R Foundations and Trends in Microeconomics Vol. 2, No 1 (2006) 1–105 c 2006 J.E. Harrington, Jr. DOI: 10.1561/0700000021
How Do Cartels Operate? Joseph E. Harrington, Jr.1 1
Department of Economics, Johns Hopkins University, Baltimore, MD 21218, USA,
[email protected]
Abstract This paper distills and organizes facts about cartels from about 20 European Commission decisions over 2000–2004. It describes the properties of a collusive outcome in terms of the setting of price and a market allocation, monitoring of agreements with respect to price but more importantly sales, punishment methods for enforcing an agreement and also the use of buy-backs to compensate cartel members, methods for responding to external disruptions from non-cartel suppliers and handling over-zealous sales representatives, and operational procedures in terms of the frequency of meetings and the cartel’s organizational structure.
1 Introduction
A recent paper reviewed various approaches to detecting collusion using patterns in firm behavior (Harrington, 2006). The efficacy of looking for patterns in prices and quantities relies on knowing what to look for. What does cartel behavior look like? How is it distinguishable from competitive behavior? Towards better addressing those questions, this paper delves deeper into cartels and explores how they operate. How a collusive outcome – in terms of price and an allocation of market supply – is determined. How a collusive outcome is monitored and enforced. How often a cartel meets and how a cartel’s organizational structure is designed. The hope is that such an exercise will produce a better understanding of how cartels operate and generate a richer set of collusive markers based on market data. This paper does not engage in an empirical analysis as it is normally conceived. Rather, the approach is to glean what one can from about 20 cartels for which there is detailed information.1 Though we will not be able to draw any definitive (that is, statistically significant) conclusions and indeed any claims are necessarily speculative, this is partially offset 1 It
is more in the style of the classic studies by Stocking and Watkins (1946, 1948) and Hay and Kelly (1974).
2
3 by being able to offer finer details about cartels which will suggest a richer set of collusive markers.2 It needs to be emphasized that the case studies are largely confined to providing information during the episode of collusion. Thus, claims about how cartel behavior differs from competitive behavior will either rely on using general knowledge of competitive behavior (rather than knowledge about how this par