Cartels: Formation and Factors | International Trade

After reading this essay you will learn about:- 1. Formation of Cartels 2. Factors Conductive For Cartel Formation 3. Operations of the Cartel 4. Factors which Indicate the Cartel Presence.

Formation of Cartels:

The trading blocks and product associations and commissions are legal entities with written constitution and code of conduct for the member countries/industries. They have physical presence in the form of Head Quarter or main office, and can be contacted by phone, fax or e-mail.

The cartels are formed for collective bargaining for a specific commodity and for specific markets or segments thereof for getting better part of the opportunities, which are shared proportionately amongst the members.

The sharing depends on the individual capacities, capabilities and influential level and importance in the cartel itself. These are not recognized registered bodies. They do not exist on paper. Nobody can produce any document for their existence or operations.

But those who suffer and those who operate know about them. The formation of the cartels is a negative phenomenon in which the opportunities are exploited to get maximum benefits for the individual member or members.

The operations and formation of cartels is just opposite to the said associations. The associations and committees formed by different countries to maximize the return on the resources of contracting member in which the socio-economic factors play important role.

The members form a chain and as any weak link makes the whole chain weak so the members help each other or try to bring each other to a common platform. Such associations have positive connotations, with the result where the cartels are frowned upon the associations and committees are taken as representative of the region or the commodities concerned.

The formation of the cartels is with the simple desire of avoiding mutual competition.

Factors Conductive for Cartel Formation:

Single product in heavy demand cycle.

Geographical proximity of producers.

Disparity in production and market share of the producers.

Concentrated consumers in a given market.

General lack of domestic laws against the cartel formation or the concerned government.

Turning blind eye to them.

Existence of high volume importers.

Operations of the Cartel:

The selected market is studied thoroughly. Each consumer is systematically identified. Demand cycles are analyzed. Powers and weaknesses of the customers are studied at micro level. Tentative division of the sales for one financial year is done in advance of the purchasing cycle.

Each member is allocated market/customer or each member is given certain percentage of the total business expected. Members select a leader of the cartel whose job is to conduct the meetings and make decisions on the member shares. Members never fight after the shares are allocated.

Each member keeps others informed of the business development and execution. All the members meet at regular intervals to review the market situation. No written form of communication is used. If due to situational constraints some communication has to be exchanged then senders and recipient put indicators on the phase of the communication that the paper be burnt after reading.

The general indicators for such actions are like “QH”. Such communication if transmitted through computer channels than the computer is so programmed that all such communication with this indicator is instantly erased from the memory.

Factors which Indicate the Cartel Presence:

The bids received from a particular country or group of manufacturers, has one particular serious offer and others are not so much satisfactory either in terms and conditions or in terms of price.

When asked for clarifications only one particular bidder responds and others try to find excuses o ask for additional time or do not respond at all.

When bidders are called for techno-commercial negotiations only one bidder comes with full team and others send only the representative.

During a meeting if a question is asked to one bidder the answer comes from another. The bidder who responds un-asked is inadvertently the leader of the cartel. When revised bids are called only one bid is submitted.

If order is split and one of the non-serious bidder is given part order, he refuses on one pretend or the other.

In many cases when a bulk order is released, the leader of the cartel normally takes it but in very short time he communicates back that due to unavoidable reasons he has to split the order and offload part quantity to others.

When shipping documents are released, watch out who else gets copy of the shipping documents, if it is marked to another bidder, then it surely indicates the presence of the cartel.

It is possible that leader of the cartel changes from year to year or from contract to contract. In such case the bidder who leads the communication is the undisclosed leader at that particular time.