Why do many price-fixing cartels eventually collapse?

Price-fixing cartels often collapse due to internal and external pressures that make it difficult to sustain coordinated behavior over time. These pressures include the temptation to cheat, market changes, regulatory enforcement, and new entrants.

Reasons Cartels Collapse

1. Incentives to Cheat

• Cartel members have a strong incentive to secretly lower prices or increase production to capture a larger market share while others adhere to the agreed-upon terms.
• This behavior undermines the cartel’s collective power and can lead to a breakdown in trust.
• Example:
  • OPEC (Oil Cartel): Despite coordinated agreements to limit oil production, individual member countries often overproduce to boost revenues, weakening OPEC's ability to control oil prices.

2. Difficulty Enforcing Agreements

• Cartels lack legal mechanisms to enforce compliance, as their agreements are typically illegal.
• Monitoring members’ actions is challenging, especially in industries where production or pricing is hard to track.
• Example:
  • European Truck Manufacturers: In 2016, the European Commission fined several truck manufacturers for colluding on pricing. The cartel collapsed as firms secretly deviated from the agreed terms to gain competitive advantages.

3. Regulatory and Legal Risks

• Cartels are illegal in most jurisdictions and face scrutiny from antitrust authorities.
• Regulatory investigations often lead to heavy fines, imprisonment, and reputational damage.
• Example:
  • Air Cargo Cartel: In 2010 and later years, airlines such as British Airways and Air France-KLM were fined billions of dollars by antitrust authorities for fixing surcharges on cargo. Regulatory enforcement dismantled the cartel.

4. External Market Forces

• Changes in demand, costs, or new technologies can destabilize cartel agreements.
• If demand falls, cartel members may be unable to sustain artificially high prices.
• Example:
  • Vitamin Cartel: The 1990s cartel involving major pharmaceutical companies collapsed after regulatory fines and as market conditions changed, making collusion unsustainable.

5. New Entrants or Substitute Products

• High prices due to cartel behavior attract new competitors, which can disrupt market dynamics.
• Availability of substitutes can also weaken the cartel's control over the market.
• Example:
  • Libor Interest Rate Cartel: Banks colluded to manipulate Libor rates, but regulatory interventions and changes in financial practices brought an end to the manipulation.

6. Public and Political Pressure

• Media exposure and public outcry can increase scrutiny and regulatory action against cartels.
• Firms in industries with strong consumer focus, like retail or healthcare, are particularly vulnerable to reputational damage.

Recent Examples of Cartel Collapses

1. European Auto Emissions Cartel (2019)

• Key Players: Volkswagen, BMW, Daimler.
• Behavior: The companies colluded to delay the development and adoption of emissions-reducing technology.
• Collapse: Investigations by the European Commission uncovered their collusion, leading to fines. Internal competition and legal risks ultimately broke the agreement.

2. Oil Cartel (OPEC+) and Russia (2020)

• Key Players: OPEC members and Russia.
• Behavior: Coordinated production cuts to stabilize oil prices.
• Collapse: During the COVID-19 pandemic, disagreements between Saudi Arabia and Russia over production cuts led to a breakdown in cooperation, causing a price war.

3. Tuna Price-Fixing Cartel (2020)

• Key Players: Bumble Bee Foods, StarKist, Chicken of the Sea.
• Behavior: Colluded to fix canned tuna prices in the U.S. market.
• Collapse: Regulatory investigations and whistleblowing exposed the cartel, resulting in fines and prison sentences for executives.

4. Generic Drug Price-Fixing Cartel (2023)

• Key Players: Several pharmaceutical companies.
• Behavior: Firms colluded to fix prices of essential generic drugs in the U.S.
• Collapse: Investigations by state attorneys general uncovered evidence of collusion, leading to settlements and dismantling of the cartel.

Why Cartels are Unstable

Cartels are inherently unstable because they rely on trust and coordination in a competitive environment where individual firms prioritize self-interest. The risks of detection, regulatory fines, and market dynamics often outweigh the short-term benefits of collusion.

Conclusion

While cartels may succeed temporarily in raising prices and profits, their eventual collapse is often inevitable due to cheating, legal risks, and market pressures. Regulatory authorities play a critical role in dismantling cartels and maintaining market competition, as seen in recent cases like the European auto emissions and tuna price-fixing cartels. These collapses highlight the challenges firms face in sustaining illegal and anti-competitive practices.