I’ve asked myself oftentimes, if a cartel that emerges on a free market and persists for quite a long time might have some positive effects for consumers and the economy as a whole, as a stabilizing and self-regulating entity.
Take OPEC, for example (although they are not in a free market). Oil is a finite ressource. If oil production wasn’t cartelized, oil producers would constantly supply the market with large amounts of oil. But through cartelization, oil producers can calculate when oil is needed the most (when prices are high) and when oil can be saved for the future (prices are low). Additionally, cartelization might be a good means for a free market to prevent cut-throat competition and pork cycles.
What do you think about free-market cartels? Might there be other positive effects and do you know any scientific papers or books that judge cartels favorably or at least less biased than typical neoclassicists?
In a real free market there is no such thing. A cartel can only occur and reap the benefits of cartel under the state. The benefits of cartel are barriers to entry into the marketplace, and capacity for regulation of cartel members by the cartel body at large.
The power of a cartel comes from privilege, which can only come from the state. Free market firms can use exclusion, but they cannot use privilege because none exists in a free market to use.
Pascal Salin made a similar argument, saying that sometimes the formation of cartels results in more efficient production than the simple merger of all firm into one mega-scale enterprise, and thus can result in benefit to the consumer.
Cartels as efficient productive structures.
One such example is a franchise restaurant chain. McDonald’s does not own every individual restaurant, but it operates them with strict rules on how they can compete with each other.
How so? Under a free market, production would be a function of capital investment, which in turn would be a function of the pool of real savings, itself a function of the relationship between short term consumption and long term investment. It seems to me the free market would coordinate the production of oil taking into consideration it is non-renewable (after all, market participants would not be ignorant of this fact). All resources are scarce, what’s so special about oil?
How do you destinguish “cut-throat” competition from “regular”(?) competition? [EDIT: What are pork cycles? - I looked it up, never mind]
In the last few months, we had in Germany cartels of electrial appliances stores, supermarkets and coffee makers which are all three not under any special government protection like patents or any entry barriers.
Yes, and since maintaining the capital value of land is in the interest of every land owner, the privately owner of an oil field would calculate the optimal amount of supply so that that the capital value of his land does not decrease.
This isn’t true. I don’t know how much the OPEC cartel is able to artificially limit supply (if at all), but calculation for optimal supply of oil is a market phenomenon, and has nothing to do with cartels. Consumers for Oil would determine the optimal amount of supply just like any other commodity.
CH 10, part 2 -Cartels, and Monopoly Price, from “Man, Economy, and State”
How do they prevent anyone else from competing with them?
Banks are setup in cartels. You cannot bank without being a member of the cartel. The entire purpose of the cartel is to raise prices by eliminating competition. Rothbard details the purpose of a banking cartel, to make sure all members are inflating evenly, in The Case Against the FED.
What you are talking about I assume is different. You haven’t provided much detail about what happened in Germany, except what they do not have. I would like to know what the purpose of the German coffee maker “cartel” is, and how they seek to accomplish it.
Sure, but with current antitrust laws, it is nearly impossible for different producers to coordinate production. For example, during an economic downturn, any oil producer that cuts back production would be easily outcompeted by a rival that left production on a constant level. If they coordinate production, however, they could decrease oil supply during crises in order to save oil for the next upswing.
Most other ressources can be either recycled, like metals, or raised, like cattle or crops. If oil is consumed it is gone forever.
Cut-throat competition is a state in which competitiors would really destroy each other. In times of cut-throat competition, no member of a cartel and no market entrant would have any incentive to compete with the cartel since it would ruin his own business, as opposed to a cartel in normal competition, that provides its members with huge returns on their investments and lures competitors into the market.
Through classical free-market methods: brand names, consumer satisfaction and huge amounts of capital, that would be needed to compete with them.
The coffee maker cartel was a typical price fixing “collusion”, as Adam Smith would have called it. I’ve found some articles discussing the incident in English:
The latter article says that "the cartel led to a price increase of 2 euros a kilogram (2.2 pounds), " which is, of course, just a projection of a government agency.
Let’s state it this way: Every price a consumer pays for a special product reflects his subjective desire for that specific good. Through cooperation, oil producers can postpone “peak oil” decades into the future by excluding market participants who would pay only a very low price, thereby allocating oil only to such participants, who desire oil highly.
We must be talking about two different things. I was talking about the free market. What do anti-trust laws have to do with the free market? By coordination, I said the market would coordinate, not the producers.
If we’re assuming free market conditions, then so what? Demand drops (for some reason, not discussed), one of the producers shuts down or goes out of business. Someone will come and get the oil at a later date if it becomes ecomomical to do so. Again, the free market takes care of it automatically.
I doubt there would be any such distinction between “cut-throat” and “normal” competition in the free market. There would simply be “competitors”.
These same oil producers do not have a clear idea of what the total supply of oil is. They only have an idea of what their production possibilities are. What would discourage oil consumption and advert peak oil is the market price; when the market price rises, people will opt for substitutes. Oil cartels raise prices because the demand for oil is inelastic. Even slight increases in price will not be met with a proportional decrease in demand.
Why shouldn’t producers be able to coordinate pricing and production, as long as consumers don’t boycot them? During a downturn, for example, producers might coordinate in order to cut back excess supply without driving each other into bankruptcy.
Warren Buffett stated in one of his letters to shareholders, that he observes some markets, where competitors seem to cooperate silently, without constantly undercutting each other, whereas in other markets, competitors try to ruin each other. If antitrust was closed down, the latter might be able to coordinate in a better way. If they coordinated too much, i.e. if they reaped gigantic profits, they would lure outside competitors, that might threaten their cartel.