Empirical Study on Hard Core Cartels: Hard Core Cartelisation – Economic Effects and Policy Options

In an empirical study of a large German cement cartel, ZEW researchers examined the effects of overt collusion on consumers and economic welfare. Kai Hüschelrath, the head of ZEW's new "Competition and Regulation" research group, explains the most important findings.

Kai Hüschelrath is Head of ZEW’s Competition and Regulation Research Group and the coordinator of the Leibniz ScienceCampus “Mannheim Centre for Competition and Innovation (MaCCI)”. He has investigated the economic effects of competition policy at ZEW since 2006. Previously he was a senior researcher in ZEW’s department of Industrial Economics and International Management. Since 2009 he has also been Assistant Professor of Industrial Organization and Competitive Strategy at WHU Otto Beisheim School of Management in Vallendar.

You analysed price fixing in a large cement cartel in Germany. What did you find?

The fixed quotas set by large German cement manufacturers between the early 1990s and the beginning of 2002 raised cement prices substantially. According to our estimates, the cartel markup was between 12.54 Euro and 17.96 Euro per tonne of Portland cement (CEM I). The collusive agreement affected both the society as a whole as well as cement buyers who had to pay higher prices. But the cartel did not only artificially limit cement supply; it also suppressed innovation.

How did the prices set by cartel members and competitors change after the cartel broke down?

At first prices fell dramatically, among former cartel members as well as competitors. But then prices began to increase markedly – a phenomenon that can be found in many other cartels as well.

Why did prices rise again?

One explanation is that former cartel members were able to introduce forms of tacit collusion, creating similar elevated prices without explicit agreement. However, it is also possible that cost increases contributed to the observed price development. A precise econometric analysis is therefore necessary to track down the true reasons for the observed prices.

What measures can legislators take to fight cartels?

The job of fighting cartels falls to competition authorities who often pursue a two-pillar strategy: using deterrents to prevent the creation of new cartels and breaking up existing ones. Fine increases and improvements in the probability of detection are two of the main drivers altered as part of a series of reforms introduced in past years. For instance, the government created stricter rules for fines and started a leniency programme under which regulators may offer to reduce or eliminate fines when companies who breached cartel laws notify officials of their wrongdoings. Tips from competitors, customers, and former cartel employees are another important factor in exposing cartels. And as cartel collusion becomes increasingly international, cooperation among national competition authorities is crucial as well.

Based on your study, what steps do you recommend politicians take to detect price fixing earlier or eliminate them altogether?

In recent years competition authorities have proposed important steps to make the legal prosecution of cartels more effective; most are already in operation. Statistics on the number of uncovered cartels provide a clear indication of the success of these measures. Of course, additional resources could be invested into a further strengthening of the deterrence effect. For instance, the government could regularly monitor industries that are particularly susceptible to forming cartels.

Are there estimates about the number of active cartels still undiscovered?

No one knows how many cartels exist and the extent of the damage they cause. But discovering all the cartels in an economy makes little economic sense anyway. You have to weigh costs and benefits.  Admittedly, uncertainty about the number of existing cartels and the damage they cause makes it difficult to assess particularly the benefits.