Cartel is an ambiguous term that generally refers to an alliance of competitors. Cartels are not always easy to recognize, and in order to distinguish them as a reliable alliance between rivals from other organization, the consideration of collaborative actions taken is necessary. Constitutive criteria for cartels would be: the partners are also direct competitors, and they can be companies, countries, political parties or principals.
The members of a cartel are independent, they can act out for each other, themselves or against each other. To be called a cartel it has to imply that at least two participants are involved and these determine their interests independently. The members of the cartel know each other, they have a direct relationship, in particular, they communicate with each other.
In practice authorities often prohibit collusion between firms. Action against cartels is therefore often an important element of competition. Where overt collusion is prohibited, firms nevertheless attempt to circumvent the law. Construction firms may act in a collusive fashion when contracts are tendered, this is done as to undermine competing firms and to secure the contracts among themselves.
They target their desired contract using group power, and the elected firm serves a slightly lower (but still high) bid to get the contract. Similar practices exist in other industries, for example, where producers decide to fix prices so that customers have no other choice than to continue to buy from the same producer. Although this practice is illegal, it is very difficult to prove such agreements sealed behind closed doors.
Collusion is only successful if the agreement can be enforced. When a large number of vendors are involved, successful collusion is highly unlikely (if not impossible). There will always be competitors who break the agreement in the hope that others will not notice, or will not respond. With a small number of large producers, the distribution of profits between the members of a cartel is often an issue.
Exclusion criteria for cartels involves many factors which include the fact that there is a hierarchical or other strong dependency relationship among the participants. The merger of competitors depends on a whole or significant association of its members.
The term cartel is typically used in a specific context, giving rise to a range of context variations. We find cartels in the economy, made up of companies or other market actors in addition to agreements between states, for example: OPEC.
Political cartels exist in the sense of a close interaction between state and party, a cooperation of parties in elections or in Parliament. On the other hand, there are also cartels of student associations and cartels of criminal gangs, etc.
The conditions for successful collusion between companies include the following: the number of firms should be small and must be known to each other. And the average production costs should be similar and will therefore be inclined to act in tandem.
The products involved must be homogeneous rather than heterogeneous, which makes it easier to have a negotiable price. And there must be significant restrictions on entry, which makes the possibility (and fear) of disruption by new firms decrease. The market must be stable and there must be no collusion restrictions.