Cartels are formal collusive agreements between firms, typically to fix prices, restrict output or divide up markets. As in the case of monopoly, the lack of competition may harm consumers, who are likely to have to pay higher prices. This, as economic theory demonstrates, results in a reduction in overall welfare.
For this reason competition authorities throughout the world now impose substantial fines on firms found to be involved in collusive activities and participants also face the threat of substantial jail sentences.
One of the most famous cartels is the Organization of Petroleum Exporting Countries (OPEC). This is an agreement between 12 countries to limit their production of oil. The OPEC cartel has been in place for over 50 years. Arguably, the intergovernmental nature of the cartel and political ramifications of intervening have meant that OPEC has been able to operate free from prosecution for so long.
However, very interestingly Freedom Watch, a US public interest group founded by a former US Department of Justice lawyer, has this week filed a lawsuit against OPEC for violation of competition laws. Quoted in the above press release, Larry Klayman, the founder of Freedom Watch, says that:
These artificially-inflated crude oil prices fall hard on the backs of Americans, many of whom cannot afford to buy gasoline during these severely depressed economic times.
Furthermore, how some of the members use the profits gained from the cartel is also called into question. He also goes on to suggest that the lack of intervention from US government agencies may be because the leaders of both political parties:
… line their pockets from big oil interests and are just sitting back and not doing anything.
This is not the first time that Freedom Watch has served a lawsuit on OPEC. In 2008, at an OPEC meeting in Florida:
In a bold move in front of members of the news media, Freedom Watch Chairman and Chief Legal Counsel Larry Klayman literally jumped out from behind a line of TV cameras and microphones on Friday, October 24, to serve a complaint on an OPEC oil minister.
That complaint was unsuccessful.
It will be fascinating to see the outcome of this latest case and, if successful, the implications for OPEC – updates to appear on this blog in due course.
Articles
Profile: Opec, club of oil producing states BBC News (01/02/12)
OPEC accused of conspiracy against consumers WND World, Bob Unruh (09/05/12)
Freedom Watch Attorney Sues OPEC Oil Minister for Economic Terrorism Conservative Crusader, Jim Kouri (31/10/08)
Lawsuits
Lawsuit brought by Freedom Watch inc. against OPEC (7/5/12)
Lawsuit brought by Freedom Watch inc. against OPEC (9/6/08)
Questions
- Why are cartels so severely punished?
- Why might it be important to punish the individuals involved as well as fine the cartel members?
- Why is fixing the price of oil particularly harmful for the economy?
- Why do you think the OPEC cartel has survived for so long?
- What do you think might be the long term implications of the lawsuit for OPEC?
Oligopoly: it’s a complex market structure and although closer to the monopoly end of the ‘Market Structure Spectrum’, it can still be a highly competitive market. The characteristics are well-documented and key to the degree of competition within any oligopoly is the number of competitors and extent to which there are barriers to entry.
The greater the barriers and the fewer the competitors the greater the power the established firms have. This can then spell trouble for pricing and hence for consumers. The following articles are just some examples of the oligopolies that exist around the world and some of the benefits and problems that accompany them.
Articles
Oligopoly of PSU oil cos reason for high ATF prices The Indian Express, Smita Aggarwal (30/4/12)
Group energy buying hits the UK headlines Spend Matters UK/Europe(18/1/11)
German cartel office probes petrol companies on pricing Fox Business (4/4/12)
Gov’t unveils steps to lower fuel prices Yonhap News (19/4/12)
How big banks threaten our economy Wall Street Journal, Warren Stephens (29/4/12)
UK Governance: Call for Whitehall to simplify the landscape for SME suppliers to win more government contracts The Information Daily (26/4/12)
Other blogs
Pumping up the price: fuel cartels in Germany April 2012
Energy profit margins up by over 700% October 2011
Every basket helps October 2011
The art of oligopoly December 2010
Questions
- What are the assumptions of an oligopolistic market structure?
- Consider (a) the energy sector and (b) the banking sector. To what extent does each market conform with the assumptions of an oligopoly?
- In the ‘Spend Matters’ article, a group of people in a Lincolnshire village formed a local buying consortium to negotiate deals for heating oil. What could we refer to this as?
- To what extent is an oligopoly in the public interest?
- Explain how barriers to entry in oligopolies affect the competitiveness and efficiency of a market.
- Illustrate how an oligopolistic market structure can fix prices and hence exploit consumers.
- How have the actions of the big oil companies in both the UK and Germany been against independent retailers and the consumer interest?
- What action can governments take to break up oligopolies? Will it always be effective?
The UK hosted the third Clean Energy Ministerial conference on 25/26 April 2012. More than 20 energy ministers from around the world attended. In his address, David Cameron, gave his backing to more wind farms being built in the UK, both onshore and offshore.
Currently just under 10 per cent of the UK’s electricity is generated from renewable sources. But to meet agreed EU targets this must increse to at least one-third by 2020. Most of this will have to come from wind.
