Cartel vs. Oligopoly — What's the Difference?

A cartel is a formal agreement among competitors in the same industry to collaborate on aspects like price setting, market shares, and production quotas, aiming to reduce competition and increase profits. In contrast, an oligopoly is characterized by a few firms having significant control over a market, which naturally limits competition due to the high barriers to entry for new competitors.

Cartels typically involve direct collusion, which is illegal in many countries as it manipulates competition and harms consumers by keeping prices artificially high. Oligopolies, on the other hand, may result in similar market conditions through implicit cooperation or independent but parallel actions, rather than through overt collusion.

In a cartel, member firms explicitly agree on actions such as fixing prices or limiting production. This explicit agreement makes cartels highly susceptible to legal penalties under anti-trust laws. Oligopolies may avoid such legal scrutiny because coordination often occurs without explicit agreements, relying instead on mutual understanding not to undercut each other’s prices.

While cartels are always considered harmful to economic welfare and are illegal in most jurisdictions, oligopolies can sometimes lead to competitive behavior that benefits consumers if firms within them strive to innovate and improve their products to gain market share. Oligopolies might also lead to price stability in the market.

The dynamics within a cartel are generally stable as long as all members adhere to the agreed-upon rules. If a member cheats, the cartel can quickly dissolve. Oligopolies, however, tend to be more dynamically stable even if one firm changes its strategy, as the remaining firms adjust their strategies accordingly.