Breaking up is Hard to Do: Determinants of Cartel Duration

Abstract

We estimate the impact of cartel organizational features, as well as macroeconomic fluctuations and industry structure, on cartel duration using a dataset of contemporary international cartels. We estimate a proportional hazards model with competing risks, distinguishing factors which increase the risk of “death by antitrust” from those that affect “natural death,” including defection, dissension or entry. Our analysis indicates that the probability of cartel death from any cause increased significantly after 1995 when competition authorities expanded enforcement efforts toward international cartels. We find that fluctuations in firm-specific discount rates have a significant effect on cartel duration, whereas market interest rates do not. Cartels with a compensation scheme – a plan for how the cartel will handle variations in demand – are significantly less likely to break up. In contrast, retaliatory punishments in response to perceived cheating significantly increase the likelihood of natural death. Cartels that have to punish are not stable cartels.