Differences between Cartel and Oligopoly

Cartel vs. Oligopoly

An oligopoly is a market structure dominated by a small number of large sellers, while a cartel is a formal agreement among competing firms to control prices, production, and other market variables. Although cartels often form within oligopolistic markets, the two terms are not interchangeable. An oligopoly can exist without a formal collusive agreement, whereas a cartel is defined by such an agreement.

In an oligopoly, firms are interdependent; the actions of one firm significantly impact the others, leading to strategic decision-making regarding pricing and output. This can result in tacit collusion, where firms coordinate their actions without an explicit agreement, or non-collusive competition. A key characteristic of oligopolies is the presence of high barriers to entry, such as substantial capital requirements, patents, or strong brand loyalty, which limit the number of new competitors.

A cartel, on the other hand, involves explicit collusion. Members of a cartel enter into a formal agreement to act as a single entity to maximize collective profits. These agreements typically involve price-fixing, setting production quotas, allocating markets, or rigging bids. Unlike the broader market structure of an oligopoly, cartels are illegal in most jurisdictions due to their anti-competitive nature.

Comparison Table

Category	Cartel	Oligopoly
Definition	A formal agreement between competing firms to control the market.	A market structure dominated by a few large firms.
Nature of Agreement	Explicit and formal agreement to collude.	May involve tacit or informal collusion, or be purely competitive.
Legality	Generally illegal and subject to antitrust laws.	The market structure itself is legal, but collusive behavior within it may be illegal.
Primary Goal	To maximize joint profits by controlling prices and output.	Firms aim to maximize their individual profits, which may involve strategic competition or collusion.
Stability	Inherently unstable due to the incentive for individual members to cheat on the agreement.	Can be relatively stable, especially with high barriers to entry and established patterns of behavior.
Examples	OPEC (Organization of the Petroleum Exporting Countries), various historical drug cartels.	The automotive industry, commercial aircraft manufacturing (Airbus and Boeing), and the telecommunications sector.

Venn diagram comparing Differences between Cartel and Oligopoly

Legality and Enforcement

Antitrust laws in many countries, such as the Sherman Antitrust Act in the United States, explicitly prohibit the formation and operation of cartels. These laws are designed to prevent practices that restrain trade and harm consumers through artificially high prices and reduced choice. Violators can face severe penalties, including substantial fines for companies and imprisonment for the individuals involved.

An oligopolistic market structure itself is not illegal. However, if the firms within an oligopoly engage in collusive practices that resemble a cartel, such as price-fixing, they can be prosecuted under antitrust laws. Proving tacit collusion can be difficult for regulators, as it does not involve an overt agreement.

Stability and Market Impact

Cartels are often difficult to sustain because individual members have a strong incentive to cheat. By secretly lowering its price or increasing its output, a single member can capture a larger market share and increase its profits at the expense of other members. This inherent instability can lead to the breakdown of the cartel agreement.

Oligopolies, while potentially competitive, can also lead to market outcomes that are detrimental to consumers, such as higher prices and less innovation, even without a formal cartel agreement. The interdependence of firms can create price rigidity, where firms are reluctant to change prices for fear of triggering a price war.