Do Cartels Undermine Economic Efficiency?

This paper examines how the formation and termination of cartels affect the performance and efficiency of their member firms. We identify 142 publicly listed firms active in 49 European cartels between 1983 and 2004. We construct empirical measures for the performance of the cartel firms to investigate three types of economic inefficiency: allocative inefficiency (assessed by profitability), productive or x-inefficiency (labor productivity), and dynamic inefficiency (innovation, measured by R&D investments). We find that profitability is higher and productivity and R&D investments are lower during the cartel period. All three types of inefficiency worsen over the cartel period and are especially pronounced for the ringleader. In sum, cartels are associated with deteriorating allocative, productive, and dynamic efficiency.