Whether cartel members choose to defraud the cartel depends on the fact that the short-term revenues from the fraud outweigh the long-term losses resulting from the eventual bankruptcy of the cartel. It also depends in part on the difficulty for companies to monitor compliance with the agreement by other companies. If surveillance is difficult, it is likely that a member will get away with fraud for longer; Members would then be more likely to cheat and the agreement would be more unstable. Amid the controversy of the mid-2000s, concerns about retaliation and potential negative effects on U.S. companies led to the obstruction of the U.S. Congressional attempt to punish OPEC as an illegal cartel. Despite the fact that OPEC is considered by most to be a cartel, OPEC members said it was not a cartel at all, but an international organization with a legal, permanent and necessary mission. In non-collusive agreements, companies would seek to improve their production or product in order to gain a competitive advantage. In a cartel, these companies are not encouraged to do so. The Bertrand model describes the interactions between companies that compete for the price. Companies set maximum prices in response to what they expect from a competitor. The model is based on the following assumptions: an agreement is a formal collusive agreement between companies with the aim of increasing profits. Perhaps the best known and most effective cartel in the world is OPEC, the Organization of the Petroleum Exporting Countries.
In 1973, OPEC members reduced their oil production. As we know that middle Eastern crude oil had few substitutes, the profits of OPEC members exploded. From 1973 to 1979, the price of oil increased by $70 per barrel, a figure not seen at the time. However, in the mid-1980s, OPEC began to weaken. The discovery of new oil deposits in Alaska and Canada introduced new alternatives to Middle Eastern oil, sending OPEC prices and profits down. At about the same time, OPEC members began cheating in an attempt to increase individual profits. Gambling theory suggests that cartels are inherently unstable because the behaviour of cartel members is a prisoner`s dilemma. Any cartel member would be able to make a higher profit, at least in the short term, by breaking the agreement (a larger quantity produced or sold at a lower price) than it would under the agreement. However, if the deal collapses because of resignations, companies will return to competition, profits would go down and things would be worse.
Agreements have a negative impact on consumers because their existence leads to higher prices and limited supply. The Organisation for Economic Co-operation and Development (OECD) has made the detection and continuation of cartels one of its priority policy objectives. It identified four main categories that define the behaviour of cartels: pricing, production restrictions, market distribution and bid manipulation (submission of collusive bids). Several factors are deterresing. First, pricing in the United States is illegal and there are antitrust laws to prevent business-to-business agreements. Secondly, coordination between companies is difficult and the number of companies involved is all the more important. Third, there is a risk of overtaking. A company may agree to meet and then break the agreement, undermining the profits of the companies that still maintain the agreement. Finally, a company may be deterred from collusion if it is not able to effectively sanction companies that could break the agreement.