Imagine you start a business and convince all your friends to start their own businesses in the same market. After a while, you notice that profitability isn’t as high as it used to be, so you gather your friends and sign a friendly deal where everyone agrees to raise prices simultaneously. This leads to higher profits, and now your product is priced at double its original value. Customers will continue to buy from you because it’s the same price as your friends’ products, and it’s still the lowest in the market.
Unfortunately, it’s not that simple—it’s illegal and called a financial cartel. No, we’re not discussing drug cartels here.
In economics, “cartels” are formed when independent firms in the same industry collaborate to control prices, limit production, or divide markets. The goal is to maximize collective profits rather than compete with each other—just like good friends do. Financial cartels are most often seen in oligopoly markets, where a small number of firms dominate the market.
When forming a cartel, you have two options: make it legal or make it illegal.
A legal cartel is formed with government permission and typically serves to benefit society or the economy. Examples include: OPEC (Organization of the Petroleum Exporting Countries), which coordinates oil production and pricing, as oil is a critical resource for the global economy. IATA (International Air Transport Association), which coordinates ticket pricing and standards for the airline industry.
These cartels are legal because cooperation is necessary for maintaining economic stability, and governments regulate and sanction them to balance the impact on consumers.
An illegal cartel, however, is always formed for profit maximization by eliminating competition. It operates in secret, without government regulation, and is usually harmful to consumers. Some famous examples of illegal cartels include: The European Truck Manufacturing Cartel (1997–2011): This cartel fixed prices and delayed the introduction of emissions technology to reduce costs. After their 14-year run, they were fined €2.9 billion in 2016. The members included Daimler, MAN, Volvo/Renault, DAF, and Iveco. Although there is not a certain number to understand how much the companies profited from forming this cartel an estimate would be likely in the billions of extra profit, as they inflated the prices by 10%–30% during those 14 years. The Vitamin Cartel (1990–1999): Members like Roche, BASF, Rhône-Poulenc, and others fixed prices and allocated the market for vitamin products (e.g., A, B, C, E) used in food, pharmaceuticals, and animal feed. This cartel led to fines of over $1 billion—one of the largest antitrust settlements in history, also profiting around hundreds of millions if not around a billion dollars, from the 9 year cooperation agreement of these companies.
Now, let’s travel to the Baltics and discuss the most recent notable illegal cartel in Latvia—the Latvian Construction Cartel. Formed in 2015, it continued its illegal activities until 2019. The companies involved, including Skonto Būve, Velve, RERE Grupa, Latvijas Tilti, and RBSSKALS, were involved in bid-rigging. The companies secretly agreed on which contract would go to which firm, allowing them to raise prices and ensure certain companies always got contracts. In 2021, the Latvian Competition Council imposed a €16.65 million fine—the largest ever issued in Latvia for anti-competitive practices. These companies generated extra-profit up to tens of millions of euros, which for the Baltics is not too shabby. To put some context into future cartel profits, these cartels usually inflate their prices by 10%-40% and thus the financial gain is often much higher than the fines implemented, but it is more the reputation that suffers.
If, after reading this, you’re still interested in creating a cartel, the more “profitable” ones might be those in Colombia (though that’s a different kind of cartel entirely), or you could stick to the legal ones. Illegal financial cartels almost always get caught, and the fines are hefty. So, don’t harm consumers, avoid forming illegal financial cartels, and leave stability and more money for the economy.
– Renarts Berzins