Reasons why the listed industries might form hard-core cartels
Cartels form part of the serious marketplace rivalry breaches. Study literature and market structure reports state that the formation of cartels is an offense both internationally and domestically. Market competition authorities have intensified their efforts to track down hardcore cartels.
However, the listed case study industries may create hardcore cartels compared with other great industries because they emerge as monopolies.
These industries are the only famous dealers in their specialty areas. Thus, they are prone to the creation of market entry barriers in order to limit marketplace competitions (Sheth & Sisodia, 2001).
According to De Kluyver (2000) report, the case study industries are prone to the formation of hardcore cartels because their sectors are largely characterized by various features.
The features include established technologies, comparable cost structures, homogeneous merchandises, extensive market entry barriers and high concentration levels.
In comparison to the other great industries, these hardcore cartel industries can easily reach planned agreements that can be preserved.
The structure of industry
The term ‘structure of an industry’ represents the scale and number distribution of industrial corporations. In an industry, the number of participating companies may range from hundreds to thousands.
Provided the quantity of corporate enterprises found within an industry is out-sized, the possibility of harmonizing business prospects among such trading corporations becomes abridged. Thus, it is true that the rivalry level in any industry rises as additional firms join the industry.
From the case study, it emanates that these industries have consolidated industrial structures. This is because each industry has some firms that own a larger portion of the total industrial sales and output shares.
This implies that each firm found within the industry is not relatively smaller when compared with the whole industrial size (De Kluyver, 2000).
From the number of firms that each industry is probably composed of, the market structure that is embraced is called oligopoly. As said by Scherer (1996), an oligopoly market structure is an industrial state where only one or two oligopolies or sellers dominate the industry.
These industries are the dominant market sellers because they are few and are aware of any marketplace actions that other industrial players might pursue. Besides, the options that corporations formulate are subjects to influencing the choices being made by other corporations.
However, the nature, structure and type of these industries make up a special type of oligopoly called cartel (Hubbard & O’Brien, 2012).
Hardcore cartels comprise of corporations that are inclined to forming colluding mergers to produce a prearranged and unambiguous accord that is drawn on when setting up manufacturing capacities and product charges.
From the above-named group of industries, lysine is a renowned cartel whereas broadband services and telecommunication industries are oligopolies. Unlike the fragmented industrial structures, the formations of consolidated industries are striking even though the scope and mode of market war are difficult to envisage.
The industries listed in the case study generate more profits, have established brand preferences, well-differentiated products, and exhibit high market entry barriers (Van Huyck, Battalio & Beil 1990, p.236).
Several industrial corporations that are consolidated are subject to damaging their proceeds in addition to those of other industries because they adopt aggressive market rivalry strategies.
The economic efficiency harms caused by cartels
Country commissioners are working hard to ensure that economic activities that require competitive authority are protected. To these commissioners, any type of cartel or colluding behavior appears as a negative growth on open-market economies.
Since cartels destroy the levels of market competitions, they often harm both the consumers and global economies. Cartels also undermine the level of industrial competitiveness in the long-run since they eliminate the competition pressure that ensures all cost efficiencies are realized, and innovation advanced.
Hence, in terms of economic efficiency, such hardcore cartels cause three major harms to the economy. These include dynamic inefficiency, the x-inefficiency or industrious inefficiency and allocation inefficiency (Leibenstein 1966, p.398).
Dynamic inefficiency
The incentives for industries to innovate are reduced by the nature of market structure. While Schumpeter (1912) argues that cartels generate high profits, which permit them to invest in innovative ventures, the argument was opposed by Arrow (1962, p.621).
Arrow (1962) showed that innovation incentives are only made apparent in competitive market environments. Both views were reconciled by Demsetz (1969, p.7) who argued that the correlations between profitability and incentives determine the type of market structure that is favorable for advancing technological progress.
Therefore, it is strongly hypothesized that when such industries form cartels, the level of innovation is considerably decreased. The assumption is derived from the fact that industries facing minimal market rivalry barely become innovative.
