Hardcore Cartels in Market Competition Terms

Abstract

Cartels are amongst the gravest market rivalry breaches. Literature and other market structure reports claim that the formation of cartels is an offense both internationally and domestically. The competition authorities have globally intensified their efforts to track down hard-core cartels. However, industries could probably create hardcore cartels compared to other great industries since they totally emerge as monopolies. These industries are well known as the only dealers in their specialty areas and are prone to the creation of market entry barriers in order to limit market competition.

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Introduction

Industries are prone to the formation of hardcore cartels since their sectors are predominantly typified by various factors. For instance, most competing companies have established technologies, comparable cost structures, homogenous merchandises, considerable market entry barriers, and comparatively high concentration levels (De Kluyver, 2000). In comparison to other great industries, these hardcore cartel industries can easily reach collusive outcome accords, which they can easily preserve. The paper discusses the formation of hardcore cartels as illustrated using the concept of market competition and their effects on economies.

The structure of the industry

The term ‘structure of an industry’ denotes the magnitude and number distribution of industrial corporations. In industry, the number of participating companies could range from hundreds to thousands. Provided the quantity of corporate enterprises found within an industry is outsized, the possibility of harmonizing business prospects amongst such trading corporations can be abridged. Thus, it is true that the rivalry level in any given industry will rise as additional firms join the industry. From industrial formation, it is apparent that most industries have consolidated industrial structures. The reason is that each industry has only a few firms that control a significant portion of the industrial sales or output. The assertion implies that each firm that is found within the industry is not relatively smaller compared to the whole industry (De Kluyver, 2000).

From the number of firms that each industry is probably comprised of, the market structure that is embraced is called an oligopoly. As Scherer (1996) asserts, an oligopolistic market structure is an industrial state where only one or two oligopolists or sellers dominate the industry. These industries are considered as dominant sellers given that they are few, and all of them are probably aware of any actions that other industrial players might pursue. Besides, the choices that a particular corporation formulates are subject to influencing the choices being crafted by other corporations. However, by keenly looking at the nature, structure, and type of these industries, it emanates that they constitute a special type of oligopoly dubbed as cartels (Hubbard & O’Brien, 2012).

Hardcore cartels comprise of corporations that are inclined to form collusive mergers to produce the prescribed and unambiguous accord that are drawn on when setting up manufacturing capacities and charges. From the industrial formation, Lysine appears as a renowned cartel whereas broadband services and telecommunication industries are oligopolies. Unlike the fragment industrial structures, it is argued that the structures of consolidated industries are striking, even though, the scope and mode of market wars are difficult to envisage or uncertain. Hardcore cartel industries generate high profits, have established brand preferences, well-differentiated products, and exhibit high market entry barriers (Van Huyck, Battalio & Beil, 1990). Several industrial corporations that are consolidated are subject to damaging their proceeds, as well as those of industries contributing to the aggressive market rivalry.

The economic efficiency harms caused by hardcore cartels

Most countries commissioners are working tirelessly hard to ensure that economic activities that require competitive authority are protected. According to these commissioners, any cartel or collusive behavior formed appears as cancer on market economies that are open (Sheth & Sisodia, 2001). Since hardcore cartels destroy the levels of market competitions, they often harm both the consumers and economies. Hardcore cartels also undermine the level of industrial competitiveness in the long run since they eliminate the competition pressure, which ensures that cost efficiencies are realized, and innovation is enhanced. Hence, in terms of economic efficiency, such hardcore cartels cause three major harms to the economy. The harms include dynamic inefficiency, the x-inefficiency or industrious inefficiency, and allocative inefficiency (Leibenstein, 1966).

Dynamic inefficiency

The incentives for industries to innovate are significantly reduced by the nature of the market structure. While Schumpeter (1912) argues that cartels generate high profits, which permit them to invest actively in innovative ventures, the argument was opposed by Arrow (1962). In fact, Arrow (1962) showed that innovation incentives are only made apparent in competitive market environments. Demsetz (1969) argued that the correlations between profitability and incentives determine the type of market structure that is favorable for advancing technological progress reconciled both the views. It is therefore strongly hypothesized that when such industries form cartels the level of innovation is considerably decreased. The assumption is derived from the fact that industries that face minimal market rivalry do not become innovative. Whereas sales, assets, research, and development expenses hardly measure the innovation outputs, these variables measure the investment incentives intended to invest in new technologies and products. Thus, the study indicated that innovation decreases during the subsequent cartel years (Oster, 1994).

