1. Briefly explain why cartels may not succeed in any economy including Kenya.
A cartel is a formal (explicit) agreement among competing firms. It’s a formal organization of producers and manufacturers that agree to fix prices, marketing and production. Cartels usually occur in an oligopolistic industry, where there are a small number of sellers and usually involve homogenous products. Cartels members maybe agree on such matters as prices fixing, total industry output, market shares, allocation of customers, allocation of territories and the division of profits. There are either private or public cartels.
One can distinguish private cartels from public 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. private cartels are subject to legal liability under the antitrust laws now found in nearly every nation of the world.
Many price fixing or market sharing agreements eventually either collapse or whither on the vine - here are some reasons:
1. Falling demand creates excess capacity in the industry e.g. during an economic downturn / recession - the classic example here is the deep tension within the OPEC oil cartel caused by the world economic recession which is causing a steep fall in the global demand for crude oil. Will OPEC deliver on planned output cuts in order to stabilize the price of crude at or around $50 a barrel?
2. Disruption caused by the entry of non-cartel firms into the industry which creates fresh competition. This means that non-cartel members can supply consumers within large quantities of goods and at a cheaper price e.g copper
3. Exposure of price fixing by Government agencies such as the Office of Fair Trading - the OFT , the US Justice Department and the EU competition commission have been especially active in trying to break...