A study conducted by Oster (1994) showed that sales, assets, research and development expenses hardly measure the innovation outputs.
These variables measure the investment incentives for venturing into new technologies and products. Thus, the study indicated that innovation decreases during the subsequent cartel years.
The x-inefficiency or creative ineffectiveness
According to Leibenstein (1966, p.398), x-inefficiencies reported in cartels were subject to the minimization of marketplace admission as well as lessening the intensity of market wars. As a result, the competitive incentives that industries and corporations had are concentrated.
In fact, cartels make industries to operate at higher marginal costs by failing to build excess capacities, over-investing, over-staffing, and utilization of new technologies in order to pay workers below the fixed market wages.
This implies that when the above-named industries operate as cartels, the levels of productivity are likely to decrease.
This is because industries that face the least competition tend to have few incentives for producing at minimal costs while adopting the most cost efficient types of technologies (Keser 2000, p.24).
This results into the x-inefficiency or industrious wastefulness. The tendencies illustrated by such cartels could generate hushed-life occupation outcomes.
Allocation inefficiency
Market collusion or cartels always emerge because of high industrial debt burdens, but they are not often economically profitable.
A study conducted by Porter (1983, p.310) showed that prices and output changes reported during the fiscal 1880 and 1886 when the United States railroad was constructed by cartels emerged due to collusive behaviors.
The profits generated, and the prices charged were subject to non incentive increments arising from cartels. For instance, instead of the United States sugar refining cartels fixing outputs and prices, such cartels were only inclined to cost cutting strategies (Genesove & Mullin 2001, p.380).
On the other hand, the profitability levels reported in terms of returns on assets were extremely high when industries colluded to form cartels. This implies that colluding industries increase their product prices as they mutually monopolize the market.
The profitability of firms that form cartels is reported to increase gradually with time. Therefore, studies reveal that hardcore cartels increase their prices to uncompetitive levels similar to those charged by monopolies.
Most consumers are unable to pay for the charged prices. The generated profits could, however, be used by industries to recover wasteful indulgence and dead-weight loss (Keser 1993, p.34).
References
Arrow, K 1962, “Economic welfare and the allocation of resources for invention”, The Rate of Inventive Activity, Princeton University Press, Princeton, New Jersey.
De Kluyver, C 2000, Strategic thinking: An executive perspective, Prentice Hall, Upper Saddle River, NJ.
Demsetz, H 1969, “Information and efficiency: Another viewpoint”, Journal of Law and Economics, vol.12, pp.1-12.
Genesove, D & Mullin, WP 2001, “Rules, communication and collusion: Narrative evidence from the sugar institute case”, American Economic Review, vol.91, pp.379-398.
Hubbard, RG & O’Brien, A 2012, Microeconomics, Pearson/Prentice Hall, Upper Saddle River, New Jersey, USA.
Keser, C 1993, “Some results of experimental duopoly markets with demand inertia”, The Journal of Industrial Economics, vol.41, pp.33-151.
Keser, C 2000, “Cooperation in symmetric duopolies with demand inertia”, The International Journal of Industrial Organization, vol.18 no.1, pp.23-38.
Leibenstein, H 1966, “Allocative efficiency vs. x-efficiency”, American Economic Review, vol.56, pp.392-415.
Oster, SM 1994, Modern competitive analysis, Oxford University Press, New York, NY.
Porter, RH 1983, “A study of cartel stability: The joint executive committee 1880-1886”, Bell Journal of Economics, vol.14, pp.301-314.
Scherer, FM 1996, Industry structure, strategy, and public policy, Addison-Wesley, Reading, MA.
Sheth, J & Sisodia, R 2001, The rule of three: Surviving and thriving in competitive markets, The Free Press, New York, NY.
Van Huyck, J, Battalio, R & Beil, O 1990, “Tacit co-ordination games, strategic uncertainty and co-ordination failure”, American Economic Review, vol.80 no.1, pp.235-247.