A formal organization set up by a group of firms that produce and sell the same product for the purpose of exacting and sharing monopolistic rents. The intended purpose of a cartel is to reap monopoly profits by artificially restricting output and thus driving the price above the level that would prevail if they remained in competition with one another. This they normally accomplish by agreeing on a relatively high common asking price for their product that none of the member firms will be permitted underbid, but sometimes the member firms may simply agree to divide the market geographically and grant each other local monopolies without necessarily enforcing a uniform price structure.
Since exceptionally high rates of profit in an industry normally would attract ambitious outside firms to make new investments to enter the industry and gain market share by cutting prices, a successful cartel must somehow secure the cooperation of all the significant producers in the industry. It also must find some way to exclude non-cartel firms from selling to customers within the cartel's market area(s) -- such as by getting their national or local governments to grant cartel members a legal monopoly or to enact administrative or tax barriers to sales of the product by outsiders. Since the essence of the cartel's strategy is to restrict the total production of their product below the levels the member firms would produce if left to themselves (that is, to produce at levels where the marginal cost of production is well below the price per unit), the cartel must also work out some mutually acceptable formula for assigning maximum production quotas to each firm in the cartel and then find some way to enforce the output quotas against firms that might want to grab a larger share of the profits by producing at higher levels. (Lower cost producers in the industry generally would be able to make even larger profits by cutting prices and expanding their market share than by cooperating with the cartel.) If the cartel agreement were a legally enforceable contract, then the government and the court system could be counted upon to do the enforcement job for the cartel, and in many fascist and authoritarian countries (as well as a few present day democracies with recent histories of authoritarian government) this has in fact historically been a general practice. However, in the United States, Great Britain and most other advanced democratic capitalist states, cartel agreements are normally either unenforceable in the courts or are held to be positively illegal as "restraints on trade" that are contrary to the public interest because of their adverse effects on consumers. Even in those countries that outlaw private cartels, however, it has often been possible for politically powerful but economically endangered high cost producer firms in a few industries to secure the "cartelization" of their industry in a back-door fashion. Under the guise of establishing a government regulatory regime that allegedly will protect the interests of the consumer through establishing price controls, assigning exclusive market areas to prevent "cut-throat competition," and excluding "unqualified" competitors by restrictive licensing requirements, independent regulatory commissions in fact have often functioned mainly to serve the economic interests of the dominant high-cost firms in the industry being regulated.
[See also: captured agency , monopoly , competition ]