Definition of Cartel: Cooperation of Entrepreneurs That Can Harm Consumers

Definition of Cartel – For those of you who often watch the news on TV or read articles on online news portals, you may have come across the word cartel. Especially in the news that discusses trade. So what is the meaning of cartel? Is he so important that he should be in the news?

In the world of business or commerce, competition is a common thing. Even without competition, there will be no perfect market. This means that the price of goods is competitive and the products sold are more varied, so that consumers can choose goods that suit their needs and budget.

Well, unfortunately there are bad guys working together to outwit the competition. Usually they want to get a big profit by reducing the competition. Yup, they are what is called a cartel.

Definition of Cartel

If you open the Big Indonesian Dictionary application and type “cartel” in it, you will find the meaning as follows:

A combination of similar enterprises aimed at controlling production, competition, and prices; a coalition of political parties that have the same goal; alliance between two or more parties.

While according to the Financial Services Authority (OJK), a cartel is a collaboration between several entrepreneurs or companies for mutual benefit. This cooperation can be in the process of determining prices, quantities and marketing areas so that competition is more limited. In the end they get a sort of monopoly position.

Lalu Lincoln Arsyad defined a cartel as an official organization of sellers who together determine the price, quantity, and differentiation of products so that the industry gets maximum profit.

Cartels are also discussed in Anti-Monopoly Law No. 5 of 1999. In this Law it is mentioned that business operators are prohibited from making agreements with competing business operators to influence prices by regulating the production or marketing process of a product or service. Because it can lead to monopoly practices or unhealthy business competition.

To understand the cartel further, Reader can read the Revised Business Competition Law book written by Dr. Binoto Nadapdap, Sh., MH In it there is a discussion about cartel polemics and changes in the Court’s attitude towards the use of indirect evidence in dealing with cartel matters.

From some of the definitions above it can be concluded that a cartel is a form of cooperation between independent producers and other independent producers to avoid competition so that they can dominate the market.

Interestingly, each of the producers included in the collaboration can still stand and have the freedom to act. And again, cartels are generally alliances of producers in the same field.

Cartels themselves are banned almost throughout the country. Although in reality its existence cannot be eliminated just like that. Either in a national or international scope, formal or informal.

And Reader needs to remember, that based on the definition above, a single business entity that dominates the market cannot be considered a cartel. So as long as the business entity does not abuse the monopoly it has, it will not be considered guilty.

The Process of Cartel Formation

Usually, these cartels appear in oligopoly conditions. This is a condition where there are only a few sellers with a homogeneous type of product. In addition, cartels can also appear or be formed in industries that have:

  1. Small or low profit
  2. Few companies
  3. Has a barrier factor
  4. The demand for the product is inelastic
  5. Concentration of companies geographically
  6. Has no legal restrictions

So usually a cartel will be formed if the companies in the industry that have these characteristics work together and comply with every rule that has been agreed upon.

The reason is because companies that work together can get greater benefits if the collaboration is effective. On the other hand, if one of the members violates, then the company will suffer a loss.

Cartel Models

Reader needs to know, cartels have their own models that are already widely known, namely:

1. Oligopoly

The first model is a market structure in which there are only a few companies, but they have a high level of interaction. Usually in this market there is a barrier that makes it difficult for prospective new companies to enter it.

As a result of this barrier, in some oligopoly markets, some or all of the producing firms have large profits over a long period of time.

With high interaction, companies that are part of an oligopoly market have to make the right decisions. For example, they will continue to compete or even work together to form a cartel.

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2. Duopoly

The second model is the simplest form of an oligopoly market. So, when in an oligopoly market there are only two companies and this duopoly model is developed to see the interaction of those companies.

Well, in this duopoly there are two other models, namely the Cournot, Edgeworth, Chamberlin, Stackelberg, Chamberlin, Bertrand, and also Sweezy models. But what will be discussed this time is the Cournot and Edgeworth models.

a. Cournot model

In this model, each firm acts as if the output of its rival firm is constant. Then the company tries to maximize profits on the rest of the existing market.

This is like if there are only two black sellers around your house. The first one already has many customers because of its position as a pioneer. While the second is a newcomer.

Well, this newcomer thinks that he cannot beat the name or branding of the first seller, so he does various things to make a profit from the remaining buyers.

b. Edgeworth model

This model is usually based on two assumptions. First, the company assumes that the prices of its competitors are fixed. Second, each company has its maximum output constraints.

With this assumption, rival companies will then sell their products at lower prices so that they can dominate a larger market.

If you look at the examples of the two previous seblak sellers. In this Edgeworth model, the seblak seller who is a newcomer sells a serving of seblak at a lower price. That way he can get more customers than his competitors.

3. The demand curve is broken

This is a condition where when a company lowers its price, other competitors do the same. However, if the company raises its price, it has no buyers and causes its sales to fall drastically.

This model is like two counters waging a price war to attract more buyers. If this condition continues, then at a certain point, any counter that raises its price first will lose its customers.

4. Pricing

This is a condition where the dominant company determines the price in order to achieve maximum profit. While other smaller companies have to sell a lot of goods in order to make a profit.

Cartel Types

Cartels, as a form of cooperation, are divided into several types. Usually this type focuses more on the scope of cooperation which has become the main point in the agreement made.

1. Price Cartel

This type of cartel is one that regulates the minimum selling price of a product produced by its members. Each member may not sell his product at a lower price than the agreed minimum price.

However, its members are not prohibited from selling their products at a higher price. Of course, all risks of loss – such as the product not selling well in the market – are borne alone.

