What Bob Learned from Cartels

Cartels… do they ring a bell? An unavoidable topic every basic Econ student encounters I am sure. If one asks me, cartels, should take part in life’s curricula, a story in a 21st century Aesop because so much can be learned from both their existence and behavioral pattern in the economic realm that can be transferred onto the inter-personal realm.

Cartels consist of temporary common-interest unions between more than one firm. Common interests vary among the cartel in question but normally the benefits of acting together exceed the costs of competing with one another. Cartels are inherently unstable because interests change as both the external context and/or the internal strategy changes, making it no longer beneficial for members to collude together. On the other hand, cartels in some industries are stable because they have built mechanisms and behavioral routines that increase the costs in the case that a member refuses to cooperate.

Cartels, in economic theory, are treated from an external vantage point- or the ‘black box’ approach. The ‘black box’ approach assumes that all cartels are the same and they all react to changes in external forces such as a shift in demand, a change in the structure of the industry or a change in the size and number of firms competing in the industry. This infantilization of cartels of course makes them predictable and easy to analyze, but, on the other hand, takes them far away from the real world of firms as strategy forming entities that, if powerful enough, possess the ability of controlling the entire game. In the economic textbook, the preceding scenario is identified as a ‘monopoly’, one firm that controls the market because it occupies the largest share of the market. In history, this situation can be compared to a monarch that holds the ‘divine right’ or ‘absolute power’ to command a designated territory.

Economic theory, however, is forgetting about another possible scenario: that of aristocratic families controlling city-states, such as those in Renaissance Italy. While these aristocrats exercise complete power over their city-states, at the same time they either are a threat or are threatened by or both, by proximate city-states controlled by enemy aristocrats. In the given environment they either invade or cooperate temporarily because of a common interest or a common threat- and here we have some earlier forms of cartels, commonly institutionalized through inter-marriage between royal members from different states.  Hence, cartels cannot be treated as ‘black boxes’, far from that they are ‘organisms’ with a will and a strategy that are bounded with other ‘organisms’ either by threat or cooperation.

Cartels’ durability depends on a number of eclectic factors. Of course the more self-sufficient and independent the firm is in a competitive environment (especially because it’s profitable and innovative) the less interested the firm is to collude with other firms as it will diminish its ability to form and implement independent strategy. The environment for one is an important determinant of cartel formation: the more uncertain the institutional environment and the industry’s profit the more likely it is that firms will collude together to offset the uncertainty. Internally, if the firm is knowledge oriented or supplier dependent it might prefer a cooperative collusion with suppliers or knowledge brokers. In this case the firm’s strategy is depended on the network in which it is embedded and cartelization is a natural choice. Finally some legal environments such as the one in the United States are very antagonistic towards cartels (anti-competitive laws actively penalize cartels), forcing collusion into a ‘shadow’ activity that some firms secretly participate in.


Enough with the economic theory talk… can you foreshadow the analogies I am about to make? Let’s start with the first one:

  • External environment uncertainty encourages collusion between firms
  • External environment uncertainty encourages people to ally themselves with other people- whether in a social club, a relationship, a job (and stay there because it is ‘too risky’ to make an independent move)

 

  • Internal strategy may or may not encourage collusive behavior in firm
  • We choose to cooperate with certain people because it matches with our overall ‘life’ strategy. We hone our network relationships to reach our goals; if we don’t know what our ‘life’ strategy is, we become a passive member following the cartel’s (social circle) aggregate strategy

 

  • Sometimes a territory’s legal and political government shapes the cartel environment. In cases where cartelization is discouraged, an informal shadow collusion emerges
  • In communities where certain types of behaviors are socially unacceptable and frowned upon, individuals develop a dual personality where they hide their true intentions behind a socially acceptable veil.

Sources:

What determines cartel success?
Airplane price wars

 

 

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