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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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    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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    File URL: https://www.degruyter.com/view/j/bejeap.2010.10.1/bejeap.2010.10.1.2511/bejeap.2010.10.1.2511.xml?format=INT
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    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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    1. Alexander, Barbara J., 1997. "Failed Cooperation in Heterogeneous Industries Under the National Recovery Administration," The Journal of Economic History, Cambridge University Press, vol. 57(02), pages 322-344, June.
    2. Alexander, Barbara & Libecap, Gary D., 2000. "The Effect of Cost Heterogeneity in the Success and Failure of the New Deal's Agricultural and Industrial Programs," Explorations in Economic History, Elsevier, vol. 37(4), pages 370-400, October.
    3. David Genesove & Wallace P. Mullin, 2001. "Rules, Communication, and Collusion: Narrative Evidence from the Sugar Institute Case," American Economic Review, American Economic Association, vol. 91(3), pages 379-398, June.
    4. Sjostrom, William, 1989. "Collusion in Ocean Shipping: A Test of Monopoly and Empty Core Model s," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1160-1179, October.
    5. Bittlingmayer, George, 1982. "Decreasing Average Cost and Competition: A New Look at the Addyston Pipe Case," Journal of Law and Economics, University of Chicago Press, vol. 25(2), pages 201-229, October.
    6. Harold L. Cole & Lee E. Ohanian, 2004. "New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 779-816, August.
    7. Mills, David E, 1984. "Demand Fluctuations and Endogenous Firm Flexibility," Journal of Industrial Economics, Wiley Blackwell, vol. 33(1), pages 55-71, September.
    8. Alexander, Barbara, 1994. "The Impact of the National Industrial Recovery Act on Cartel Formation and Maintenance Costs," The Review of Economics and Statistics, MIT Press, vol. 76(2), pages 245-254, May.
    9. Fraas, Arthur G & Greer, Douglas F, 1977. "Market Structure and Price Collusion: An Empirical Analysis," Journal of Industrial Economics, Wiley Blackwell, vol. 26(1), pages 21-44, September.
    10. Saxonhouse, Gary R, 1976. "Estimated Parameters as Dependent Variables," American Economic Review, American Economic Association, vol. 66(1), pages 178-183, March.
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