CCP Seminar: ‘Incentives or Institutions: What Determines the Duration of E.C. Cartels?’
November 8, 2012 Leave a comment
On Friday 9th November, the CCP’s weekly seminar series continues with our very own Richard Havell (ECO) presenting his research entitled ‘Incentives or Institutions: What Determines the Duration of E.C. Cartels?’ A copy of his abstract can be found below.
The theory of incomplete cartels identifies several characteristics such as discount rate, costs and capacity which dictate which firms will be members of a cartel and which non-members. Any entry to a cartel must involve the outsider firm which is most similar to the member firms. This firm will then become the first firm to leave the cartel. A dataset of 482 firms’ membership in 91 cartels prosecuted by the E.C. between 2001 and 2011 is analysed using a logit model predicting a firm’s exit from an active cartel with their entry into an already established cartel. It is found that firms indeed are more likely to exit a cartel early if they entered that cartel late and if the cartel in question is large.
What firms joining or leaving a cartel signals about that cartel is ambiguous. A cartel with a membership which does not change over time may have strong institutions and disciplined members or it may be fragile and would break down with entry or exit. Similarly, a cartel with a highly variable membership may be unable to maintain its agreements or it may be successful, thus attracting entrants, or structurally sound, thus inducing members to defect to the fringe. The durations of the same group of cartels is analysed using three Cox survival models and it is found that cartels which experience entry and exit over their duration tend to survive for longer than those with less variable membership.