What Determines Cartel Success?

Abstract

In this paper we survey several cross-section studies of cartels and a large sample of case studies of cartels in individual industries. We compare the findings of these studies of cartel activity from the 1800s through the 1980s with the characteristics of a sample of international cartels from the 1990s, and present preliminary evidence on whether the stylized facts regarding industry characteristics for historical cartels also hold for contemporary cartels. The hard lesson learned from our survey of the empirical work is that it is difficult to generalize about cartel behavior. Our examination of cartel duration concludes that cartels are neither short-lived nor long-lived; they are both. Similarly, our analysis of the effect of cartels on prices and profitability finds that there is enormous variance in cartel success at raising price to the joint-profit maximizing level. In our examination of cartel breakdowns we find, as suggested by recent theoretical literature, that cheating is a common cause. Occurring even more frequently, however, are entry, external shocks, and bargaining problems, suggesting that these issues should be given deeper consideration in future work. Stigler's hypothesis that large customers contribute to cartel breakdowns is borne out in a few case studies. But there appear to be more cases in our sample in which large customers help to stabilize the cartel. Only the oldest of suppositions, that highly concentrated industries are more prone to cartelization, seems to hold true across studies. Our inability to find more commonality among these studies and among cartels does not simply reflect our ignorance of cartel operations or secrecy on the part of cartels (or the different methodological approaches covered in this survey). Rather, it reflects the innumerable possibilities for organizing a successful cartel, and the interdependence of those factors determining cartel success.

Keywords: cartel, price-fixing, collusion, antitrust, competition policy, price war

JEL Classification: L13, L41, N8