But whilst wind turbines create no CO2 emissions, electricity generated from wind is currently some 15% more expensive than from gas. To make wind power profitable, energy companies are required by law to generate a certain percentage of their electricity from renewables and the cost is passed on to the consumer. This adds some £20 per year to the average household energy bill.
Over the coming years, many new power plants will have to be built to replace the electricity generated from older plants that reach the end of their life. So what types of plant should be built? Unfortunately measuring the costs and benefits from power generation is not easy. For a start, energy needs are not easy to predict. But more importantly, electricity generation involves huge environmental and social externalities. And these are extremely difficult to measure.
What is more, the topic is highly charged politically. The social costs do not fall evenly on the population. People might favour wind turbines, but they do not want to see one outside their window – or from their golf course!
The following videos and articles will give you some insight into the difficulties that any decision makers face in making the ‘right’ decisions about electricity generation
Webcasts and podcasts
Can Cameron still claim the ‘greenest government ever’? Channel 4 News, Tom Clarke (26/4/12)
Energy Secretary: UK will meet green targets BBC News, Ed Davey (25/4/12)
Donald Trump attacks Scottish government’s green policy BBC News, James Cook (25/4/12)
Trump: Wind farms ‘bad for Scotland’ BBC News (24/4/12)
Tycoon Trump fights Scotland over wind farms near golf resortReuters, Deborah Gembara (25/4/12)
Wind power blows Siemens off course Euronews, Anne Glemarec (25/4/12)
Mexico inaugurates largest wind farm in Latin America BBC News, Carolina Robino (9/3/12)
BP’s Flat Ridge 2 Wind Farm in Kansas YouTube, BPplc (10/4/12)
Arnold Schwarzenegger: Green quest goes on BBC News (26/4/12)
Denmark Pioneers Clean Energy Green TV (18/4/12)
EU wind industry defies recession Green TV (16/4/12)
Wind Farm Issues – Compilation LiveLeak (15/4/12)
News articles
David Cameron commits to wind farms The Telegraph, Louise Gray (26/4/12)
David Cameron says wind energy must get cheaper The Telegraph, Louise Gray (27/4/12)
Could 2012 be year of the wind turbine? The Telegraph, Louise Gray (3/2/12)
Green energy vital, says David Cameron Independent, Emily Beament (26/4/12)
Cameron: renewables are ‘vital to our future’ businessGreen, Will Nichols and James Murray (26/4/12)
Green energy ‘must be affordable’ – Cameron BBC News (26/4/12)
Wind farms will kill tourism, says Donald Trump Independent (25/4/12)
Donald Trump accuses Salmond of ‘betrayal’ over wind farm plans The Telegraph, Simon Johnson (25/4/12)
Turbine scheme provokes wuthering gale of protest Independent, Mark Branagan (6/4/12)
Prince Charles endorses wind power in new film at Sundance Festival The Telegraph, Roya Nikkhah (29/4/12)
Study claims tourists ‘not put off’ by wind farms in Scotland BBC News (24/4/12)
Tide turns in favour of wave power instead of wind farms Scotsman, David Maddox (23/4/12)
Rush towards wind-generated electricity will not reduce fuel poverty Power Engineering (21/4/12)
Shell says no to North Sea wind power Guardian, Terry Macalister (26/4/12)
David Cameron, the Speech He Needs to Make Huffington Post, Juliet Davenport (25/4/12)
Campaigners want David Cameron to come clean over wind farm policy Western Daily Press (27/4/12)
Being Green Doesn’t Mean Higher Electricity Costs Says Green Energy UK DWPub (27/4/12)
Documents
Cost Benefit Methodology for Optimal Design of Offshore Transmission Systems Centre for Sustainable Electricity and Distributed Generation, Predrag Djapic and Goran Strbac (July 2008)
A Cost Benefit Analysis of Wind Power University College Dublin, Eleanor Denny (19/1/07)
Ecological and economic cost-benefit analysis of offshore wind energy Renewable Energy 34, Brian Snyder, Mark J. Kaiser (2009)
Questions
- Why is difficult to predict the future (financial) cost per kilowatt-hour of electricity generation by the various methods?
- Why is it difficult to estimate the demand for electricity in 10 years’ time?
- Identify the external benefits and costs of electricity generation from (a) onshore wind turbines; (b) offshore wind turbines.
- Is ‘willingness to pay’ a good method of establishing the value of external benefits and costs?
- What are the steps in a cost–benefit analysis?
- What types of problems are there in measuring external benefits and costs?
EDF, one of the big six energy retailers in the UK, has agreed to pay out a record £4.5m. £1m of this will go to funding an energy advice centre; the rest will go to providing £50 each to 70,000 ‘vulnerable customers’ who struggle to pay their bills and who receive the government’s warm home discount.
