Famous cartels

FAMOUS CARTELS

© North Delta College 2015

Mathema'cs applied to Business Theory 1

INTRODUCTION

We will study in this presentaFon an ideal economical structure: The Cartel. The very first surprising fact is that this ideal structure do exist in the outside reality. There are a good handful of examples of real Cartels in the real Economy.

A Cartel is a group of firms in the same industry regrouped by common vested interest and making superior profit in their niche market. When we say superior profit, it is not just 15% or 20% or 25% above average. It is truly, 300 Fmes, 3000 Fmes etc… As unbelievable as it may seem, such firms do exist and protect their profit by creaFng the Cartel.

Indeed, the hen with golden egg do exist in Economics. Without geVng to its metaphysical implicaFon, let us admit here there exists a point of infinite aWracFon in the Economical realm.

The main landmark of this presentaFon will be to demonstrate 2 non-‐trivial examples of cartels which should normally put the reader into deep meditaFon if not aware of the fact.

So welcome, dear reader, to “Famous Cartels”, the presentaFon that will show you another facet of Economics.


SUMMARY


PART 1 : MATHEMATICAL STRUCTURE OF A CARTEL A) DefiniFons B) Inner-‐Structure C) Economical implicaFons D) Why break the Cartel PART 2 : THE CARTEL OF MEDELLIN PART 3 : INVESTMENT BANKING PART 4 : OXFORD/CAMBRIDGE FINAL STATEMENT

A) DescripFon B) Why is this a Cartel? C) Economical & Societal impact of this Cartel D) How to break this cartel?

PART 1 : MATHEMATICAL STRUCTURE OF A CARTEL

A Cartel is a very special kind of economic enFty where a group of firms doing business in the same niche industry see their revenues and profits mulFplied hundred-‐fold when the other compeFtors (those not in the Cartel) are sFll struggling doing 100 or 1000 Fmes less business although the company sizes are the same. It is therefore a very strange phenomenon, very close to a verFcal irrupFon in the Economical realm and is never fortuitous. We will try to understand it in the following slides. Mathema'cs applied to Business Theory 4

DefiniFons

Figure 1: The Cartel Inside the Cartel: Superior profit

Outside the Cartel: Normal Universe

Firm I

Firm H

Firm G

Firm F Firm E

Firm D Firm C

Firm B Firm A

Inner-‐Structure

How does the Cartel work? The firms in the Cartel have access to a product or services extremely coveted, and having noFced it, have raised barriers of entry for any newcomers for having access to that product or service. The consequences of that logic are 3-‐fold 1. The prices of the goods jerk up because customers are sFll ready to pay for it like in a good old-‐fashioned Monopoly except here there is not one but several firms acFng as one but legally separated so anF-‐trust laws do not apply 2. No other economic agent can challenge the credibility, reputaFon and brand idenFty of the firms in the cartel. 3. There is absolute control of the exisFng members of the cartel over who enters the cartel



Figure 2: The hidden protected Grail

Firms in the Cartel

The Holy Grail

Stringent Barriers to Entry


Economical ImplicaFons

The 4 Ps Prices: As we have noFced, the Prices go up. In fact they even sky-‐rocket. Profits: Profits inside the cartel are thus of a pharaonic kind and reserved to them only in the whole industry. Power: Obviously if there is so much money to be made, there are power issues here. Not directly poliFcal power but a more opaque form of power placing the chiefs of the Cartels above the law or at least far above your regular poliFcian. PresFge: The firms outside the Cartel are at a degree 0 of presFge in their industry. Conversely, the brand idenFty of the Cartel is a near miss to some form of religious icons.


Figure 3: The 4 Ps

The 4 Ps of a Cartel

Prices sky-‐rockeFng

Profits: Pharaonic

Power of an unusual kind

PresFge almost God-‐like

Cartels are indeed dangerous enFFes, precisely because their power is opaque, because their economical logic favours exclusion, and their control grip over the populaFon nothing less than a perverted form of totalitarism. Therefore a genuine effort has to be put in order to break the cartel. The strategy for achieving this depends on each individual cartel. We will now in the rest of the presentaFon give the 3 most famous examples of Cartels.


