The Effect of Competition on Trade Patterns: Evidence from the Collapse of International Cartels

Abstract:     
How do changes in competitive intensity affect trade patterns? Models of collusive arrangements in spatially separated markets generate testable predictions of the effects of collusion on price, trade patterns and concentration. We exploit a quasi-natural experiment associated with increased anti-trust enforcement activity over the last two decades to test these predictions. In particular, we analyze detailed trade data linked to descriptive information from seven international cartels which collapsed as a consequence of increased antitrust enforcement activity. Because antitrust activity is highly unlikely to affect spatial patterns of demand and supply (other than through its effect on the competitive environment), enforcement induced changes that are ideally suited to study the effect of competition on trade patterns. We confirm significant declines in prices following the breakup of these seven cartels. Contrary to conventional wisdom, and consistent with the more recent market-sharing oligopoly trade models, we find no significant change in spatial patterns of trade following cartel breakup; in particular, there is no significant change in the effect of distance on trade. Neither do we find evidence of significant changes in concentration or rearrangement of market shares. These results imply that cross-hauling is not uncommon under collusion, and hence that the existence of cross-hauling by itself does not provide evidence of the existence

Number of Pages in PDF File: 54

Keywords: Multimarket collusion, gravity, oligopoly, anti-trust policy

JEL Classification: F12, F23, D43, D21

working papers series