How Do Cartels Influence Market Competition?

Introduction

Cartels are formed when different enterprises merge with the objective of controlling competition and costs (Bauman & Williams 2004). They determine their prices and reduce production tactically. In addition, by changing the conditions of sales and establishing common industries, the collusions aim to increase individual benefits because of the increased market competition. Furthermore, past research shows that the number of industries that combine to forge a common scheme endlessly increases. However, the breakup of cartels has several economic implications, as will be discussed in this paper.

A case Study on the Petroleum Industry in Australia

The Organization of Petroleum Export Countries (OPEC), started in 1961, was used to set up a mutual policy of fossil oil prices in western states and was subsequently joined by African nations. The break-up of OPEC cartels has led to contention, and the oil prices have been adjusted downwards (Billgrena & Holme 2008). As a result, Australia is experiencing a reduced inflation rate due to the constitution of individual bodies that fix lower prices in the petroleum industry to suit their personal profit. The study will analyze the different effects of reduced prices On GDP and employment in the Australian Economy using Demand and supply theories

Economic view

Economics applies demand and supply law to forecast and direct the country’s future economy. The legal philosophy of demand claims that demand and price are positively linked. For instance, an increase in demand leads to an increment in the prices of commodities. In addition, the philosophy of supply states that as supply goes up, the demand for commodities and services decreases (Measham 2007). When the two conventions are mixed, they create the law of demand and supply, which claims that for an economy to be at equilibrium, the total supply should equal the total demand (Gannon 2004).

Effects on the Australian Economy

Aggregate demand is the total sum of all goods and services demanded at the individual level. Aggregate supply is the summation of all goods and services supplied at the individual level (Gaston & Spicer 2004). Therefore, this theory of aggregate demand and aggregate supply can be used to illustrate the effects caused by the breaking up of cartels on a country’s economy through the following discussions:

Aggregate Demand Curve

It is a curve that displays the total sum of quantities of all goods, services, and services demanded in the economy at varying prices. The aggregate demand curve is downward sloping. The conclusion is anchored on the three assumptions. First, the wealth effect under which the supply of money, which represents the wealth of the economy, is held constant by the state. Thus, a rise in the prices of goods causes a decline in the economy’s wealth, also known as the money supply (Collins, 2008). In addition, the price of goods and services is negatively related to the real Gross Domestic Product (income wealth), as shown by the downward-sloping AD curve. Secondly, the interest rate effect states that business firms require more money to make transactions as the price level rises. Furthermore, a fixed money supply makes the price of money, referred to as the interest rate, go up. Likewise, higher interest rates will lower the demand. Hence, an inverse relationship between prices and Real GDP will be displayed by AD, which is the downward sloping. The final reason is the net export effect assumption that an increase in domestic price levels makes imports cheap and demanded more. Therefore, higher prices for imports are a consequence of expensive locally produced goods and services hence less demand for them (Measham 2007).

Final Results on the Australian Economy, Without Lower Inflation Rate

We can use the theory of aggregate demand and supply can be used to analyze the effects of cartels on the Australian economy without a lower inflation rate (high prices). As discussed earlier, cartels are combinations of individual firms into one unit to offset fixed prices in the market environment. In addition, the existence of cartels creates a competitive atmosphere in the marketplace. Thus, a lower inflation rate means the price of oil in the Australian economy is high.

According to the law of aggregate supply, an increase in prices causes a reduction in the number of goods and services supplied (Bauman & Williams, 2004). Consequently, the increased inputs (oil) costs will lead to a total decline in the quantity of oil supplied in Australia measured in terms of GDP. Hence, this will lead to demand-pull and cost-push inflation in the economy. Equally, low employment levels in the economy will be recorded due to the lay-off of workers by firms to reduce wage costs. Overall, the economic growth will grow negatively due to declining production, and the Australian economy will experience a recession.

Final Results on the Australian Economy, with Lower Inflation Rate

When cartels break up, there will be market competition, and each firm will lower its prices to make more sales. A lower inflation rate means that the level of prices of goods and services in the economy is very low. According to the law of demand and supply, at lower prices, more is supplied, and less is demanded. Due to low inflation rates in the Australian Economy caused by an increase in the number of oil-supplying firms leads to a decrease in oil prices. As a result, the Australian GDP will be stimulated to grow upwards because of the increased oil supply measured in terms of GDP. Furthermore, a high employment rate will be realized in the economy since there will be a need to employ more workers as the number of oil supply firms increases in the number. The rate of interest in the economy will decline, and the investment climate in the Australian economy will be attractive. To sum up, at lower inflation, the GDP responds positively.

Conclusion

In conclusion, the Cartels are significant to the economy for developing policies that influence prices. However, the fundamental thing for the economy to rise is through competition because it serves a nation run into its production targets and also raises the quality of goods and services rendered. Besides, there is a demand to form competitive strategies against the foreign competition to promote the use of locally made goods at lower prices. Nevertheless, governments should implement policies that enhance competition by doing away with monopoly organizations whose aims are only profit maximization and not product improvement.

References

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