A Cartel in the Derivatives Market

The New York Time’s latest coverage alleging a cartel formed amongst “big banks” in the oligopolistic derivatives market is an interesting one. In standard Economics textbook it is often said that the stability of a cartel lies on its ability to enforce its ground rules among its members.

In this case it appears that the cartel might actually be strengthened on the legislative side with the support of a Republican-controlled Senate. But then a Judiciary that is interested in interpretting law rather than focusing on upholding the law might thwart that.

As an added twist, if a cartel were to be formed there are incentives for outside firms to stay out of the cartel and then cheat by producing more and selling at the price created by the output restrictions of the firms involved in a cartel. However in this case, since total market power is created by law to be concentrated on the hands of the members of the cartel, only members in the inner circle benefit.

In my humble normative judgement, I think economics should be a focal point of the impending debate. In an utilitarian view point, the cartel should be broken down and transparency is paramount because the benefits accrued to society in greater and cheaper accessibility to derivatives far outweights the cost (profits of “Big Banks”, whatever “Big Banks” mean). On a Just Deserts theory viewpoint, it is hard to make a case that the members involved in his cartel deserve the economic rent (which mean institutionalised guarantee of maximum profits, which may be negative,zero or positive) by virtue of their contribution in providing a valuable service, because the additional value attested by the profits is artificially sustained by forcefully keeping potential competitors out.

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