The agreement was made with Ofgem after an investigation into mis-selling, both on the doorstep and over the phone. Customers were persuaded to switch energy suppliers with the promise of savings on their bills. As the FT articles states:
Ofgem found that EDF’s sales force did not always provide complete information to customers on some contract terms, or on the way in which their monthly direct debits had been calculated. In some cases, telesales agents claimed savings without knowing whether they were accurate for the specific customer on the call, the regulator said.
Ofgem did not accuse the company of directly sanctioning such practices, but rather of weak monitoring and control of its sales force’s actions.
The £4.5m payment is in lieu of a fine. Consumer groups have welcomed this, preferring the company to pay compensation to a fine, which would have simply increased Treasury funding.
It is the first settlement in a broader investigation into mis-selling, involving four of the six major suppliers.
Articles
EDF to pay out £4.5m in mis-selling case Financial Times, Guy Chazan and Hannah Kuchler (9/3/12)
EDF agrees to pay £4.5m misleading sales ‘fine’ Guardian, Lisa Bachelor (9/3/12)
Is it a fine? Is it a penalty? No, it’s EDF’s mystery Ofgem payment Management Today, Rebecca Burn-Callander (9/3/12)
‘Misleading claims’ cost EDF a £4.5m payout from watchdog , Independent, Tom Bawden (10/3/12)
EDF Energy agrees to pay a £4.5m ‘fine’ BBC News (9/3/12)
EDF Energy agrees to pay a £4.5m ‘fine’ BBC News, John Moylan (9/3/12)
More energy payouts could follow EDF’s £4.5m The Telegraph, Kara Gammell (9/3/12)
Ofgem ruling
EDF energy agrees to invest £4.5 million to help vulnerable customers following Ofgem investigation Ofgem
Questions
- What types of market failure are present in the energy supply industry?
- What are the arguments for and against fines being paid directly to victims of crime rather than to the government?
- In what ways could the energy industry be made more competitive?
- Why do the utilities, such as gas, electricity and water, require their own regulator rather than simply being subject to competition law?
For years, Britain has suffered a decline in its manufacturing base relative to many of its competitors. In part this was the result of the success of the financial sector and the accompanying high exchange rate. But, with the problems of the financial sector since 2007 and the subsequent recession, attention has increasingly turned to ways of stimulating manufacturing capacity and the competitiveness of the export sector generally.
In other words, attention has turned to the supply side of the economy.
But what should be the features of a successful supply-side policy? Should it encourage competition and focus largely on deregulation and removing ‘red tape’ to encourage market forces to operate more efficiently and effectively? Or should it be more interventionist?
The Business Secretary, Vince Cable, has been in the headlines for criticising his own government’s policy and arguing for a more active supply-side policy – one that is more interventionist. The following podcasts, the second of which is an interview with Dr Cable, look at the arguments for a more active supply-side policy and the forms it could take. The articles look at some of the arguments in more detail.
Podcasts
Industrial strategy ‘lacking in the UK’ BBC Today Programme, Mariana Mazzucato (6/3/12)
Government ‘getting behind’ industry BBC Today Programme, Vince Cable (6/3/12)
Articles
Cable urges long-term plan for industry Financial Times, George Parker (12/2/12)
Cable defends concern over lack of vision Financial Times, Elizabeth Rigby and George Parker (6/3/12)
Vince Cable leaked letter: in full The Telegraph (6/3/12)
Rusting Britain threatens recovery The Telegraph, Alexander Baldock (4/3/12)
Vince Cable is Right: we “lack a compelling vision of where the country is heading” Birmingham Post, David Bailey (6/3/12)
Rebuilding Britain’s economy: the hunt for an ‘industrial strategy’ Citywire Money, Chris Marshall (29/2/12)
Companies must stop hoarding cash and start investing instead Observer, Will Hutton (19/2/12)
Britain needs to shape an industrial strategy Observer, Editorial (4/3/12)
Questions
- Distinguish between the terms ‘industrial strategy’, ‘market-orientated supply-side policy’ and ‘interventionist supply-side policy’
- Identify some ways in which innovations and productivity growth can be supported by government.
- Does interventionist supply-side policy inevitably involve the government spending more?
- If the government wishes to encourage a more entrepreneurial country, should this involve a careful mix of intervention and market liberalisation and, if so, what should the mix look like?
- Summarise the arguments in Vince Cable’s letter to the Prime Minister and Deputy Prime Minister.
- What are the lessons of Silicon Valley for the UK and other European countries?
- How important is successful demand-side policy for a successful supply-side strategy?
- Comment on the following quote from the Will Hutton article above: “British companies are running a cash surplus of some 6% of GDP, again the largest in the world, but are refusing to spend that cash on investment or innovation, preferring to hoard it, preserve profit margins or buy back their own shares. Business investment as a share of GDP is thus the lowest among large industrialised countries.”
Cartels are formal collusive agreements between firms, typically to fix prices, restrict output or divide up markets. As in the case of monopoly, the lack of competition may harm consumers, who are likely to have to pay higher prices. This, as economic theory demonstrates, results in a reduction in overall welfare.
