Wednesday, July 28, 2010
Posted by D. Daniel Sokol
Margaret C. Levenstein, University of Michigan at Ann Arbor - Survey Research Center, University of Michigan - Ross School of Business, Jagadeesh Sivadasan, University of Michigan - Stephen M. Ross School of Business, and Valerie Y. Suslow, University of Michigan - Stephen M. Ross School of Business discuss The Effect of Competition on Trade Patterns: Evidence from the Collapse of International Cartels.
ABSTRACT: How do changes in competitive intensity affect trade patterns? In this paper, we exploit a quasi-natural experiment associated with increased anti-trust enforcement activity over the last two decades. A large number of international markets underwent a change in competitive intensity as they shifted from explicit collusion to oligopolistic competition. We draw on models of collusive arrangements in spatially separated markets to generate testable predictions of the effects of collusion on price, trade patterns and concentration. One set of models (Pinto 1986, Fung 1991, building on Brander and Krugman 1983) suggests that colluding firms in commodity markets are likely to specialize geographically, while competing oligopolists are more likely to invade each others’ markets. More recent models (Baake and Normann 2002, Bond and Syropoulos 2008) suggest that efficient cartel arrangements may necessitate market-sharing and cross-hauling of goods, as these entail lower defection profits. We analyze detailed trade data linked to descriptive information from ten international cartels to test these predictions. Consistent with both sets of models, we confirm significant declines in prices following the breakup of each of the ten cartels. Contrary to conventional wisdom, and consistent with the more recent oligopoly trade models, we find no significant change in spatial patterns of trade; there is no significant change in the effect of distance on trade. Neither do we find evidence of significant changes in concentration or rearrangement of market shares.