Cartels: How They Work and Why They Matter in Economics (From Drugs to Oil, Diamonds, and More)

The Economics Behind Cartels Explained in One Minute: From Drugs to Oil (OPEC), Diamonds, and More

What is a cartel? A cartel is a group of independent producers of a good or service who agree to limit competition and increase prices by controlling supply, output, market share, or bidding. ¹ Cartels are usually illegal and harmful to consumers, who have to pay higher prices and face lower quality or quantity¹

Why do cartels form? Cartels form when producers face high competition, low demand, or falling prices in their industry. By colluding with each other, they can reduce uncertainty, increase profits, and gain market power. ² However, cartels are unstable and prone to cheating, as each member has an incentive to secretly undercut the agreed price or increase their output to gain more market share²

What are some examples of cartels? Cartels exist in various industries, both legal and illegal. Here are some of the most famous ones:

• Drug cartels: These are criminal organizations that control the production and distribution of illegal drugs, such as cocaine, heroin, or methamphetamine. They often use violence, corruption, and intimidation to maintain their dominance and eliminate rivals. Some of the most notorious drug cartels are the Sinaloa Cartel and the Jalisco New Generation Cartel in Mexico, and the Medellin Cartel and the Cali Cartel in Colombia²
• Oil cartel: The Organization of the Petroleum Exporting Countries (OPEC) is a group of 13 oil-producing countries that coordinate their oil production and pricing policies to influence the global oil market. OPEC was founded in 1960 to counter the dominance of Western oil companies and to protect the interests of oil-exporting countries. OPEC has been accused of manipulating oil prices and creating artificial shortages or surpluses to affect the world economy¹
• Diamond cartel: The De Beers Group is a company that has historically controlled the supply and marketing of diamonds worldwide. De Beers was founded in 1888 by Cecil Rhodes and operated as a monopoly until the 1990s, when new sources of diamonds and competitors emerged. De Beers used to buy up all the diamonds from producers and sell them to selected dealers at fixed prices, creating an illusion of scarcity and high value. De Beers also created the famous slogan “A diamond is forever” to promote the demand for diamonds as a symbol of love and commitment²

Cartels are fascinating examples of how human behavior and economic incentives interact to shape the world we live in. However, they also pose serious challenges to the principles of free and fair competition, consumer welfare, and social justice. Therefore, it is important to be aware of their existence and their effects on our lives.