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What is the main measure for determining the success rate of cartels?
Under what circumstances are cartels most likely to succeed?

Assessing whether or not a cartel will succeed is simplified by purely considering whether the
incentive to cheat, and undermine attempts by firms to collude dominates the incentive to maintain
stable raised profits from collusion (Levenstein and Suslow, 2006). When firms perceive the gains
from maintaining collusion ties are higher than the gains from cheating, a cartel will stand a better
chance of being successful in the long term. The past century has seen a great rise in cartel
behaviour, an activity that sees a group of independent firms in the same industry impose restraint
upon competition (Carlton and Perloff, 2000). Cartels are the result of a formal agreement between
a group of producers to regulate either prices or supply within a market so as to extract higher
levels of profit. Hunter (1954 cited in Lipczynski et al., 2013) argues that the formation of cartels
is not solely to extract profit from the consumers, but as a measure of self-defence and to reduce
the risk of firm entry within the market. MacGregor (1906, p. 46) postulates that It is the pressure
of risk which first arouses producers to the possibilities of another method of organisation and that
the role of price fixing is of secondary importance. Economists are split on the issue of whether
cartels are successful in the long term, with Stigler (1964) arguing that attempts to form cartels
would inevitably fail as one of the colluding firms succumbed to the temptation to reduce prices
marginally so as to increase their individual profits. This essay will outline a suitable measure that
can be used to determine the success rate of cartels, providing circumstances that foster the growth
of cartels, and the key problems that cartels face.
Accurately measuring the success of a cartel is inherently difficult due to the illegal and hidden
nature of the agreements. However, from the data that has been uncovered, we discover that the
duration of cartels varies significantly, with a range of very short-lived agreements up to those that
last decades. Levenstein and Sullow (2006) provide evidence for cartels in the graphite electrode,
maltol and cartonboard markets that last over five years and Jacquemin et al. (1981) present
evidence that some Japanese export cartels have existed for longer than ten years. The use of cartel
duration as a measure of success has both merits and downfalls. Krouse (1991) argues that it is
significantly more easily measured than attempting to measure either the excess profits or price
increases that are caused by collusion. Duration is also easily used to compare the relative success
of a range of cartels, allowing comparisons between different industries. An issue raised by
Levenstein and Suslow (2006) is that many cartels go through a period of breakdown and
reformation. This cycle causes issues with observation as the empiricist may be unsure whether a

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single period of collusion was viewed or whether one long lived cartel was observed. Furthermore,
a measure of duration does not take into account the extent to which the cartel is colluding to
control the market price and output (Carlton and Perloff, 2000). It is possible that a cartel may
exist for many years without exerting a significant influence on the market or experiencing any
increase in profits. Lipczynski et al. (2013) extend this argument by postulating that it is difficult
to ascertain when a cartel officially began its formal collusion, and thus to accurately measure the
duration of any influential collusion. In light of the drawbacks, analysis of price manipulation
should be undertaken to add further weight to the measure of success. Ideally, we would like to
compare the prices and profits that prevailed with what would have been obtained absent of the
cartel. This kind of a rigorous counterfactual analysis is rarely attempted (Levenstein and Suslow,
2006, p. 45).
Success is ultimately reliant on the cooperation of all members within the cartel, however there are
a number of factors that are conducive to cartel formation and success. Lipczynski et al. (2013)
explore the main factors that help foster cartels, namely: high market concentration, similar sized
firms with similar cost functions and an industry that is subject to minimal demand fluctuations.
Imperative to the success of a cartel is that the level of market concentration is high as this will
help the effective functioning of the group. Bain (1959) argued that this is the most important
factor for success as concentration is associated with duration, confirmed by Symeondiss (2003)
finding of a concave association between cartel prevalence and concentration. Markets that are
highly concentrated allow the controlling firms a larger share of the market and thus their payoff
from setting a monopolistic price increases (Levenstein and Suslow, 2006). Furthermore, theories
of group and coalition behaviour suggest that, as firm numbers increase, the unanimity of goals
diminishes and therefore the costs of communication, monitoring and enforcement will rise. Firms
are also more likely to cheat as firm numbers increase, as they perceive a lower risk of detection.
In conjunction with high market concentration, cartel success depends upon these firms controlling
similar shares of the market (MacGregor, 1906). Asymmetric market shares are likely to lead to a
divergence of objectives, with larger firms using their dominance to defect, forcing smaller firms
out of the market entirely.
Along with similar size, cartels are more likely to succeed if they face similar cost structures.
Lipczynski et al. (2013) argue that if one firm in a cartel has a relatively flat average cost curve,
whilst another has a cost function that decreases as output increases, this firm may be reluctant to
restrict its output. In the absence of side-payments to offset the opportunity cost incurred by
membership, the firm may be reluctant to join the cartel in the first place (p. 219).

