Price-Fixing Cartels and Firm Innovation

Abstract

This paper examines the relationship between price-fixing cartels and firm innovation using a dataset encompassing all 461 cartel cases and 1,818 firms identified in the United States in the years 1975–2016. A difference-in-differences estimation reveals a positive relationship between collusion and innovation. Colluding firms exhibited increases of 28% in patent filings, 20% in top-quality patents, and 16% in R&D investment. Innovation breadth also expanded by 16%, suggesting that firms explored new technological areas. Once cartels were dissolved, innovation activities reverted to pre-collusion levels. The effect varied across industries and was more pronounced in fast-growing and patent-intensive industries, underscoring the importance of technological opportunities. Further, the umbrella pricing effect that also benefits non-colluding competitors offers a unique opportunity to unpack mechanisms. Results reveal that the extra financial resources account for at least a quarter of the effect, with stronger cartels exhibiting more pronounced effects. Specifically, firms that relied more on internal financing before collusion and that generated higher revenues during collusion showed a greater effect; no evidence was found of capital reallocation within firms. As much as the remaining three-quarters of the effect can be attributed to managerial expectations of future profitability. These findings offer insights for managers and policymakers aiming to foster novel innovation, although careful interpretation is required given the heterogeneous effects.

Keywords: antitrust, collusion, competition, technological innovation, R&D investment

JEL Classification: D40, D43, L41, O31, O32