Why break the Cartel


Figure 4: Breaking the Cartel

DescripFon

A drug cartel is consFtuted by a certain number of firms controlling the producFon and distribuFon of certain illicit narcoFc and running the whole business against InternaFonal law. The Cartel of Medellin is the first Cartel which comes to the mind of anyone as it has had media presence over the years due to an addiFonal aggravaFng factor. It is THE Cocaine-‐based drug cartel and has therefore to recourse to violence to achieve its objecFves. Basically, a drug cartel consists of the following logisFcs units:

-‐ Drug producers -‐ Drug distributors -‐ Armed miliFas -‐ Financiers


PART 2: THE CARTEL OF MEDELLIN

Why is this a Cartel?

Drug Cartels like the Cartel of Medellin have all the ingredients of a good old cartel. Coveted product: whether it is Cocaine or any form of illegal drug, the client is ready to pay for it so prices can sky-‐rocket, sFll demand will be there. Barriers to Entry: Barriers to entry in the Cartel are maintained through different means. Through armed intervenFon in the producFon area or throughout the distribuFon channel, Or through brand reputaFon prevenFng the cartel to replicate elsewhere or through technical know-‐how of how to process the drug. Legal structure of the Cartel: There is tacit agreement among members of the cartel about prices and modus operandi of the operaFons. Furthermore they meet regularly as physically they are very olen located at the same place.



Economical & Societal impact of this Cartel

As the drug cartels make fabulous amount of money illegally, they have 3 kinds of impact: In the home countries, where the narcoFc is produced, there is suddenly influx of capital, job creaFon although safety record go down the drain In the country where the drug is sold, a parallel market is created for the distribuFon of the drug to its customers, with hooked up clients ready to pay that much for their drug. However most of the economic benefits go back to the cartel’s headquarters in the home country. There is also excess sFmulaFon of a very different market, below radar, The market of illicit narcoFcs.



How to break this Cartel?

As the main commodity sold in the drug cartel is illegal, breaking the cartel means physically dismantling it as by law already it shouldn’t be there. SomeFmes, the army has to be sent to clean off the city or ciFes where from the cartel is operaFng. Legal threat has liWle impact on a drug cartel as their whole supply chain and distribuFon system uses illegal means and their consumers, knowingly, buying the product on a non recognized market.



This is a less well known fact to the general public. The Fer 1 investment banks form a Cartel. What do we mean by Investment Banks and what do we mean by Tier 1? Investment Banks offer very strange kind of services for those used only to retail banking. They help firms in raising capital in the financial markets allowing them to do complex legal and financial operaFons such as IPOs (IniFal Public Offering) or M&As (Mergers and AcquisiFons) etc. which requires if not skills at least impeccable reputaFon to get investors confidence. But to really have a Cartel , one needs an auto-‐declared club membership. Here it is the acceptance by people in the industry that you are a Fer 1 investment bank (the list is in any Business school’s brochure). As this acceptance is ipso facto in the hand of people already involved with banks in the Fer 1 list, we have here a very sectarian cartel with virtually no newcomers.


PART 3 : INVESTMENT BANKING

DescripFon


Again, all the good ingredients are there Coveted product: Firms and MulFnaFonals are ready to pay immense fees or share fortunes for raising capital and aWract investors as their own fortunes depend on it. Barriers to entry: As menFoned, the reputaFon of the bank is a key factor in this industry. And to build reputaFon one needs a major IPO or a major M&A to build credibility. This IPO or M&A will only come to you if you have prior reputaFon. We are therefore indeed in a very closed circuit. Collusion: The IPOs fees are virtually the same for all the banks in the cartel without any physical concertaFon. How’s that? Through tacit collusion. This collusion is the binding force of the Investment Banking Cartel.

PART 3 : INVESTMENT BANKING Why is this a Cartel?

The first consequence of having this cartel of I-‐banks in our Economy is that the whole financial system in the Western Hemisphere is in the hands of a handful of banks and their decision-‐makers. The first problem of this elite is thus its: i)  Difficulty to renew its thinking: The same people, same firms are there since

ever. Making the same mistakes in 2008 as they did in 1929. ii)  Its short-‐sightedness with regard to Economic maWers, as, as we noted in i),

their tenets are rigid despite crashes and failures.

Their control over Economics thinking is absolute in the West, especially in the US. The blend of capitalism they promote is the Wall street capitalism, although already in 2015, many other versions have been defended.


