Cartel Agreements Are Difficult to Maintain Because
August 25, 2023 | by cloudacademy.in
Cartel agreements are difficult to maintain because they go against the principles of fair competition. In a free market, businesses compete with one another to sell goods and services to consumers. Cartel agreements, on the other hand, involve a group of businesses agreeing to work together to control the market and fix prices. This means that consumers have limited choices, and prices can be artificially inflated, which is illegal in many countries.
One of the primary reasons why cartel agreements are challenging to maintain is that they rely on trust between firms. Cartels are often formed by companies in the same industry who are looking to maintain high prices and reduce competition. When companies agree to a cartel, they must agree to limit their output and production and raise prices. However, in reality, it is challenging to ensure that all members adhere to the agreement as it only takes one company to break the agreement and start undercutting prices to cause the entire cartel agreement to collapse.
Another reason why cartel agreements are difficult to maintain is due to the risk of legal action and penalties. Cartels are illegal under antitrust laws, which prohibit businesses from collaborating to fix prices, limit production, or allocate customers or markets. If caught, businesses face significant fines and even jail time for individuals involved in the cartel. Additionally, being involved in a cartel can damage a business`s reputation, making it harder to attract new customers and business partners.
Furthermore, while cartel agreements can be successful in the short term, in the long-term, they can lead to decreased innovation and competitiveness. By limiting production and agreeing to maintain high prices, businesses are not incentivized to innovate or improve their products and services. This means that they may lose market share to competitors who offer better value to consumers.
In conclusion, cartel agreements are difficult to maintain because they go against the principles of fair competition and rely on fragile trust between firms. The risk of penalties and legal action also dissuades companies from participating in cartels. Finally, cartels can lead to decreased innovation and competitiveness in the long term, making them unsustainable in the modern business landscape. Therefore, businesses should avoid cartel agreements and focus on competing fairly in the marketplace.