A cartel is an agreement among competing firms where there is small number of sellers and they usually involve in the production of homogeneous products. Cartel members agree on price fixing, total industry output, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these.
Cartels are formed to control, manipulate and regulate prices. The aim of cartel agreement is to increase individual members’ profits by reducing competition.
Cartel gives all advantage to member firms where as it gives most of disadvantage to customers and competing firms.
Advantages of Cartels are as follows:
- It distributes risks and profits equitably among member firms.
- The firms have not to incur much on publicity.
- It stabilizes market.
- Reduce different types of cost production, distribution etc.
- Firms do not face any competition among themselves.
- It is more stable than pool.
Disadvantages of Cartels are as follows:
- Standard of product is reduced.
- The customers are charged higher prices because there is no competition among the firms.
- Cartels drive the competing firms (which are not member of cartel )out of existence,
- Reduced volume of trade
- It increases inflation level and decreases purchasing power.