How Cartels Endure and How They Fail: Studies of Industrial Collusion (review)

Economics textbooks teach us that, in general, cartels are unstable, inefficient, bad for the public good, and (at least in the United States) illegal. The eleven chapters in this provocative book dispel such generalities. Through cross-sectional surveys and case studies, the authors explore various definitions of success and failure in understanding the rise and fall of cartels. The available empirical findings "do not always conform to the textbook, or even the sophisticated game theoretic, models" (p. 2).

In a succinct introduction Grossman asks, "What do cartels do? Why do they form? What is their purpose?" (p. 4). Do cartels exist only to raise price, restrict output, and maximize members' profits? By these benchmarks, how do we measure success? The greater the number of firms, cheating and enforcement problems (including ineffective barriers to entry) might break cartels, but some (such as OPEC and DeBeers) continue. What accounts for the long-term stability of these cartels? How long is long? How, then, do we measure stability?

Margaret C. Levenstein and Valerie Y. Suslow answer some of these questions by a cross-sectional analysis of ten data sets and sixteen cartelized industries. The results are equivocal: some cartels managed to raise prices amid price wars, but others charged a price below cost; some lasted less than one year (or never got off the ground), while others endured more than two decades (but with periodic renegotiations). The likelihood of collusion and cartel profits increase with industry concentration and cartel market share. The number of firms involved thus matter little. In addition, cartel "success" also depended on demand elasticities, organizational structure, and, in the case of international cartels, cultural differences (or the ability to overcome them). Grossman's fascinating chapter comparing the Joint Executive Committee of the eastern trunk line railroads from 1880 to 1887 and the express (parcel post) cartel adds to the discussion by highlighting the institutional and financial constraints of the two cartels and thus explain their respective staying power.

Other chapters of the book challenge various "stylized facts" on cartels, including whether cartels, by reducing competition, necessarily harm the public good. George Bittlingmayer's chapter (reprinted from the Journal of Law and Economics) on U.S. vs. Addyston Pipe (1898) argues that noncompetitive and collusive solutions might be necessary for an industry where competitive equilibrium (price equals marginal cost) did not obtain. Likewise, William Sjostrom uses the theory of the core (specifically, an empty one) to explain shipping conferences, or the organization of shipping lines on a particular route setting freight tariff and/or allocating capacity among its members since 1875. Given the high sunken (no pun intended) costs of ships and uncertainty of demand, carriers and shippers as a group might benefit from cooperating rather than destructive competition.

Can cartels actually lower prices and benefit consumers? Janice Rye Kinghorn and Randall Nielsen's study of the late nineteenth-century German coal, iron, and steel industries suggests that they might. Actual prices obtained by participating German producers are lower than the "predicted" prices in the absence of cartelization. Reduced transaction costs and other savings stemming from cartel organization might thus be passed on to consumers.

As defender of the public good, what role should the government play against cartels? In the United States, while the populist-inspired Sherman Antitrust Act has long been the law of the land, there are exceptions. Andrew R. Dick analyzed the effects of the Webb-Pomerene Act (not to mention the National Cooperative Research and Production Act and the Export Trading Company Act). These legislations provide limited antitrust exemptions for the formation and operation of associations of otherwise competing businesses to engage in "collusive activities" that range from price fixing, to information gathering, to cost saving through cooperative marketing. American exporters who dominated the domestic and world trade of phosphates, abrasives, carbon black, and crude sulfur soon signed on...