Cartel

CARTEL. - The cartel (or consortium) is an agreement among industrial firms in the same branch of production for the purpose of regulating the market. It differs from other forms of industrial coalition (merger, absorption by the larger firm in a given productive branch of part or all of the other firms in that branch) in that the firms which give rise to the latter lose their autonomy. The differentiation of the individual firms, which on the other hand continues to subsist, gives rise in the cartel to particular juridical problems and is of considerable economic interest. The individual firms, for example, foreseeing that the cartel may break up, continue to maneuver in the forms available to them, engaging in competition within the cartel itself in order to secure good positions for when competition on the market resumes. For this reason, and because of the imbalance between the productivity of the participating firms, which is accentuated by variations in demand, the cartel is one of the most unstable forms of coalition. In sectors where the tendency toward coalition is accentuated for other reasons as well (integration of plants, specialization or standardization of production, etc.), it is destined to give way to other, more stable forms of coalition.

The juridical organization of the cartel may be of the most varied kinds: from a written agreement to the establishment of a commercial company, and even to open prices, a form in which every written agreement is lacking, the members limiting themselves to transmitting periodically to a central office data on their economic activity. The direction of the cartel may be entrusted to one of the members or to a bank, or else to a collective body of the firms whose decisions may be taken by majority or must be taken unanimously. Only in this last case do the weaker firms have a valid possibility of defending their positions within the cartel, which, moreover, the economic power of the larger firms can render rather unstable. In the other cases the predominance of the stronger firms strengthens the tendency toward more complex forms of coalition.

Cartels can be classified according to various criteria. Various types of cartel have been examined, distinguished according to the intensity of the agreements and the form of direction. Another distinction may be based on the modalities by which the cartel attains the aim that characterizes it: stabilization of prices, allocation of sales zones, determination of the maximum quantities of production for each firm. Every distinction responds above all to a need for clarity of exposition, since the phenomenon in reality presents a complexity whose individual elements theory must necessarily break down. The very distinction between cartels and the other forms of coalition that primarily pursue other ends (integrations, specializations, standardization of production: in a single word, greater efficiency of the firms) loses much of its importance if one considers that in reality the coalitions that set out to act on prices by limiting competition generally bring about linkages that respond to the second order of ends (thus the existence of a cartel can favor, among the firms of a given productive branch, agreements for the purchase of raw materials, for the utilization of energy and the establishment of common offices or departments, for the conduct of réclame, and can favor the tendency toward more complex integrations). Conversely, the coalitions that enable a firm in a given economic branch to attain greater efficiency and a larger scale strengthen the monopolistic power of the firm, bringing about in price formation phenomena analogous to those provoked by price leadership, etc.

A distinction that corresponds to a clear concrete differentiation is that between voluntary cartels and compulsory cartels. In agriculture, for example, cooperation among producers to support prices, for the common purchase of seeds, fertilizers and productive implements, was deemed necessary by many governments in order to overcome the condition of inferiority in which, as a result of industrial development, that sector had come to find itself. The consortium among agricultural producers was thus made compulsory in many cases.

Cartels began to establish themselves in America in the second half of the 19th century, favored by the severe depression that struck the American economy around 1872 in a particularly acute manner. Thus arose great complexes that centralized the production of petroleum, steel, coal, gas, and sugar. Financially powerful organizations, more or less linked among themselves, necessarily ended up controlling an ever vaster sector of economic activity and dominating political life. In vain, with the Sherman Act (1890), was an attempt made in the United States to prohibit cooperation among producers aimed at influencing prices. The tendency, which continued in other forms, ended up prevailing. In Europe too the cartels spread rapidly: especially in Germany.

Price formation in a market dominated by a single cartel that controls a notable share of the total supply is similar to price formation under a monopoly regime. Naturally the monopolistic power, which depends on the elasticity of demand and on that of the residual supply (that is, the supply of the non-adhering firms and of those that could enter the market), is rather limited for those cartels that do not control the entire supply and that do not achieve, through the coordinations that have been mentioned, a greater efficiency of the adhering firms: in that case, in fact, the non-adhering firms are in a position to wage effective competition against the cartel. The very tendency that leads to the constitution of the cartel therefore drives toward more intense linkages among the adhering firms. When the cartel breaks up, a regime of imperfect monopoly is succeeded by a regime of oligopoly: competition among the large firms that were already participants in the cartel will presumably take the form of an economic struggle that will lead to more intense linkages among the firms themselves or that will end with the survival of a single monopolistic firm.

Price formation in a market dominated by several cartels (a highly plausible hypothesis if one considers, for example, a world market) is analogous to price formation under an oligopoly regime. In this case too the competition of the firms that do not participate in the cartels and potential competition weaken the power of the cartels themselves. The monopolistic power is naturally greater for compulsory consortia that control the entire supply and that are not subject to potential competition.

One cannot but hold, contrary to the opinion of Pantaleoni, that the spread of cartels responds to needs that are anything but pathological in the development of the economic system. The moral judgment that must be passed on the phenomenon is therefore evident. It poses new problems of economic policy, which must not oppose the tendency toward coalition of firms, but must create the conditions so that this tendency, rather than aggravating the overbearing power of determinate economic and political forces, may lead to greater possibilities for the development of the human person. The interventions of the State that must attain this objective will take different forms according to the economic power of the cartel, the possibility of guaranteeing - through indirect interventions - that its activity is carried on within the framework of the general directives of economic policy, and the usefulness that direct management of the cartel may have for the purposes of a general coordination of economic activity. Catholic theology does not consider cartels unlawful, when the means employed remain within the due bounds of justice, because cartels are capable of bringing several advantages, especially in the fection of the goods and in prices; but it demands that they be kept within proper limits both in their implementation and in their supervision, because they easily offer occasion for bankruptcies, immoderate prices, and corruption.

Siro Lombardini