Valerie Y. Suslow

What Determines Cartel Success

Following George Stigler (1964), many economists assume that incentive problems undermine attempts by 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.

Estimating Monopoly Behavior with Competitive Recycling: An Application to Alcoa

This article develops a structural model of the aluminum industry during the period between World War I and World War II. It takes into account both the intertemporal nature of Alcoas cost minimization problem and the competitive recycling sector. The model enables estimation of Alcoas degree of market power, while allowing for the effect of competition from recycled aluminum. Previous work has emphasized Alcoas control over the size of the secondary sector in the long run as a source of market power for Alcoa. The results here indicate that Alcoa could exert little influence in this regard, but nonetheless had substantial market power.

International Cartel Enforcement: Lessons from the 1990s

The enforcement record of the 1990s shows that private international cartels are not defunct--nor do they always fall quickly under the weight of their own incentive problems. Of a sample of 40 such cartels prosecuted by the United States and the European Union in the 1990s, 24 lasted at least four years. And for the 20 cartels in this sample where sales data are available, the annual worldwide turnover in affected products exceeded

Inventories as an Asset: The Volatility of Copper Prices

30 billion. National competition policies address harm in domestic markets, and in some cases prohibit cartels without taking strong enforcement measures. The authors propose a series of reforms to national policies and steps to enhance international cooperation that will strengthen the deterrents against international cartelization. Furthermore, the authors argue that aggressive prosecution of cartels must be complemented by vigilance in other areas of competition policy. If not, firms will respond to the enhanced deterrents to cartelization by merging or by taking other measures that lessen competitive pressures.

Cartels and Collusion - Empirical Evidence

The spot price of copper metal is known to be extremely volatile. From 1958 to 1980, the mean monthly average price was

Oligopoly Pricing with Capacity Constraints

0.49 per pound (in constant 1967 dollars), while the standard deviation of month-to-month changes in the real price was

Commitment and monopoly pricing in durable goods models

0.06. Claims to copper inventories are traded on the London Metal Exchange (LME), a competitive world asset market. This paper empirically investigates the dynamics of copper spot prices on the LME, focusing on the rate of return to holding copper metal and on the implications of inventory stockouts for this rate of return. We make one major departure from the standard economic theory of exhaustible resources.2 Instead of assuming constant short-run marginal cost (SRMC), we incorporate rising SRMC of extraction into the model.3 This technological assumption provides an economic motive for production smoothing by holding inventories. Equilibrium inventory holdings ameliorates rising SRMC by moving extraction to low SRMC time periods. We show that this amelioration is imperfect because of inventory stockouts. When stockouts can occur, the spot price of a resource reflects transient shocks to its scarcity value as well as permanent shifts. More specifically, the economic motive for inventory holding affects the equilibrium price dynamics of exhaustible resources in two ways. First, as long as positive inventories are being held, their holders should earn the competitive rate of return. Thus, the price of extracted resource should rise at the rate of interest in expected value. This result differs from most recent theoretical studies of exhaustible resources, which conclude that price minus marginal extraction cost should rise at the rate of

How Do Cartels Use Vertical Restraints? Reflections on Bork's the Antitrust Paradox

Chapter prepared for publication in Oxford Handbook on International Antitrust Economics, Roger D. Blair and D. Daniel Sokol, editors. Cartels occur in a wide range of industries and engage in a wide range of behaviors in their efforts to increase profits. In this chapter, we discuss the wide variety of techniques that cartels use to increase prices and profits. Studies of national and international markets across the twentieth century find cartels in a wide variety of products and services, and these cartels typically last between five and eight years. The most important determinant of cartel breakup is effective antitrust policy. While it has often been presumed that cartels’ demise results from cheating by member firms tempted by short term profits, empirical analysis suggests that cheating rarely destroys cartels. The potential profits from collusion provide sufficient incentives for cartels to develop creative ways to limit the temptations that inevitably arise. While scholars and policy makers have often been concerned that business cycle downturns are associated with cartel formation, the evidence we review here does not suggest strong cyclical effects. There is evidence that cartels are formed during periods of falling prices, but these are more likely to be the result of market integration or an increase in competitive intensity than macroeconomic fluctuations. Similarly, cartel breakup does not evidence strong cyclicality.

Entry Deterrence Strategies

The shape of short run marginal cost (SRMC) is critical to understanding pricing behavior over the business cycle. We construct an econometric model of output and price determination for an industry with steep SRMC around capacity. In the North American aluminum industry, the capacity constraint plays an important role in pricing. When it binds, prices are high over a broad range of industry concentration. Market power raised prices at the cyclical trough much more when the industry was concentrated than it does now.

Breaking Up is Hard to Do: Determinants of Cartel Duration

This article investigates the issue of commitment by a durable goods monopolist. Two models of the interaction between durability, recycling, and market power are compared. The two differ according to the ability ?f the seller to credibly commit to a given salec qtrn+egy. This article takes the standard durable goods monopoly model, extends it to allow for depreciation, and compares the monopoly markup with Swan’s predicted markup for a recycled good. The difference between the two models is shown to reduce to a single parameter in the markup equation.