What Determines Cartel Success?

Abstract

Following George Stigler (1964), many economists assume that incentive problems undermine attempts b firms to collude to raise prices and restrict output. But the potential profits from collusion can create a powerful incentive as well. Theory cannot tell us, a priori, which effect will dominate: whether or when cartels succeed is thus an empirical question. We examine a wide variety of empirical studies of cartels to answer the following questions: (1) Can cartels succeed? (2) If so, for how long? (3) What impact do cartels have? (4) What causes cartels to break up? We conclude that many cartels do survive, and that the distribution of duration is bimodal. While the average duration of cartels across a range of studies is about five years, many cartels break up very quickly (i.e., in less than a year). But there are many others that last between five and ten years, and some that last decades. Limited evidence suggests that cartels are able to increase prices and profits, to varying degrees. Cartels can also affect other non-price variables, including advertising, innovation, investment, barriers to entry, and concentration. Cartels break up occasionally because of cheating or lack of effective monitoring, but the biggest challenges cartels face are entry and adjustment of the collusive agreement in response to changing economic conditions. Cartels that develop organizational structures that allow them the flexibility to respond to these changing conditions are more likely to survive. Price wars that erupt are often the result of bargaining issues that arise in such circumstances. Sophisticated cartel organizations are also able to develop multipronged strategies to monitor one another to deter cheating and a variety of interventions to increase barriers to entry.

Cartel overcharges

“…Price wars are not necessarily signs of failure, rather, they may be opportunities for a cartel to reorganize and adopt better rules for price setting, profit sharing, compensation, and the like (Levenstein & Suslow, 2006).…”

Individual Exemption Applications and Their Assessment: Lessons from the Competition Law Change in the Netherlands during the 1990s

“…There are some cartels that last even decades: the maximum duration for the anti-competitive horizontal agreements is 53 years. These figures show that the Dutch cartels in the exemption applications were much more resilient compared to the international cartels surveyed in Levenstein and Suslow (2006). Furthermore, summary statistics on anti-competitive vertical agreements reveal valuable information about these agreements.…”

Competition Law Enforcement in the BRICS and in Developing Countries

“…Third, they need to prevent entry (or expansion) by non-cartel firms (Levenstein and Suslow 2006). Companies engage in such conduct to maximise their joint profits.…”