IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Cartel Dissolution with Effective Antitrust Policy

Listed author(s):
  • Cai, Xiaowei
  • Stiegert, Kyle W.

Cartel operations still exist worldwide despite the recent development and enforcement of antitrust laws in scores of countries that previously had no such legal framework. Since 1990, 283 international cartels were discovered by antitrust authorities around the world (Connor 2003). According to a 1990s' sample of U.S. Department of Justice and European Commission prosecuted cases, the discovered cartels operated in a wide variety of industries such as chemicals, metals, paper products, transportation, communication, food, textiles and services (OECD 2002). Were it not for the efforts to deter cartels by the antitrust agencies, there would likely have been many more such arrangements (Connor 2005). The presence and societal impacts of domestic and international private cartels is an important policy issue that has drawn the attention of various key public stakeholders including justice, trade and commerce departments, policymakers, and industry and consumer advocacy groups. Because only the detected cartels are observed, it is difficult to measure the impact of antitrust policy on collusion (Harrington 2006). One central issue is then concerned with whether antitrust agency’s spending on cartel detection is optimal to dissolve cartels under market uncertainty. Therefore, the purpose of this paper is to examine theoretically the optimal spending by the antitrust agency when cartel’s profit is uncertain, link the theoretical findings with the observed real world cases, and to provide useful antitrust policy implications. Cartel firms operate in an uncertain environment, facing market demand uncertainty and the possibility of being detected by the antitrust agency. We develop a dynamic model in which an incumbent cartel decides whether or not to dissolve the cartel based on the observed profit and the antitrust agency’s budget level used for cartel detection. At the beginning of each period, the cartel observes its potential short run profit and the budget level that the antitrust agency allocates on cartel detection, and decides whether to keep the cartel or dissolve it. By keeping the cartel in operation, there is a probability that the cartel is detected and hence penalized. By dissolving the cartel, the firms receive competitive profits in the current and future periods. The Bellman equation is solved using the Newton’s method and based on the given parameters, we found the optimal values and the optimal actions when different levels of cartel detection budget allocation are observed. The post-optimality analyses show that the value of the cartel is an upward-sloping function of the profit for any antitrust budget. The critical cartel profit below which the cartel dissolves is calculated when the antitrust agency’s budget allocation increases each year. The higher the observed antitrust budget, the lower the value for the cartel and the higher the profit required to sustain the collusion. Obviously, governments can set budgets sufficient to deter cartels. Our paper sheds light on the effectiveness of current spending levels in assessing whether antitrust enforcement is effective enough to limit cartel formation to an acceptable social level.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Agricultural and Applied Economics Association in its series 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado with number 61297.

in new window

Date of creation: May 2010
Handle: RePEc:ags:aaea10:61297
Contact details of provider: Postal:
555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202

Phone: (414) 918-3190
Fax: (414) 276-3349
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

in new window

  1. Simon J. Evenett & Margaret C. Levenstein & Valerie Y. Suslow, 2001. "International Cartel Enforcement: Lessons from the 1990s," The World Economy, Wiley Blackwell, vol. 24(9), pages 1221-1245, 09.
  2. Joseph E. Harrington, 2005. "Optimal Cartel Pricing In The Presence Of An Antitrust Authority," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(1), pages 145-169, 02.
  3. John Connor, 2006. "Effectiveness of Antitrust Sanctions on Modern International Cartels," Journal of Industry, Competition and Trade, Springer, vol. 6(3), pages 195-223, December.
  4. John M. Connor, 2004. "Global Antitrust Prosecutions of Modern International Cartels," Journal of Industry, Competition and Trade, Springer, vol. 4(3), pages 239-267, 09.
  5. Bryant, Peter G & Eckard, E Woodrow, Jr, 1991. "Price Fixing: The Probability of Getting Caught," The Review of Economics and Statistics, MIT Press, vol. 73(3), pages 531-536, August.
  6. Margaret C. Levenstein & Valerie Y. Suslow, 2002. "What Determines Cartel Success?," UMASS Amherst Economics Working Papers 2002-01, University of Massachusetts Amherst, Department of Economics.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ags:aaea10:61297. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.