Cartels are created when a few large producers decide to co-operate with respect to aspects of their market. Once formed, cartels can fix prices for members, so that competition on price is avoided. In this case cartels are also called price rings.

A cartel is a collection of independent businesses or organizations that collude in order to manipulate the price of a product or service. Cartels are competitors in the same industry and seek to reduce that competition by controlling the price in agreement with one another.

The word cartel comes from the Italian word cartello, which means a “leaf of paper” or “placard”. The Italian word became cartel in Middle French, which was borrowed into English. Its current use in Mexican and Colombian drug-trafficking world comes from Spanish cartel.

Many collusive agreements between firms in an oligopoly eventually collapse either because of exposure by the competition authorities, the impact of a recession or perhaps because of a breakdown in co-operation between firms and cheating on output agreements.

How to break a cartel in Reverse Auction process

1. The cartel may decide to increase the pricing cohesively.
2. The cartel may decide to boycott the auction partially or completely, either by not quoting for some of the items or all of the items in the auction.

Cartels are inherently unstable because individual firms can earn higher profits by selling more than their allotted quota. As more firms in the cartel cheat, prices fall, defeating the agreement. This leads to a kink in the demand curve and relatively stable market prices.

However, in reality, the stability of cartels varies widely. For example, while nearly one-quarter of Webb-Pomerene agreements collapsed within 2 years, another quarter survived for 15 or more years.

As is known, a cartel is internally stable if a k-firm has no profit incentives to become fringe. Similarly, a cartel is externally stable if it is not profitable for a j-firm to join the cartel.

The stability of a cartel depends on the profits that are generated at equilibrium. for firms inside and outside the cartel: A cartel is stable if and only if firms inside. do not find it desirable to exit and firms outside do not find it desirable to enter.

In the low-cost price leadership model, an oligopolistic firm having lower costs than the other firms sets a lower price which the other firms have to follow. Thus the low-cost firm becomes the price leader.

Types of price leadership

• Barometric model.
• Dominant firm.
• Collusive model.
• Large market share.
• Trend knowledge.
• Technology.
• Superior execution.
• Profitability.

AGGRESSIVE PRICE LEADERSHIP It occurs when a very large or dominant firm establishes its leadership by following aggressive price policies and thus forces other firms in the industry to follow him in respect of price. It is also known as exploitative price leadership.