B. Cartels, Mergers, and Corporations

A common argument holds that cartel action involves collusion. For one firm may achieve a “monopoly price” as a result of its natural abilities or consumer enthusiasm for its particular product, whereas a cartel of many firms allegedly involves “collusion” and “conspiracy.” These expressions, however, are simply emotive terms designed to induce an unfavorable response. What is actually involved here is co-operation to increase the incomes of the producers. For what is the essence of a cartel action? Individual producers agree to pool their assets into a common lot, this single central organization to make the decisions on production and price policies for all the owners and then to allocate the monetary gain among them. But is this process not the same as any sort of joint partnership or the formation of a single corporation? What happens when a partnership or corporation is formed? Individuals agree to pool their assets into a central management, this central direction to set the policies for the owners and to allocate the monetary gains among them. In both cases, the pooling, lines of authority, and allocation of monetary gain take place according to rules agreed upon by all from the beginning. There is therefore no essential difference between a cartel and an ordinary corporation or partnership. It might be objected that the ordinary corporation or partnership covers only one firm, while the cartel includes an entire “industry” (i.e., all firms producing a certain product). But such a distinction does not necessarily hold. Various firms may refuse to enter a cartel, while, on the other hand, a single firm may well be a “monopolist” in the sale of its particular unique product, and therefore it may also encompass an entire “industry.”

The correspondence between a co-operative partnership or corporation—not generally considered reprehensible—and a cartel is further enhanced when we consider the case of a merger of various firms. Mergers have been denounced as “monopolistic,” but not nearly as vehemently as have cartels. Merging firms pool their capital assets, and the owners of the individual firms now become part owners of the single merged firm. They will agree on rules for the exchange ratios of the shares of the different companies. If the merging firms encompass the entire industry, then a merger is simply a permanent form of cartel. Yet clearly the only difference between a merger and the original forming of a single corporation is that the merger pools existing capital goods assets, while the original birth of a corporation pools money assets. It is clear that, economically, there is little difference between the two. A merger is the action of individuals with a certain quantity of already produced capital goods, adjusting themselves to their present and expected future conditions by cooperative pooling of assets. The formation of a new company is an adjustment to expected future conditions (before any specific investment has been made in capital goods) by cooperative pooling of assets. The essential similarity lies in the voluntary pooling of assets in a more centralized organization for the purpose of increasing monetary income.

The theorists who attack cartels and monopolies do not recognize the identity of the two actions. As a result, a merger is considered less reprehensible than a cartel, and a single corporation far less menacing than a merger. Yet an industry-wide merger is, in effect, a permanent cartel, a permanent combination and fusion. On the other hand, a cartel that maintains by voluntary agreement the separate identity of each firm is by nature a highly transitory and ephemeral arrangement and, as we shall see below, generally tends to break up on the market. In fact, in many cases, a cartel can be considered as simply a tentative step in the direction of permanent merger. And a merger and the original formation of a corporation do not, as we have seen, essentially differ. The former is an adaptation of the size and number of firms in an industry to new conditions or is the correction of a previous error in forecasting. The latter is a de novo attempt to adapt to present and future market conditions.