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The East German Cement Cartel : An Inquiry into Comparable Markets, Industry Structure, and Antitrust Policy

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Author Info

  • Veltins, Michael A.
  • Schaller, Armin
  • Blum, Ulrich

Abstract

Maintaining sufficient levels of competition ranks among the core interests of any national – and increasingly international – antitrust policy; however, the formal proof that a cartel really functioned economically and did not only exist in a legal sense is hard to deliver: market power is not identical to the existence of a legal cartel unless the monopolistic frontier is reached; the legal proof of a cartel does not imply that the market was harmed. From an economic point of view, focusing on legal proof of a cartel is fruitless unless collusion resulted in excess profits or excess revenues. This economic evidence, however, rests empirically on the proper definition of comparable markets, and a sound statistical methodology. When in spring 2003, the German Antitrust Agency (GAA) fined the German cement industry – € 661 million for having established quotas in each of the four market regions through the end of 2001, the legal issue seemed beyond doubt as, beside formal inquiries, two of the industry members had acted as key witnesses. However, the economic implications drawn by the GAA remain doubtful. In this paper, we use the quota agreement in the East German market, the region for which these allegations are undisputed by all major suppliers, as a reference case. We challenge the GAA’s computation of excess income of 10 €/ton on two grounds: (i), the comparative market period chosen, 2002, does not meet the requirements of a reference market, especially regarding a certain level of stability and converging prices; (ii) three parallel developments could have triggered the price decline: the openly announced end of the quota cartel, which generated general price-setting insecurity (ii-a), the price war triggered by one of the oligopolists, who desperately tried to improve poor utilization of capacity and squeeze out competitors (ii-b), and the general decline in construction activity (ii-c). Within the framework of an econometric model based on data of one German cement producer, we find that sufficient levels of competition prevailed throughout the cartel period. Furthermore, the demand structure did not change from 2001 to 2002 so as to suggest a fundamental change in competition. Finally, no excess income or profit can be computed. In fact, we show that the general demand regime estimated for the period 1995 to 2001, which is the period of alleged market power, equally well describes the market condition of 2002. Price war and a collapsing construction market lead suppliers to maintain levels of production and capacity utilization, thus sacrificing profits at the expense of the market shares of small and medium-sized suppliers independently from the cartel issue. This empirical finding of an agreed but ineffective cartel is supported by theoretical evidence on the conditions under which cartels can work effectively – which did not exist in the East: strong import competition, a high level of transparency limiting the effects of „cheap talk“ and spatial pricing that generates local market power in the absence of cartels. Furthermore, general supply-side conditions in the cement industry suggest that a considerable level of imperfect competition is structurally unavoidable; antitrust possibilities that in the short run enforce additional competition based on the wrong assessment of effective collusion may lead to exits and less competition in the long run. We conclude that the methodology described may be useful for antitrust policy as it offers a credible analytical tool to compute excess income and profit. --

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Bibliographic Info

Paper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 04/04.

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Date of creation: 2004
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Handle: RePEc:zbw:tuddps:0404

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Related research

Keywords: antitrust; cement; competition; collusion; Germany; econometrics; excess income; excess profit; quota agreement;

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References

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  1. Norman, G. & Thisse, J.-F., . "Product variety and welfare under tough and soft pricing regimes," CORE Discussion Papers RP -1201, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. F.C.v.N. FOURIE & A. SMITH, 1994. "The South African Cement Cartel: An Economic Evaluation," South African Journal of Economics, Economic Society of South Africa, vol. 62(2), pages 80-93, 06.
  3. Svend Albæk & Peter Møllgaard & Per Baltzer Overgaard, 1997. "Government-Assisted Oligopoly Coordination? A Concrete Case," CIE Discussion Papers 1997-03, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  4. George J. Stigler & Robert A. Sherwin, 1983. "The Extent of the Market," University of Chicago - George G. Stigler Center for Study of Economy and State 31, Chicago - Center for Study of Economy and State.
  5. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215.
  6. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
  7. F.C.v.N. FOURIE & A. SMITH, 1995. "The South African Cement Cartel: A Reply to Leach," South African Journal of Economics, Economic Society of South Africa, vol. 63(1), pages 51-56, 03.
  8. Abbott, Thomas III, 1994. "Observed price dispersion: Product heterogeneity, regional markets, or local market power?," Journal of Economics and Business, Elsevier, vol. 46(1), pages 21-37, February.
  9. Abraham Hollander, 1990. "Quota Leasing as a Competitive Strategy: A Story of Chicken Feed, Laying Hens, and Eggs," Canadian Journal of Economics, Canadian Economics Association, vol. 23(3), pages 617-29, August.
  10. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
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Cited by:
  1. Christian Lorenz, 2005. "Screening markets for cartel detection - collusive marker in the CFD cartel-audit," Industrial Organization 0511003, EconWPA.
  2. Lorenz, Christian, 2005. "Der KMD-Kartellcheck: Marktscreening nach Kartellstrukturen am Beispiel des deutschen Zementmarkts," Beiträge zur angewandten Wirtschaftsforschung 11, Center of Applied Economic Research Münster (CAWM), University of Münster.

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