2. Cartel Terms

The conditions cartel usually dictates certain conditions that must be complied with. For example, quality standards, delivery, and packaging in selling products. The purpose of this requirement is to establish product uniformity and attributes so that competition between producers does not occur.

3. Kartel Rayon

The third type is more focused on determining or dividing sales areas. Usually this division is accompanied by pricing for each region. With this agreement, cartel members can only sell their products in designated areas.

4. Production Cartel

Production cartels generally form agreements on the maximum amount of goods each member can produce. The goal, of course, is that there is no excess production that has the potential to lower selling prices.

5. Kartel Pool

In this cartel, the profits earned by its members are collected in a joint treasury and then divided again according to a pre-agreed agreement.

6. Sales Syndicate

In this type of cartel, members hand over the goods they produce to a central sales office. That way, these goods can be sold at the same price so there is no competition in the market.

Further discussion of the types of cartels can be found in the book Circumstantial Evidence: As Evidence in Cartel Cases  by Dr. Rosana Kesuma Hidayah, SH, M.Sc.

Cartel Advantages and Disadvantages

Even though it is prohibited by law, it does not mean that the cartel does not have its own advantages and disadvantages. Here are some of them:

Cartel Profits

  • Cartel members are well positioned to face competition because of the cartel’s position in the industry market.
  • Risks in sales and capital risks for cartel members can be minimized because the production and sale of goods can be regulated and the amount guaranteed.
  • This cartel can carry out a rationalization that causes the price of goods sold to tend to fall.
  • Cartels can also create a more conducive working relationship between company management and workers. Because if there is a source of conflict, such as demands for wage increases and workers’ welfare, it can be easily discussed.
  • The risk of termination of employment (PHK) can be minimized because every company that is a cartel member tends to have a stable position in free competition.
  • The risk of loss caused by low sales can also be minimized because production or sales are regulated and the amount is guaranteed.
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Cartel Losses

  • There is a possibility that cartel competitors smuggle in and become members
  • In public life, cartels are also considered detrimental because they can freely change selling prices
  • Regulations made and agreed upon can bind the freedom of its members
  • Innovation can be reduced because cartel member companies already have definite and stable profits
  • If there is a company that wants to innovate, it is likely to be hindered because there are regulations and sanctions that have been mutually agreed upon.
  • It is detrimental to society because cartels can make prices unstable. What’s more, the cartel also has the power to increase prices as it wishes.
  • Competition between producers becomes unhealthy which causes the business climate to become less conducive.
  • Unstable and vulnerable product prices can also affect people’s purchasing power.
  • There is a possibility that cartel members will gain too much profit in the long run.
  • To the detriment of society at large because price rigidity can fuel chronic inflation.

Fortunately, in Indonesia cartels are not allowed and are considered legally illegal. This prohibition is regulated in Article 11 of Law Number 5 of 1999 concerning Prohibition of Monopolistic Practices and Unfair Business Competition.

The article states that business actors may not enter into agreements with competitors to influence selling prices and regulate the production and marketing of goods or services. Because this agreement can result in monopolistic practices and unfair business competition.

Exactly as mentioned by Galuh Puspaningrum in his book entitled The Law of Agreements Prohibited in Business Competition .

Problems Existing in the Cartel

1. Obstacles for companies that are not members of a cartel

Within a cartel there are hurdles for companies wanting to become new members. For example, if a company in an industry succeeds in increasing its price until it is profitable in the long run.

Now this company is not interested in joining the cartel because they feel that they are already getting economic benefits. It is very likely that this company will face various obstacles presented by cartel members.

2. Natural obstacles

The cartel also has natural barriers which are divided into two, namely:

  1. The first natural barrier arises when output is greater than total demand. Under these circumstances, existing firms can make a profit without inviting other firms to enter the market.
  2. The second natural barrier arises when there is an absolute cost advantage. This means that companies that are already involved in an industry have a low average cost curve and within very large limits. Especially when compared with potential new income.

This obstacle has the potential to cause existing companies to determine a price even though the company has already earned a profit. While newcomers have to suffer losses in a certain time.

3. Resistance Made by Enterprises

This is an obstacle deliberately created by cartel member companies to prevent new entrants. Usually this condition occurs if there is no natural resistance that occurs.

 

The way it is done is to increase the number of similar products that have several features and can be combined into several combinations. In the end will appear a place to market products that are almost the same.

Examples of Cartel Cases that Have Happened in Indonesia

To better understand the meaning of cartel and its intricacies, Reader can look at examples that have happened in Indonesia. One of them is the SMS (Short Message Service) tariff business.

In 2008, there were many reports about several mobile operators (Telkomsel, Mobile-8, Bakrie, Telkom, and XL) playing with the tariff for SMS. They have been doing cartel since 2004 until 2007.

The Business Competition Supervisory Commission (KPPU) at that time succeeded in proving the violations committed by the mobile operators. The action is the agreement that caused the SMS tariff cartel.

At that time, the competitive tariff for SMS was as much as Rp. 114 per SMS, but the operators set a higher tariff, namely Rp. 250. As a result, consumers or communities that use their services experience losses of Rp. 136 per SMS.

This lasted for three years until in total, the consumer or customer of the mobile operator experienced a loss of around Rp. 2.827 Trillion. On the other hand, the operators profit from the losses.

That is the discussion about the meaning of cartel and other matters related to it. This phenomenon cannot be left alone and we as a society should be more aware of the existence of cartels in this country. Moreover, there are already cases that prove that the community is the one that is harmed.