The adverse effects of government actions against cartels
Government intervention against cartels is seldom effective and sometimes counterproductive. Competitive firms may conspire to push up prices and profits, but this is difficult to achieve for a lengthy period of time. Firms have different costs, market prospects and objectives and price or market share agreements break down because of:
- ever-present incentives of the members to ‘cheat' on their rivals by gaining market share through surreptitiously undercutting the agreed prices;
- the prospect of new entrants being attracted into the market by the high prices.
Instability of cartels has been shown in international markets for diamonds, coffee, freight liner shipping, mercury, electrical equipment, and many other industries. Some anti-cartel actions by competition authorities have backfired resulting in reduced levels of competitive rivalry.