What Is a Cartel in the Industrial Revolution? Definition and Examples

Businesses during the Industrial Revolution sought ways to maximize profits and limit competition. One method was forming cartels—agreements between companies to control prices, production, or markets. These arrangements stabilized profits but often led to higher prices for consumers and restricted competition.

Definition of a Cartel

A cartel is an agreement between businesses in the same industry to coordinate actions that reduce competition. These agreements typically involve setting prices, limiting production, or dividing markets. By manipulating supply and demand, companies maintain higher profits than in a competitive market.

Unlike mergers, where companies combine into a single entity, cartels allow businesses to remain independent while acting in unison. This distinction helps firms avoid regulatory scrutiny. Despite this, many governments have outlawed collusion, as it inflates prices and stifles innovation.

Legal treatment of cartels varies by country. In the United States, the Sherman Antitrust Act of 1890 banned price-fixing and market allocation, with violators facing heavy fines and imprisonment. The European Union enforces similar restrictions under Article 101 of the Treaty on the Functioning of the European Union (TFEU), imposing fines of up to 10% of a company’s global revenue for cartel behavior.

Historical Context of Cartels in the Industrial Revolution

The rapid industrialization of the 18th and 19th centuries created intense competition. To protect market positions and secure stable profits, companies formed cartels. The absence of modern antitrust regulations allowed firms to coordinate production and pricing without legal consequences.

Governments largely adhered to laissez-faire principles, minimizing economic regulation. Without strict oversight, industries could form agreements that limited competition, particularly in sectors where economies of scale made it difficult for smaller firms to survive. In Germany, cartels even had government support, as authorities saw them as a way to strengthen national industries and stabilize the economy.

Financial institutions also played a role in cartel formation. Banks and investment firms funding industrial projects often facilitated agreements to ensure predictable returns. In some cases, financial backers directly influenced pricing and production decisions, reinforcing cartel structures. These arrangements helped large firms dominate markets while making it harder for new entrants to compete.

Examples of Cartels During the Industrial Revolution

One of the most prominent cartels emerged in the European steel industry. The German Stahlwerksverband, formed in 1904, brought together major steel producers who agreed on output quotas and market divisions. This arrangement prevented price wars and ensured profitability even during economic downturns. By restricting supply, they maintained higher prices, benefiting established manufacturers while limiting opportunities for smaller competitors.

The coal industry also saw widespread cartelization, particularly in Britain and Germany. In the Ruhr region, coal producers formed syndicates that controlled distribution and pricing. These agreements ensured steady revenues for mine owners but often resulted in inflated fuel costs for industries relying on coal. Since coal was a primary energy source, higher prices increased production costs for factories and transportation networks.

Railroads, essential to industrial expansion, were another sector where cartel-like agreements flourished. In the United States, major railroad companies engaged in rate-fixing to avoid undercutting each other. By setting uniform prices and dividing routes, rail operators maximized earnings while reducing financial risk. However, this lack of competition led to widespread dissatisfaction among farmers and merchants who depended on rail transport, fueling public demand for stronger regulation.

Impact of Cartels on Industrial Growth

Cartels influenced industrial expansion by shaping investment and technological progress. With reduced competition, firms had little urgency to innovate, often maintaining existing production methods rather than investing in efficiency improvements. This stagnation was particularly evident in industries where cartel agreements dictated output levels, as companies had no incentive to develop cost-saving technologies if they could simply raise prices. Over time, this lack of innovation placed cartelized industries at a disadvantage compared to sectors that remained competitive.

Market distortions caused by these agreements also affected capital allocation. Investors, knowing that cartels protected members from price fluctuations, were more likely to fund industries with controlled markets rather than those exposed to competition. This led to an uneven distribution of resources, where cartelized industries attracted disproportionate financial backing while emerging sectors struggled to secure funding. As a result, economies became overly reliant on protected industries, making them vulnerable to external shocks when cartel agreements collapsed or demand shifted.