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A final and key aspect of success is that the industry in which the cartel operates is highly stable,
with relatively little fluctuation in demand. Reductions in total demand place strain on cartel
agreements as firms are more tempted to undercut one another to protect their sales volumes
(Lipczynski et al., 2013). This destabilising effect is exacerbated when firms operate in an industry
where fixed costs account for a large proportion of total cost. Falling demand tempts producers to
cut prices in an attempt to cover these fixed costs. At the other end of the scale, in times of rising
demand, monitoring and detection is more difficult as sales rise for all firms. This increases the
opportunity to cheat without facing punishment, and thus demand stability is key to ensuring cartel
stability (Carlton and Perloff, 2000).
However, even when all the conditions for a successful cartel are met, upon formation, cartels face
a number of challenges that threaten to reduce their levels of success. Osborne (1976) groups these
challenges into three broad categories: selecting and coordinating the behaviour of all cartel
members (i.e. choosing a point on the contract surface), monitoring the behaviour of members for
defections and preventing entry by non-cartel firms. The fundamental reason that so many cartels
fail to meet expectations is that they are unable to escape from the Prisoners Dilemma:
by raising price above marginal cost, the cartel creates an incentive to each
producer to cheat. Each firm would like to lower its price, increase its output
and market share, and thereby increase its profits. But if each one did so,
collusion would immediately dissolve into competition.
(Levenstein and Suslow, 2006, p. 46)
This incentive to cheat is further magnified if the market is dominated by a small number of
concentrated buyers (Stigler, 1964). Orders are likely to be large and infrequent, increasing the
temptation for parties to defect and offer a price reduction to secure the business. In order to ensure
that cartel members do not choose to cheat, incumbent members need to increase the cost of
cheating so that it is higher than the benefit. Therefore the effective imposition of sanctions is
important to ensure cartel stability (Lipczynski et al., 2013). Stigler (1964) argues that the most
effective way to avoid defection is to constantly monitor the actions of those within the cartel.
Monitoring strategies include the use of a joint sales agency, which reduces the discretionary
powers of individual firms with respect to pricing, output and distribution. Sufficient monitoring
and sanctions will increase the stability, success, and therefore profitability, of the cartel.

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This essay has provided a range of conditions that are required to foster the growth and success of
cartels, along with the problems that they face upon formation. Market concentration and firm size
distribution have been put forward as the most significant preconditions, with effective monitoring
essential for maintaining stability. The literature has indicated cartel duration as the best measure
of overall success. The task of identifying success is, by the illegal nature of cartels, very
complicated (Krouse, 1991). Economists are only able to analyse the structure and success of those
cartels that have been discovered and broken up, thus we unsure if the most successful cartels are
still operating undetected. As the European Commission increases the pressure on cartels, more
information will be provide for this debate. In recent months, the Commission has fined four North
Sea shrimp traders 28m for price fixing and eight financial institutions 1.71bn for cartel activity
in the derivative markets. This increase in pressure hopes to increase the costs above the benefits
for participants, leading to an overall reduction in the agreements seen within the EU.

Reference List
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Osborne, D. (1976) Cartel Problems, The American Economic Review, Vol. 66, No. 5,
pp. 835-844
Jacquemin, A., Nambu, T. and Dewez, I. (1981) A Dynamic Analysis of Export Cartels: The
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Symeonidis, G. (2003) In Which Industries is Collusion More Likely? Evidence from the UK,
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