Administered pricing is an attempt to establish prices for an entire market. Such prices may be arranged through the cooperation of competitors, through national, state or local government or by international agreement. The legality of administered pricing arrangements of various kinds differs from country to country and from time to time. A country may condone price fixing for foreign markets but condemn it for the domestic market, for instance.
In general the end goal of all administered pricing activities is to reduce the impact of price competition or eliminate it. Price fixing by business is not viewed as an acceptable practice (at least in the domestic markets) but when the government enters the field of price administration they presume to do it for the general welfare to lessen the effects of destructive competition.
The point at which competition becomes destructive depends largely on the country in question. To the Japanese excessive competition is any competition in the home market that disturbs the existing balance of trade or gives rise to market disruptions. Few countries apply more rigorous standards in judging competition as excessive as Japan but no country favors or permits totally free competition. Economists the traditional champions of pure competition acknowledge that a perfect competition is unlikely and agree that some form of workable competition must be developed.
The pervasiveness of price fixing attempts in business is reflected by the diversity of the language of administered prices, pricing arrangements are known as agreements, arrangements, conspiracies and cartels. Communication of profit pools licensing, trade association, price leadership, customary pricing or informal inter firm agreements. The arrangements themselves vary from the completely informal, with no spoken or acknowledged agreement. To highly formalized and structured arrangements. Any type of price fixing arrangement can be adapted to international business but of all the forms mentioned cartels are the most directly associated with international marketing,.
A cartel when various companies producing similar products or services work together to control markets for the types of goods and services they produce. The cartel association may use formal agreements to set prices, establish levels of production and sales for the participating companies allocate market territories and even redistribute profits. In some instances, the cartel organizations itself takes over the entire selling function sells the good of all producers and distributes the profits.
The economic role of cartels is highly debatable but argue that they eliminate cutthroat competition and a rational business permitting greater technical progress and lower price to consumers. However most experts doubt that the consumers benefit very often from cartels.
The Organization of Petroleum Exporting Countries (OPEC) is probably the best known international cartel. Its power in controlling the price of oil resulted from the percentage of oil production it controlled. In the early 1970s, when OPEC members provided the industrial world with 67 per cent of its oil OPEC was able to quadruple the price of oil. The sudden rise in price from $3 a barrel to $ 11 or more a barrel was a primary factor in throwing the world into a major recession. In 2000, OPEC members lowered production and the oil price rose from $10 to over $30 creating a dramatic increase in US gasoline prices. Non OPEC oil exporting countries benefit from the price increase while importers of foreign oil face economic repercussions.
One important aspect of cartels is their inability to maintain control for indefinite periods. Greed by cartel members and other problems generally weaken the control of the cartel. OPEC members tend to maintain a solid front until one decides to increase supply and then others rapidly follow suit, In the short run however, OPEC and their effect on global prices are above $60 a barrel but most analysts attribute this more to burgeoning demand than OPEC’s ability to control supply.
Source: International Marketing