Predicting Cartel Formation

The Value of Collusion with Endogenous Capacity and Demand Uncertainty

“…Yet, evidence about cartel formation is somewhat inconclusive because some cartels were formed when demand was falling, e.g., the ones in the Norwegian cement or the European steel beams industries. Other cartels, such as the European animal‐feed phosphates conspiracy, were established when demand was rising (Steen and Sørgard [], Grout and Sonderegger [], Herold and Paha []). This article presents a computational duopoly model showing how some of these patterns can be reconciled when taking into account differences in the size and symmetry of firms' production capacities.…”

Antitrust Compliance: Managerial Incentives and Collusive Behavior

“…An empirical meta‐study of individual, moral issue, and organizational environment antecedents of unethical choices was provided by Kish‐Gephart et al (). Herold and Paha () and Levenstein and Suslow () conducted case studies identifying events in firms' market environment leading to collusion. The present article shows under what conditions concerning the persistence of profit shocks and aspects affecting the curvature of managers' utility function u ( π i ) compliance officers and risk managers should be concerned about collusion in times of either high or low profits.…”

“…For example, intense competition was observed prior to the formation of the conspiracies in methionine, soda ash, vitamins, and plasterboard (Grout and Sonderegger, ). More intense competition and lower profits can be caused by a variety of different shock types, such as demand shocks (Herold and Paha, ), entry or expansion of competitors (Tosdal, ; Sonnenfeld and Lawrence, ), cost shocks, excess capacity, or changes in the bargaining power of buyers (Ashton and Pressey, ). These findings are supported by the evidence collected by Levenstein and Suslow () who state: “While cartels seem to form during periods of falling prices, the existing evidence suggests that formation occurs in response to increases in the intensity of competition .…”

“…A profitability shock is generally more likely to induce cartel formation if it is persistent rather than transitory. For example, 16 of the 41 cartels investigated by Herold and Paha () were preceded by a decline in demand causing a decline in profits . In 50% of these cases, low demand was expected to be fairly persistent.…”

“…Note that (Herold and Paha, ) analyzed changes in demand for the cartelized product. Such analyses of industry‐demand must be distinguished from studies examining the effect of aggregate demand (i.e., overall economic conditions) on cartel formation.…”