Economics

1. Economics Antonio Sposato classe LMG/01Facoltà di GiurisprudenzaUniversità degli studi di Macerata

2. Cartels and Collusions • A cartel is a formal agreement among competing firms and it's a formal organization where there is a small number of sellers and usually involve homogeneous products or services of legal or illegal nature (drug cartels). • Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. The aim of such collusion (also called the cartel agreement) is to increase individual members' profits by reducing competition.

3. Cartels and Collusions • Collusion, instead, is a implicit or explicit agreement (a private cartel) betweenfirmswhichaimtoavoid or limitcompetition. • Antitrust laws prohibit collusions, and also forbid mergers that greatly reduce competition. • Collusion most often takes place within the market structure of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole.

4. Public cartels and private cartels • In the public cartel a government is involved to enforce the cartel agreement, and the government's sovereignty shields such cartels from legal actions. • Inversely, collusions (private cartels) are subject to legal liability under the antitrust laws now found in nearly every nation of the world. Furthermore, the purpose of collusions is to benefit only those individuals who constitute it, public cartels, in theory, work to pass on benefits to the populace as a whole.

5. Collusion: conditions • Thereisonly a smallnumber of firms in the industry • The industryhassubstantial entry barriers • A largenumber of customers • Total market demandisnottoovariable - Low incomeelasticity of demand - Demandfairlyinelasticwithrespectto price, interest rates, etc • Firm’s output can beeasilymonitored - Easiertocontrol total supply and identifyfirmswho are cheating on output quotas • Price discounts are hard todeliver - Hard forfirmsto under-cut theirrivals and break the cartel

6. Public cartels • Usually public cartels are referred as less harmful to the general good and are government-backed, so they result as effective as potentially harmful.(M. Rothbard) • In the case of public cartels, the government may establish and enforce the rules relating to prices, output and other such matters. • Export cartels and shipping conferences are examples of public cartels. • In Japan, for example, such arrangements have been permitted in the steel, aluminum smelting, ship building and various chemical industries.

7. Public cartels • International commodity agreements covering products such as coffee, sugar, tin and more recently oil (OPEC) are examples of international cartels with publicly entailed agreements between different national governments. • Crisis cartels have also been organized by governments of various industries or products in different countries in order to fix prices and ration production and distribution in periods of acute shortages.

8. Cartels: instability • Most of cartel arrangementsexperiencedifficulties • Fallingdemandcreatesexcesscapacity in the industry (e.g. duringaneconomicdownturn) • Entry of non-cartelfirmsintoindustry • Exposure of price fixing byGovernamentagencies • Over-productionwhichbreaks the price fixing - OPEC isone of the best examples – butotherinternationalcommodityagreementshavesufferedfromsimilarproblems • Prisoner’s Dilemma suggeststhatcollusionbreaks down - Incentive tocheat, because joint-profit maximationdoesn’t meanthateachfirmismaximisingprofits on theirown.

9. Cartels: favorablepoints of view • Consumersmaygainadvantagesfrom: - Periods of relative price stability - A reduction of some of the wastefulcosts of advertising and marketing ifproducers co-operate ratherthan compete witheach-other - Guaranteedsupplyfrom the producer cartel • Producer cartel maybesuccessful in raising the price of exportedcommodities - May help tofundhigherlevels of capital investment - Boosttoexport revenuesforcountrieswith a high dependency on exports of primarycommodities

10. Adam Smith: “the invisiblehand” • In economics, the invisible hand of the market is a metaphor conceived by Adam Smith to describe the self-regulating behavior of the marketplace. • The idea of markets automatically channeling self-interest toward socially desirable ends is a central justification for the laissez-faire economic philosophy, which lies behind neoclassical economics. In this sense, the central disagreement between economic ideologies can be viewed as a disagreement about how powerful the "invisible hand" is. • In alternative models, forces which were nascent during Smith's life, such as large-scale industry, finance, and advertising, reduce its effectiveness.

11. Smith: “The Wealth of Nations” • According to Smith, the motivations that determine the economic choices are self-centered objectives for individuals: each pursues its own interest. In the world described by him the economic subjects come in connection with each other only through the exchange of goods – the “spontaneous order”. “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” – The Wealth of Nations (1776)

12. The principle of “the invisiblehand” • According to the principle of “the invisible hand”, given a situation of open market, the interaction of economic agents, each one fallowing only its own self-interest, determines the maximum possible well-being for the entire community. • This principle is a cornerstone of liberal thought. It shows that there is no contradiction between the pursuit of individual achievement and collective welfare, but rather that in a market economy the first is a necessary and sufficient condition for the second. • The mechanism by which it acts is the invisible hand of the price system which are formed on the open market.

13. Effects of “the invisiblehand” Startingfromthatprinciple, we can recognizethreeeffects: • Itis a processbywhich a social orderiscreated. • Itis a mechanismwhichallow a balance of the market. • Itis a factorthatpromotesthe growth and economic development.

14. Processcreating a social order • Given the equality before the law and non-interference of the state, the invisible hand ensures the realization of a social order that meets the general interest: spontaneous convergence of personal interests to the collective interest.

15. Mechanismbalancing the market • Supply and demand of different markets tend to equalize: the free functioning of a competitive market, as well as the convergence of the market price to the actual price, tends to disappear any unbalanced demand or any over-supply.

16. Factorpromoting the growth • The first effect of the invisible hand has an impact on the population through the labor market (in case of excessive population, the salary falls below the minimum subsistence leading to a reduction of the population and vice versa in case of deficient population); • The second effect also applies to the savings, a necessary condition for the accumulation of capital and thus economic growth through greater division of labor (people tend spontaneously to save as eager to improve their condition); • Finally, the third effect also affect the allocation of capital (investment spontaneously directed towards the most remunerative activities).

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