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The Welfare Impact of Collusion under Various Industry Characteristics: A Panel Examination of Efficient Cartel Theory

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  • Taylor Jason E

    ()
    (Central Michigan University)

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    Abstract

    In the past three decades, several case studies have documented specific industries and instances whereby collusion was welfare-enhancing rather than harmful as is usually assumed. Specifically, two distinct “efficient cartel” hypotheses claim that inter-firm coordination can increase economic efficiency in industries with a large degree of avoidable fixed costs and/or variable output. This paper performs the first systematic empirical test of these hypotheses via an examination of cartel performance under the National Industrial Recovery Act of 1933, a two-year cartel experiment in the United States. While I find a wide variation in welfare changes during cartelization, there is no compelling evidence that differences in fixed costs are the cause. I do, however, find robust empirical support for the hypothesis that industries with highly variable output experience higher welfare gains (or less negative welfare declines) under collusion.

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    Bibliographic Info

    Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

    Volume (Year): 10 (2010)
    Issue (Month): 1 (October)
    Pages: 1-29

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    Handle: RePEc:bpj:bejeap:v:10:y:2010:i:1:n:97

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