Evan Davis on... cartels

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The subject of cartels is a very interesting one; those situations where businesses collude with each other to try and raise their prices rather than compete.

When you talk to the public they often think that virtually everything’s a cartel and businesses are out there conspiring against them. When you talk to businesses, they’re frankly very surprised that anyone ever gets a cartel off the ground, and business has a case there, really. A) it’s illegal, so it’s very difficult, and there are very high penalties in a lot of countries for engaging in cartel-like behaviour, and if you go in with a large number of other players trying to organise a cartel, it only takes one to shop you all, to get you all into trouble.

But there’s a second reason why it’s hard to get a cartel off the ground; it’s that the incentives are all about cheating. Even if there was no law against organising cartels, holding it together is very difficult. If there are five of you conspiring to hold your prices up it pays each of you individually to cut your prices and let everyone else keep their prices up.

Indeed, that’s the perfect world, to have everyone else keeping their prices high while you surreptitiously let your prices fall. And it’s that, really that is a protector of the consumer as much as often the law is in the case of cartels. That’s my view. You can join the debate with the Open University.