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July 21, 2019 

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AFC: The abbreviation for average fixed cost, which is fixed cost per unit of output, found by dividing total fixed cost by the quantity of output. Average fixed cost is one of three related cost averages. The other two are average variable cost and avarage total cost. Average fixed cost decreases with larger quantities of output. Because fixed cost is FIXED and does not change with the quantity of output, a given cost is spread more thinly per unit as quantity increases. A thousand dollars of fixed cost averages out to $10 per unit if only 100 units are produced. But if 10,000 units are produced, then the average shrinks to a mere 10 cents per unit.

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CARTEL:

A formal agreement between businesses in the same industry, usually on an international scale, to gain market control, raise the market price, and otherwise act like a monopoly. The most famous international cartel is the Organization of Petroleum Exporting Countries (OPEC), which seeks to exert control over the world oil market. Other cartels have existed, or still exist, in the global markets for uranium, diamonds, long distance telephone services, and airlines.
A cartel is a formal arrangement by firms in industry that is designed to monopolize the market. It is most often seen on an international scale where the "firms" are actually governments of individual countries that control the production of a good or resource. A cartel is an example of explicit collusion.

The most noted example of a cartel, international or otherwise, is the Organization of Petroleum Exporting Countries (OPEC). OPEC is an international organization of more than a dozen nations, primarily located in the Middle East, but also in Africa and Central America, that controls a sizeable portion of the world's petroleum reserves. This control of reserves gives it a great deal of influence over the petroleum market.

However, other lesser known international cartels exist or have existed recently in the markets for steel, uranium, assorted chemicals, international long distance telephone service, and international air transportation.

International cartels come in three varieties:

  • Private Firm Cartel: This form of cartel includes two or more private firms from two or more different countries that seek to control the market for a particular good. This market can be domestic or foreign. A private firm cartel epitomizes secretive explicit collusion among firms. Such cartels are inevitably illegal and are often prosecuted by domestic law enforcement agencies.

  • Export Cartel: This type of a cartel includes two or more private firms in a particular county, often an industrial trade group, that seek to control the exports to, and markets in, another country or other countries. These cartels are often exempt from domestic antitrust laws and might even be encouraged by domestic governments.

  • Government Cartel: This form of cartel is exemplified by OPEC and includes the governments of two or more countries that seek to control the market for a particular good. These cartels, like most international organizations, often seek multiple economic, political, and social objectives. That is, they might not control the market exclusively for profit and economic gain, but maybe to gain political favor from other countries.
Whatever form a cartel takes, like any collusive arrangement it is susceptible to instability. A cartel tends to be unstable because the artificially high price that it sets gives each member of the cartel an incentive to "cheat" by offering a slightly lower price. If only one member of the cartel sells at a lower price, then it can make oodles of extra profit by taking customers away from the other members. If all members of the cartel cheat, then the cartel falls apart, at least until cartel authority is reestablished.

Some cartels are able to prevent member cheating and maintain market control for extended periods (decades or even centuries). Other cartels are less successful and fall apart over a shorter time span.

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Recommended Citation:

CARTEL, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2019. [Accessed: July 21, 2019].


Check Out These Related Terms...

     | collusion | explicit collusion | implicit collusion | merger | conglomerate merger | horizontal merger | vertical merger |


Or For A Little Background...

     | oligopoly | oligopoly, behavior | oligopoly, characteristics | industry | market structures | market control | firm | industry | competition among the few | short-run production analysis | profit maximization | production |


And For Further Study...

     | market share | concentration ratios | four-firm concentration ratio | eight-firm concentration ratio | barriers to entry | product differentiation | game theory | kinked-demand curve | kinked-demand curve analysis | collusion production analysis | collusion, efficiency |


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