In the study of economics and market competition, collusion takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market structure of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. Cartels are a special case of explicit collusion. Collusion which is not overt, on the other hand, is known as tacit collusion. How is OPEC a collusive oligopoly?
OPEC is a collection of oil exporting countries.
Oligopoly - Industry that is controlled by a few major players (firms or countries) Collusion - When industry leaders secretly agree to limit quantities of production. This will guarantee the colluders a higher price for their product OPEC meet to discuss the quantity of oil they will allow onto the world market. This is collusion. Because the OPEC members are the main suppliers of oil they are said to be an Collusion and Cartels by David A. Mayer
One of the blessings of competition is that it leads to lower prices for consumers. For the producer, however, this blessing is a curse. Low prices often mean low profits. Given a choice between competition and cooperation, profit-maximizing firms would more often than not prefer cooperation. Regardless of what you learned in kindergarten, you do not want the businesses you buy from to cooperate. You want them to compete. Adam Smith, the father of modern capitalism, warned that nothing beneficial comes from the heads of business getting together. In the United States, firms are forbidden from cooperating to set prices or production. The abuses of the late nineteenth and early twentieth century trusts were the impetus for the “trust-busting” of President Theodore Roosevelt. With the Sherman Antitrust Act and later the Clayton Antitrust Act, the government prohibited outright collusion and other business practices that reduced competition.
Prior to OPEC, world oil prices were mainly under the control of the Texas Railroad Commission. With the rise of OPEC came a shift in power from U.S. producers to the oil states of the Middle East. Even though it violates the law, businesses from time to time will collude in order to set prices. Colluding firms can divide up the market in a way that is beneficial for them. The firms avoid competition, set higher prices, and reduce their operating costs. Because collusion is illegal and punishable by fine and prison, executives at firms are reluctant to engage in the practice. The meetings of business leaders are almost always in the presence of attorneys in order to avoid the accusation of collusion. Forming Cartels
Businesses that collude may form cartels. A cartel is a group of businesses that effectively function as a single producer or monopoly able to charge whatever price the market will bear. Probably the best-known modern cartel is the Organization of the Petroleum Exporting Countries, or OPEC. OPEC is made up of thirteen oil-exporting countries and is thus not subject to the antitrust laws of the United States. OPEC seeks to maintain high oil prices and profits for their members by restricting output. Each member of the cartel agrees to a production quota that will eventually reduce overall output and increase prices. OPEC is bad news for anyone that enjoys cheap gasoline....