What is a Cartel | Types of Cartels

What is a Cartel?

A cartel is a form of combination in which independent business firms in an industry agree to regulate their output, to fix sales quotas and to control sales contracts and prices.

Business Cartel

Business Cartel

A cartel is a voluntary association formed with the objective of eliminating competition and to secure monopoly in the market. To achieve their objective, various restrictive measures are imposed by them. In this arrangement several business units dealing in the same line of business agree to pool the output with the cartel. The cartel will sell the output and distribute profits in a per-determined basis. Germany is the birth place of cartels.

In a cartel, the manufacturers and dealers fix prices, restrict output, pool the output and also establish a common agency through which the output is sold.

Types of Cartels

Von Beckereth has classified cartels into the following types:

1. Quota fixing cartels

The objective of these cartels is to restrict supply. To achieve this objective they seek to limit production by fixing production quotas for each member. No member can produce more than the quota allotted to him.

2.  Price firing cartels

These cartels regulate prices by restricting output. Minimum prices are fixed for products. No member can sell products at a price lesser than the minimum price.

3. Term fixing cartels

Terms of trade are fixed by the cartels. Members have to adhere to the terms of trade fixed by the cartel. Terms of trade may relate to time of delivery, place of delivery, mode of delivery, payment terms, credit period, insurance, packing, interest charges on balance payment etc.,

4. Customer assigning cartels

They are formed to assure a certain volume of sales to each member. They are similar to market pools. The entire market is divided among the members and a specific number or type of customers is assigned to each member. The member unit should sell its products only to those customers which have been allotted to it.

5. Zonal cartels

They are similar in nature to territorial pools, They are formed to assure certain volume of sales to each member. The total market is divided territory wise and members are given the right to deal in specified territories. For e.g., the entire Indian market can be divided into North, South, East and Western zones and each zone allotted to a certain member.

6. Super cartels

They are formed on an international basis. These refer to agreements between cartels of one country with the cartels of the other countries.

7. Syndicates

In a syndicate, member units enter into an agreement to form a joint selling agency. Member units sell their products to the syndicate at a price known as accounting price. The accounting price would cover the cost of production and also includes profit margins.

The syndicate studies the market structure of individual markets and sells at the highest possible price in each market. The prices charged by the syndicate would therefore be different in different markets. Prices charged by the syndicate are more than the accounting price and profits are earned. The profits earned are shared among members. Profit ratios are generally based on the output given to the syndicate by different members.