The Welfare Impact of Collusion under Various Industry Characteristics: A Panel Examination of Efficient Cartel Theory

Taylor Jason E ()
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Taylor Jason E: Central Michigan University

The B.E. Journal of Economic Analysis & Policy, 2010, vol. 10, issue 1, 29

Abstract: In the past three decades, several case studies have documented specific industries and instances whereby collusion was welfare-enhancing rather than harmful as is usually assumed. Specifically, two distinct "efficient cartel" hypotheses claim that inter-firm coordination can increase economic efficiency in industries with a large degree of avoidable fixed costs and/or variable output. This paper performs the first systematic empirical test of these hypotheses via an examination of cartel performance under the National Industrial Recovery Act of 1933, a two-year cartel experiment in the United States. While I find a wide variation in welfare changes during cartelization, there is no compelling evidence that differences in fixed costs are the cause. I do, however, find robust empirical support for the hypothesis that industries with highly variable output experience higher welfare gains (or less negative welfare declines) under collusion.

Keywords: collusion; efficient-cartel; National Industrial Recovery Act; empty core; avoidable fixed costs (search for similar items in EconPapers)
Date: 2010
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DOI: 10.2202/1935-1682.2511

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