A cartel is an organization of two or more separate firms that coordinates output or price, although the cartel may coordinate other aspects of its members‘ behavior as well. The cartel reduces competition that might otherwise exist among cartel members. Firms and cartels are both business organizations. Both are characterized by coordination of output and pricing. The creation and boundaries of both are economically motivated. A firm is created when the cost of doing something ―internally,or through a hierarchy such as an employment relationship, is cheaper in relation to results than is use of the market. A cartel is created when there are gains to be had from coordination of output or sales.
We describe a cartel as ―naked when these gains result entirely (or almost entirely) from reduced market-wide output and higher prices. Some agreements among rivals are efficient, however, because they reduce development, production, or distribution costs. Such agreements can be profitable to the firms whether or not they have market power and even if they result in lower prices. We generally characterize these relationships as ―joint ventures and any restraints on price or output that they might contain as ―ancillary.