Monday, October 5, 2009
Posted by D. Daniel Sokol
Maggie Levenstein (Michigan - Ross School of Business) and Val Suslow (Michigan - Ross School of Business) explain that Breaking Up Is Hard to Do: Determinants of Cartel Duration.
ABSTRACT: Economic theory identifies uncertainty as the primary cause of cartel instability. The lure of collusive profits, however, provides firms with a strong incentive to reduce that uncertainty. Cartels respond to imperfect or noisy information by trying to create governance and compensation systems that raise the quality and credibility of information and better align individual firm incentives with those of the group. Cartels that endure are cartels that manage to do exactly this. We estimate the impact of these organizational mechanisms, as well as macroeconomic fluctuations and industry structure, on cartel duration using a new dataset created from detailed descriptions of contemporary international cartels. We estimate a proportional hazards model with competing risks, distinguishing those factors which increase the risk of “death by antitrust” from those that affect “natural death,” including defection, dissension or entry. Our analysis indicates that the probability of cartel death from any cause increased significantly after 1995 when competition authorities expanded their enforcement efforts toward international cartels. We also find that fluctuations in firm-specific discount rates have a significant impact on cartel duration. Cartels that have a compensation scheme – a plan for how the cartel will handle variations in demand – are significantly less likely to break up. In contrast, retaliatory punishments in response to perceived cheating significantly increase the likelihood of natural death. Cartels that have to punish are not stable cartels.