PART 3 : INVESTMENT BANKING Economical & Societal impact of this Cartel


The problem with most of the Cartels is that they have an open door for you to join in. Except this one. The Tier 1 Investment Banking Cartel is a closed, secluded fortress. Therefore it has to be broken. The best way to oppose it, is to promote exactly the reverse: A mass-‐market capitalism through crowd-‐funding, microfinance, and a socially inclined entrepreneurship where the people ulFmately themselves will choose a different form of banking and finance. This will bring back capitalism to its original roots which were to radically transform the society by the individual and be a genuine changing force instead of promoFng the status quo and the empty rhetoric we hear regularly in the mass media about the Economy and its real driving forces which have, in fact, always been: -‐  The Individual -‐  The Small Business -‐  A fiery spirited Entrepreneurship.

PART 3 : INVESTMENT BANKING How to break this Cartel?

The next example might be a slight surprise to many, but anyone familiar with the Oxford / Cambridge system will de facto place them in the Cartel category. How does this system work? The Collegiate system. Let us Explain it in the case of Oxford. To be part of Oxford University you have to be part of one of its colleges. The list of these colleges is finite and fixed at any given Fme but new colleges can be accepted in the system provided many condiFons but in parFcular the excellence of their academic teams and their evenness in this respect with the other, exisFng colleges in the list. These colleges, de facto form a Cartel. Similar logic with Cambridge.


PART 4 : OXFORD/CAMBRIDGE DescripFon


More subtle this Fme, but the mathemaFcal economical structure is replicated here once more. Coveted product: The Brand name is such that everyone wants an Oxford/Cambridge educaFon. EducaFon being the entry key to so many roles in our socieFes, the Oxbridge colleges are indeed siVng on a gold mine. Barriers to entry: Academic excellence is a rare gil. And as standards go up with Fme, meeFng the cartels’ requirement is indeed something of an herculean task. Link between the members of the Cartel: Tacit connivance. Here again, the colleges are quite loosely connected. However they know their privilege and have instaured a very special bond between them: The Oxbridge culture. You automaFcally know if you are in or out, if you are a new entrant college trying to join in the system.

PART 4 : OXFORD/CAMBRIDGE Why is this a Cartel?

Is it the Oxbridge system which has skyrocketed higher educaFon fees in the English speaking world? Hard quesFon!! We will let the reader make his own judgement. One thing is certain, it is the grip these colleges have over the English speaking realm. Whatever might be the pretenFons of Harvard, MIT, Stanford to form the world elite, the key levers in the Anglo-‐Saxon world are in reality very much in the hands of people coming from one of these colleges. To the benefit of this cartel we must sFll admit. Contrarily to other systems, this cartel is indeed always open. And is not the product of a centralized bureaucraFc regime as the colleges are fairly independent among each others and from external controls. This is precisely its strength and why it has endured for nearly 800 years. Try to compare this to the French Grandes Ecoles!!


PART 4 : OXFORD/CAMBRIDGE Economical & Societal impact of this Cartel

How does one enter the cartel first of all? By creaFng a brand new college in Oxford town or Cambridge town and geVng accepted by the respecFve UniversiFes as having an Oxford or Cambridge level educaFon. In that case, why break this cartel? We firmly believe, the EducaFonal system needs a total reshaping. First of all the English speaking genius siVng in rural Africa or China shouldn’t have to move to Oxford to get an Oxford EducaFon. It should come to him. Second, it should be free!! Like in the French system!! That is where E-‐learning comes in and has the soluFon. E-‐learning can provide virtually cost free educaFon all over the world, without discriminaFon, 24/7 and in an user-‐friendly way for the potenFal student. Furthermore, through chat rooms and tools like Skype it can also provide tutorials and thus support its teaching 1 to 1 and come very close to an Oxbridge type of EducaFon without entering the Cartel.


PART 4 : OXFORD/CAMBRIDGE How to break this Cartel?

Final Statement

We have therefore seen in this presentaFon a very curious economical EnFty: the Cartel, with ogre-‐like appeFte for money and power. The new result of this presentaFon is to integrate explicitly Investment Banking and the Oxbridge system into the Cartel-‐type structure by unfolding their inner logic and inner moFves. By doing so, we are doing far more than just widening already opened doors. The Cartel logic is the real structure behind Oxford or Goldman Sachs and explains the nearly mythical status they enjoy in the Anglo-‐Saxon socieFes (The first in the UK/Commonwealth, the other in the US). It is quite interesFng to note the top of the pyramid in Western socieFes is held by different sorts of but always Cartel-‐like structures. (The same holds in the French system).


FINAL STATEMENT

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Famous cartels