This is a preview. Log in to get access Show Abstract Following George Stigler (1964), many economists assume that incentive problems undermine attempts by firms to collude to raise prices and restrict output. But the potential profits from collusion can create a powerful incentive as well. Theory cannot tell us, a priori, which effect will dominate: whether or when cartels succeed is thus an empirical question. We examine a wide variety of empirical studies of cartels to answer the following questions: (1) Can cartels succeed? (2) If so, for how long? (3) What impact do cartels have? (4) What causes cartels to break up? We conclude that many cartels do survive, and that the distribution of duration is bimodal. While the average duration of cartels across a range of studies is about five years, many cartels break up very quickly (i.e., in less than a year). But there are many others that last between five and ten years, and some that last decades. Limited evidence suggests that cartels are able to increase prices and profits, to varying degrees. Cartels can also affect other non-price variables, including advertising, innovation, investment, barriers to entry, and concentration. Cartels break up occasionally because of cheating or lack of effective monitoring, but the biggest challenges cartels face are entry and adjustment of the collusive agreement in response to changing economic conditions. Cartels that develop organizational structures that allow them the flexibility to respond to these changing conditions are more likely to survive. Price wars that erupt are often the result of bargaining issues that arise in such circumstances. Sophisticated cartel organizations are also able to develop multipronged strategies to monitor one another to deter cheating and a variety of interventions to increase barriers to entry. Journal Information The Journal of Economic Literature (JEL), first published in 1969, is designed to help economists keep abreast of the vast flow of literature. JEL issues contain commissioned, peer-reviewed survey and review articles, book reviews, an annotated bibliography of new books classified by subject matter, and an annual index of dissertations in North American universities. Publisher Information Once composed primarily of college and university professors in economics, the American Economic Association (AEA) now attracts 20,000+ members from academe, business, government, and consulting groups within diverse disciplines from multi-cultural backgrounds. All are professionals or graduate-level students dedicated to economics research and teaching. Rights & Usage This item is part of a JSTOR Collection. 3Which would make it easier to maintain an effective collusive agreement in a cartel?34)______A)a new method of pricing that makes it more difficult for firms in the cartel to determine the prices at which othercartel members are selling their productB)an increase in the number of substitutes for products produced by the cartelC)a decrease in the elasticity of demand for the cartel's productD) the emergence of a number of potential entrant firms3Advertising may be an efficiency-enhancing activity when it results in the following, except when it35)______ 3Game theory, which is used in studying oligopoly behavior, originated from the study of games such as thefollowing,except36)______ TRUE/FALSE.Write 'T' if the statement is true and 'F' if the statement is false.3Two industries that have the same four-firm concentration ratio can have significantly different Herfindahlindexes.37)______MULTIPLE CHOICE.Choose the one alternative that best completes the statement or answers thequestion.3Advertising can enhance economic efficiency when it TRUE/FALSE.Write 'T' if the statement is true and 'F' if the statement is false.3Repeated games with reciprocity tend to reduce the payoffs for both players, as compared to a one-time gamewith a similar payoff matrix.39)______4One common factor that often weakens collusion among cartel members is the incentive to cheat.40)______MULTIPLE CHOICE.Choose the one alternative that best completes the statement or answers thequestion.4FirmMarket Share (%)A40302055BCDE If enforcement of antitrust laws caused the two largest firms in this table to be divided in half, with each halfhaving equal market share, the industry's four-firm concentration ratio would ________ and its Herfindahlindex would ________.41)______ C)remain the same; fallD)remain the same; rise4A low concentration ratio means that42)______ What is the strongest form of collusion?The strongest form of collusion is a cartel, an agreement by several producers to restrict output in order to increase their joint profits.
Why is it difficult for firms to maintain collusive agreements?Collusive agreements are typically difficult for cartels to maintain because each firm can increase profits by: producing more output than the quantity that maximizes joint cartel profits.
Which of the following is a condition that helps enforce a cartel agreement?Which of the following is a condition that helps enforce a cartel agreement? there are many entrants in the industry.
Why is it more difficult to maintain a cartel when there are more than two firms?A cartel agreement is difficult to enforce because each firm has an incentive to cheat. By lowering price, the cheating firm can increase its market share and profits. A second reason that firms do not collude is that such behavior violates antitrust laws.
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Which would make it easier to maintain an effective collusive agreement in a cartel?
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