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The x-inefficiency or creative ineffectiveness

According to Leibenstein (1966), x-inefficiencies reported in hardcore cartels are subject to minimizing marketplace admission and lessening the intensity of market wars. As a result, the competitive incentives that industries and firms initially had, which motivated them to work efficiently is reduced. In fact, cartels make industries operate at high marginal costs by failing to build excess capacities, over investing, overstaffing, and utilization of new technologies in order to pay workers below the stipulated market wages. When industries operate as cartels, the levels of productivities are likely to decrease. In fact, such industries face minimal competition and have few incentives for producing at minimal costs while adopting the most efficient types of technologies (Keser, 2000). The resultant effect is the x-inefficiency or industrious wastefulness. The tendencies illustrated by such cartels could generate hushed occupation outcomes.

Allocative inefficiency

Cartels or collusions always emerge as a result of high industrial debt burdens, and they are not often economically profitable. A study by Porter (1983) concluded that prices and output changes reported during the fiscal 1880 and 1886 United States railroad cartels emerged due to collusive behaviors. The profits generated and the prices charged were subject to increments due to cartels. For instance, rather than the sugar refining cartels found in the United States fixing outputs and prices, such cartels were merely reported to be inclined to cost-cutting strategies (Genesove & Mullin, 2001).

Conclusion

The concept of market competition is globally recognized as a healthy phenomenon. However, hardcore cartels resulting from market competitions have generated mixed reactions. For instance, the profitability levels reported in terms of returns on assets are reported to be extremely high when industries collude to form cartels. Such a supposition is derived from the fact that colluding industries increase their charged prices when they mutually monopolize the market. Over a given period, the profitability of firms that form cartels is reported to increase gradually. Therefore, studies reveal that such hardcore cartels increase their prices to uncompetitive levels similar to those charged by monopolies. Most consumers are thus intentionally priced out, and the generated profits could be used to recover wasteful indulgence and deadweight loss (Keser, 1993).

References

Arrow, K. (1962). Economic welfare and the allocation of resources for invention. The Rate of Inventive Activity. Princeton, New Jersey: Princeton University Press.

De Kluyver, C. (2000). Strategic thinking: An executive perspective. Upper Saddle River, NJ: Prentice Hall.

Demsetz, H. (1969). Information and efficiency: Another viewpoint. Journal of Law and Economics, 12, 1-12.

Genesove, D. & Mullin, W. (2001). Rules, communication and collusion: Narrative evidence from the sugar institute case. American Economic Review, 91, 379-398.

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Hubbard, R. & O’Brien, A. (2012). Microeconomics. Upper Saddle River, New Jersey: Pearson/Prentice Hall.

Keser, C. (1993). Some results of experimental duopoly markets with demand inertia. The Journal of Industrial Economics, 41, 33-151.

Keser, C. (2000). Cooperation in symmetric duopolies with demand inertia. The International Journal of Industrial Organization, 18(1), 23-38.

Leibenstein, H. (1966). Allocative efficiency vs. x-efficiency. American Economic Review, 56, 392-415.

Oster, S. (1994). Modern competitive analysis. New York, NY: Oxford University Press.

Porter, R. (1983). A study of cartel stability: The joint executive committee 1880-1886. Bell Journal of Economics, 14, 301-314.

Scherer, F. (1996). Industry structure, strategy, and public policy. Reading, MA: Addison-Wesley.

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Sheth, J. & Sisodia, R. (2001). The rule of three: Surviving and thriving in competitive markets. New York, NY: The Free Press.

Van Huyck, J., Battalio, R. & Beil, O. (1990). Tacit co-ordination games, strategic uncertainty and co-ordination failure. American Economic Review, 80(1), 235-247.

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