monopoly: Cartels lead to creation of monopoly. Such monopolies adversely affect the interest of the consumers by resorting to restricting output, creating artificial scarcities, producing low quality products and selling them at high cost, lack of innovation etc.
5. Creation of excess capacity: Enthused by the high profits earned by the members of the cartel during boom periods, many businesses would be set up and membership of the cartel would increase. But during periods of recession and depression, the over capacity created would lead to high unsold stock and member units would sink together.