Abstract
Evaluation of the impact of cartels on national economy and competitiveness is a relevant issue for EU Member States and Lithuania, as the country of small economy with developing culture of competition; however, apart from episodic discussions in the public domain this topic has been scarcely analysed in Lithuania. This explains why most conclusions in this monograph rely on studies carried out by foreign authors. Although it is widely known that cartels are harmful to society, there is a lack of research and studies on the cartels’ impact on national economies and competitiveness. The literature generally analyses the adverse effects (harm) of cartel outcomes on an individual affected party (e.g. on the final and/or intermediate customer, competitors, suppliers), but not on national economy or competitiveness. Insufficiency of studies on the impact of cartels on national economy and competitiveness justifies the relevance and timeliness of the problems addressed.
The most successful, of course, are those, that are never discovered
(Utton 2011)
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Notes
- 1.
At best, cartel can fix the monopolist’s price and therefore the final outcome of a cartel is a monopoly in the market and profit which is equal or close to the monopolist’s profit. Even though this is a more theoretical outcome, such modelling and establishment of emergencies can show maximum effects made by a cartel on an economy.
- 2.
Consumer surplus represents the difference between the maximum price a consumer is willing to pay and the actual price he does pay. The welfare (surplus) of market consumers is the sum of the consumers’ surplus for all individual consumers.
- 3.
Producer surplus is the profit obtained after selling the good at issue. Market producer surplus is the sum of profits derived by all market producers.
- 4.
Total surplus is maximised at the market equilibrium under conditions of perfect competition, i.e. the triangle’s area aky is the largest when ahy—consumer surplus, while the triangle’s area hky—producer surplus. When a cartel is formed in the market it sets the price equal to the monopolist’s price and the amount sold in the market decreases. Consumer surplus decreases and is equal to the triangle’s area jax. Cartel’s profit (producer surplus) increases and is equal to area jxzk. The total surplus is represented by the area axzk (area axzk < area ayk). Thus, market welfare is the lowest when the market price is equal to the monopolist’s price (the maximum price that the firms could set) (in the monopolist market), and the highest when the price is equal to marginal costs (in perfect competition market). It should be stressed that the total surplus is higher in a perfect competition market than in a monopolist market, but the producer surplus is higher in a monopolist market than in a perfect competition market. As a result of passing from a monopolist market to a perfect competition market the producer obtains an additional surplus equal to the area wyz. This requires the establishment of a market price equal to P before_cartel, which withdraws surplus equal to the area hjxw (area hjxw > area wyz). The decrease in consumer surplus resulting from transition from perfect competition market to monopolist market is higher than the increase in monopolist surplus, i.e. the total surplus equal to the area xwy is lost. The triangle’s area xyz shows total market inefficiency in the case of monopolist market structure, i.e. the loss of additional total surplus which would be achieved in the presence of perfect competition market structure. This is deadweight loss. The part of demand line in the section xy shows the loss of consumer marginal value, while the part of supply line in the section zy—producer’s marginal costs.
- 5.
For example, cartel members may use tariff barriers and antidumping duties to prevent entry by developing country participants. International cartels may also use government-authorized, non-tariff barriers to prevent entry (e.g., quotas or regulation) or punish outsiders (e.g., using trade reporting and import surveillance by government agencies to track where other firms are selling). In addition, cartels can construct private barriers to prevent entry, such as the threat of retaliatory or predatory price wars, use of a common sales or distribution agency and patent pooling.
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Bruneckienė, J., Pekarskienė, I., Guzavičius, A., Palekienė, O., Šovienė, J. (2015). Analysis of the Impact of Cartels on National Economy and Competitiveness. In: The Impact of Cartels on National Economy and Competitiveness. Springer, Cham. https://doi.org/10.1007/978-3-319-17287-3_5
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