Cartels operating in the manufacturing sector are more likely to suppress competition by dividing markets, while in other sectors cartels often work by just fixing prices. Pure price-fixing cartels are more common when demand is mostly from retail buyers.
These are the conclusions of research by Ari Hyytinen, Frode Steen and Otto Toivanen published in the July 2019 issue of The Economic Journal. The authors use data from Finland to provide new insights into how cartels function and how they would act, were they not illegal. Such research could be helpful to authorities and courts in cartel cases.
The study analyses 898 representative collusive agreements from Finland where, as in many European countries, cartels were legal until the early 1990s. The authors find that 53% of manufacturing cartels suppress competition by dividing markets among themselves.
This often means adopting a ‘home turf’ principle, whereby colluding firms avoid each other by allocating the product, production or territory among themselves. Cartels of this type are often bilateral and use relatively simple contracts.
According to the study, quota cartels are also relatively common in manufacturing, where 16% of the cartels resort to quotas. Quota cartels use more complex contracts and are more frequent when demand is mostly from industrial buyers.
In non-manufacturing sectors, cartels often suppress competition by just fixing prices: 53% of the non-manufacturing cartels collude by agreeing on prices. Pure price fixing cartels are more common when demand is mostly from retail buyers. Mixed cartels, which fix prices and allocate markets, also exist, especially in industries where capital intensity is high.
This research could assist authorities and courts make correct decisions in cartel cases, because the boundaries for unlawful and harmful practices remain unclear. For example, the study demonstrates what behaviour should be treated with suspicion. In manufacturing, visible division of markets by area could be indicative of collusion through the ‘home turf’ – principle. In the case of quota cartels, authorities should look for evidence of the communication that the more complex contractual arrangements of those cartels likely necessitate.
An Anatomy of Cartel Contracts by Ari Hyytinen, Frode Steen and Otto Toivanen is published in the July 2019 issue of The Economic Journal
Professor of Economics at Hanken School of Economics and Helsinki Graduate School of Economics
Professor of Economics at NHH, Norwegian School of Economics
Professor of Economics at Aalto University School of Business and Helsinki Graduate School of Economics