When Are Cartels Stable Contracts?
Why do some industry cartels survive for decades while others are quickly undermined by price wars and entry? Variation in cartels' longevity can be explained by differences in their costs of self-enforcement and service value to members. Analyzing legal cartel contracts formed under the Webb-Pomerene Export Trade Act, I find that longer-lived cartels tended to export to small buyers, to have wide industry coverage, to operate in periods of stable prices and growing demand and to sell under side agreements with foreign competitors. Contracts in which the cartel centralized its control through a common sales agency tended to be more stable. However, cartels usually grew less stable with age and when there was a recent and long history of cartelization in the industry. Finally, cartels whose primary rationale was to fix price tended to be particularly unstable because these contracts invited fringe competition and entry. Copyright 1996 by the University of Chicago.
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- Douglas W. Allen & Dean Lueck, 1993. "Transaction Costs and the Design of Cropshare Contracts," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 78-100, Spring.
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