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Anti-competitive agreements (collusion), the so-called cartels are one

Anti-competitive agreements (collusion), the so-called cartels are one of the main reasons for the existence of competition authorities around the world. There are several cartels dating the 19th century as a Beer in Sweden (1894) or Railroads in the US (1870’s).
Basically, a cartel is an agreement between competitors in order to set higher prices, allowing them to keep extra profits harming consumers. If one industry is controlled by a cartel, it is the same as having just one firm (monopoly) in the market. There are several ways of collude: Firms can just agree on a selling price; they can divide the market in geographical areas or set other division criteria. Whatever the type of agreement, the main goal is always keeping prices higher than if firms had no agreement to generate higher profits. According to Connor and Lande (2005)1 the median increase on prices of a cartel is 22%. An example of market division is the Turbine Generator Industry in the U.S. during the 1950’s: There were three firms in the market and they ask firms (turbine generator consumers) to submit bids for the good demanded. Firms coordinated/divide the market by a lunar calendar, each firm has a number of days which it would be the only one able to got the contract offered by the consumer as a monopoly. The length of each period was proportional to firms’ market share.
The bright side of collusion is that it is not sustained forever. Levenstein and Suslow (2004)2 found that average cartel duration is 5.4 years but it has large variations. Cartel duration depends on several determinants such as: market share of the firms, entry barriers in the market, homogeneity of the good, laws and punishments regarding to cartelization, technological developments, etc. The previous authors also realized that the entry of new firms seems to be the most important reason for a cartel breakdown which is highly related with its duration – Easier the firms’ entry; the shorter period collusion is sustained.
Even knowing that cartels would disappear by market forces, competition authorities want to make this faster. Authorities tried to create breaking down incentives within cartels by cartel leniency (decreasing cartel duration). This procedure basically gives immunity for firms that denounces their own cartels and reduce fines to the ones that cooperate with the competition authority. On one hand, leniency seems to increase cartel’s breakdown and reducing their duration, leading to competition which increases welfare. On the other hand, firms could have higher incentives to create cartels because leniency makes potential punishment lower (cooperating with competition authority).
In the end, leniency seems to be a good policy to breakdown cartels but we should be able to avoid their creation using other tools as forbidden information on prices and quantities in trade associations or increasing the punishment by law of cartelization.
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Guilherme Rodrigues 541
1 How High Do Cartels Raise Prices? Implications for Reform of the Antitrust Sentencing Guidelines; 2005; Connor, John; Lande, Robert; American Antitrust Institute Symposium: Thinking Creatively about Remedies.
2 What Determines Cartel Success?; 2004; Levenstein, Margaret C.;Suslow, Valerie Y. ; Journal of Economic Literature, Vol. 44, No., pp. 43-95Published

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Author: studentnovasbe

Master student in Nova Sbe

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