I don't think that conclusion is justified, at least not directly. A more conservative conclusion might be "capitalism requires buyer flexibility in order to function correctly" (where "correctly" means that prices accurately track the intrinsic value of the goods being sold).
The article clearly describes a study performed in diligence (from the looks of it) which reveals a perhaps serious flaw that permeates (or can permeate) in all markets. The conclusion being that cartels emerge as a product of the system, not as a product of immorality or deceit.
I guess I understand why people would not want to see it put so bluntly (capitalism is flawed. full stop.) but even you in so many words said the same thing. It is in part inherently corrupt and the silent hand of the market is sometimes a sinister one.
The paper is a study of a particular mathematical model and simulation.
The suggested association of the mathematical model to the model of markets (with many suppliers) where the buyer has a "slow reaction time" results in a price that would, in some sense, be analogous to the price generated by cartels.
The implication is likely that such a market doesn't reach the perfectly competitive price, which is what a simpler model that doesn't consider the buyer's reaction time would predict.
Neither the article nor the paper claims that this emergent phenomenon occurs (can occur) in all, or even the majority of, markets.
Quote: "Under certain market conditions, cartels arise naturally without collusion. This raises important questions over how the behavior should be controlled"
Neither the article nor the paper claims that cartels always "emerge" as "a product of the system". No systems were mentioned, and no definition of product was given.
Neither the article nor the paper claims that cartels do not emerge "as a product of immorality or deceit".
It seems plausible that people might not enjoy a misrepresentation of the authors, who did put in effort (authoring such a paper is never done in a night).
Just to make sure, do you agree with the definition I alluded to in my comment (where "correct" means that market prices track intrinsic value, and "flawed" is anything else)?
In any case, we already know that there are cases where capitalism fails, the best-known probably being the monopoly. We even know that there are certain market conditions that encourage these failure modes (for example, economies of scale encourage monopolies and oligopolies). Recognizing another possible failure mode (non-collusive cartels) and the conditions that trigger it doesn't push capitalism over the line from desirable to flawed. Maybe you already believe that capitalism is flawed, but I don't think that this by itself pushes it over the line.
If you read the study, you'd realize the flaw doesn't permeate all markets.
It permeates markets with perfectly inelastic demand (all consumers are obligated to buy), where the sellers all use a particular pricing strategy, and where sellers have considerably better information than buyers (i.e., when K=1, ~60% of price updates must be seller price updates before cartel behavior begins).
A more limited way of putting it would be that (neo-)classical economic theory has some flaws, in that it assumes prices will track supply/demand balance and maximize market participants' utility (as expressed via price preferences), in the absence of state distortion of markets, which appears not to always be true, since markets can be self-distorting. Not surprising given that most complex systems have strange pathologies in the form of feedback loops, local attractors, etc., but interesting to see this study nonetheless.
Whether that means capitalism is flawed depends on the extent to which you consider the neoclassical utility-maximization explanation of how markets work to be an important part of the justification for capitalism. It probably undermines the utopian libertarian vision of a laissez-faire, unregulated economy in which everything is free and everything is perfectly allocated, more than it undermines the U.S./European brand of pragmatic market economies.
...(neo-)classical economic theory has some flaws, in that it assumes prices will track supply/demand balance and maximize market participants' utility...
No, classical economic theory doesn't assume this. It derives this as a conclusion under some specific assumptions: demand and supply are elastic, many non-colluding buyers and sellers, good information and low transaction costs. The conclusion of classical economic theory is that under the circumstances I described above, prices will stabilize near a price P satisfying supply(P)=demand(P), where "near" is bounded by the size of transaction costs.
The paper under discussion is also classical economic theory, it just makes different assumptions: it assumes perfectly inelastic demand (i.e., users have no choice but to buy) and poor information/high transaction costs (buyers can only switch sellers infrequently and can't switch arbitrarily). It also assumes that sellers only copy the pricing strategies of others, and never come up with their own (e.g., no aggressive price competition).
It's not a "flaw" in classical economic theory, it's just applying classical economic theory to a new circumstance. It seems like it might be a good model for certain markets - mandatory insurance for example (auto collision insurance or health insurance in MA), display both demand inelasticity (you are legally obligated to buy) and comparison is difficult.
Neo-classical economics is merely an approach to economics based on game theory and utility maximization (as distinguished from, e.g., behavioral economics). The article we are discussing is a perfect example of neo-classical economics - it's pure game theory.
If you want to argue that the assumptions made by the article are more accurate in general than the more common assumptions (good information, low transaction costs, elastic supply and demand), be my guest.
I'm not sure how we're defining "flaw" here. Nor am I sure that free market theory promises "perfect allocation". Isn't the claim that a free market will provide a _better_ (e.g. more productive, more generally satisfying) allocation of goods than any other arrangement? I don't see anything in the OP that suggests this.
Consumers may complain that this behavior results in higher prices than they would otherwise pay. But I suspect those prices are likely only raised at the margin, to some degree that shifts consumer surplus from consumers to sellers. They aren't being priced out of the gasoline market entirely -- were they so, total sales would fall off signalling reduced demand, and we'd expect prices to fall accordingly. Copying here is sellers following those prices that best capture that surplus. I'd be more worried about collective behavior that restrained market entry by other sellers.
Also: this discussion is focused on the short- to mid-term. The overall price level, even if shifted among possible equilibria by collective behaviors, signals demand to producers. A high gasoline price raises oil prices which increase incentives to find and produce more oil. As that oil comes to market, supply increases and price falls.
tl;dr Free markets promise "best", not "perfect", allocation. Not clear that these tacit cooperations do more than move prices within possible local equilibria so as to capture more consumer surplus for producers. In any case, prices still serve, over the long term, to signal returns to investment in production.
If this is an argument that, when there are economic profits to be made in a market:
1. The "size" of the firms will increase to compensate : Do take note of diseconomies of scale beyond a certain size.
2. New firms will enter to compete in the market : Depends on the barriers to entry.
Why wouldn't it? It's an unrealistic expectation that the fact that we have ideas for certain econopolitical models and that they're superficially consistent in normal discourse should mean that, in practice, they exhibit multiple negative behaviors.
All systems are flawed and unfair to some level, and there are tons of examples for capitalism in particular. The question is to what extent we can mitigate some of the negative effects and which ones we're willing to accept.
don't get me wrong, i agree that there's tons of flaws with capitalism, but i was curious as to why the natural emergence of cartels is considered a flaw.
Cartel-like (monopoly/oligopoly) pricing leads to a non-optimal outcome (the loss is usually called the deadweight loss). The price is set higher than the socially optimal price - some consumers who would have benefited overall from the good (benefit from good > production cost of good) would not buy and consume the good because the price is higher than the production cost (price of good > benefit from good).
If your curiosity is strong enough, you can find a more detailed outline of the concept in an introductory economic text.
Surprisingly and scarily in tune with Zeitgeist Moving Forward [1]
1. http://www.youtube.com/watch?v=QYLLFpNn4lM