American

American Economic
Economic Association
Association

On the Workings
On the Workings of of aa Cartel:
Cartel: Evidence
Evidence from
from the
the Norwegian Cement Industry
Norwegian Cement Industry
Author(s):
Author(s): Lars-Hendrik
Lars-Hendrik Röller
Röller and Frode Steen
and Frode Steen
Reviewed
Reviewed work(s):
work(s):
Source: The
Source: The American
American Economic
Economic Review,
Review. Vol.
Vol. 96, No. 11 (Mar.,
96. No. (Mar.. 2006), pp. 321-338
pp. 321438
Published
Published by: by: American Economic Association
Stable
Stable URL:
URL: http://www.jstor.org/stable/30034368 .
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 On
On the
the Workings
Workingsof
of aa Cartel:
Cartel: Evidence
Evidencefrom
fromthe
the Norwegian
Norwegian
Cement Industry
Cement Industry
By
By LARS-HENDRIKRöLLERANDFRO-DE
LARS-HENDRIKR6LLER AND FRODE S TEEN*
STEEN*

There are
There are relatively few empirical
relatively few empiricalstudies
studies on Most empirical
Most studies on
empirical studies cartels focus on
on cartels on
the
the workingsof a cartel. The primary
workings of a cartel. The reason for
primaryreason for markets where a
marketswhere a known cartel exists
known cartel and inves-
exists and inves-
this is
this that cartels
is that cartels are Often illegal
are often illegal and
and therefore
therefore tigate
tigate the ability
ability of the cartel to keep
cartelto keep a
a collusive
collusive
data
data are
are difflcult
difficult toto obtain. Even though
obtain. Even though anti-
anti- agreement
agreement inin place,
place, that
that is,
is, on
on the cartel's ef-
the cartel's ef-
trust
trust agencies
agencies sometimes compile in-
compile detailed in- forts
forts to prevent individual
to prevent individualmembersfrom fromcheat-
cheat-
formation
formationonon cartels,
cartels, strict
strict confidentiality rules
confidentialityrules ing on
ing the agreement?
on the agreement.3B
Byy contrast,
contrast, tthere
hereare
are
often
often keep data from
keep data from academic research. A
academic research. A no-
no- few
few empirical studies that
empirical studies that focus
fcxus explicitly
explicitly on
on
table exception
table exception is the seminal work
the seminal work byby Robert the
the problem of the effectiveness of aa particular
problem of the effectiveness of particular
H. Porter
H. Porter (1983),
(1983), which
which investigates price wars
investigates price wars cartel
cartelagreement,
agreement,such
such as the choice
as the choice of
of aa sharing
sharing
in a
in railroad cartel
a railroad operating in
carteloperating the United
in the United States
States rule,
rule, which
which determines
determines how
how the
the monopoly rents
monopoly rents
in the
in late nineteenth
the late century. More
nineteenth century.' More recently,
recently, are
are divided up among
divided up among the members.
the members.
David Genesove
David Genesove and Wallace P.
and Wallace P. Mullin
Mullin (1998)
(1998) nis
This studies the effectiveness Of a car-
paper studies the effectiveness of a car-
use data
use from 1892
data from 1892 to to 1914
1914 Ofof the
the American
American tel.
tel. By
By effectiveness,we mean the
effectiveness, we mean the ability
ability of
of a
a
sugar
sugar indwstry,
industry,where the American Sugar Re-
American Sugar Re- legal cartel
legal cartel to achieve profit
to achieve maximization in
profit maximization in
fining Company controlled (through acquisi-
fining Company controlled (through acquisi- light Of a particular sharing rule.
light of a particular sharing rule. Given the Given the
tion) 95
tion) 95 percent of of the U.S. U.S. sugar
sugar market
market by by legality of
legality the Norwegian
of the Norwegian cement
cement cartel,
cartel, we
we
1895.
1895. Finally,
Finally, the so-called
so-called Lysine
Lysine cartel,
cartel, an
an have a large
largeamountof
amountof primary
primary data
data allowing us
allowing us
industry
industryprcKiucing
producing feed
feed additive
additive used
used to ensure
ensure to do a complete
complete welfare analysis. Using
analysis. Using the
the proper
the proper growth
growth of of livestcwk,
livestock, hashas provided
provided unique institutional
unique institutional setupof
setup of the
the Norwegian
Norwegian ce- ce-
more information on the workings Of
more information on the workings of cartels'
cartels' ment industry,
ment industry,in in particular
particular its
its sharing rule, we
sharingrule, we
international settings
international settings (see
(see James
James M. M. Griffin,
Griffin, are able to identify the workings of a
are able to identify the workings of a cartel in cartel in
2001).2 some
some detail.
detail. Taking
Taking these institutional
institutional factors
factors
into account,
into account, we we fcrus
focus on the two
on the fundamental
two fundamental
problems
problemsthat thataa cartel
cartel faces:
faces: deciding
deciding onon domes-
domes-
tic quantity and
tic quantity and on the distribution
on the distributionOf rents.4
of rents.4
** Rölk-_ Wissenschaftsæntrum Berlin (WZB) and
Riller: Wissenschaftszentrum Berlin (WZB) and Given data on domestic and world market
Humboldt University,
Humboldt University. Reichpretschufer
Reichpietschufer50, 10785 Berlin,
50, 10785 Berlin,
Given data on domestic and world market
Germany (e-mail:
Germany (e-mail: Roeller@wz-berlin.de);Steen: Steen: Depart- prices, prcxluction,andexports,
prices, production, and exports,we we usea simple
use a simple
mt of Economics, Norwegian
ment Noosegian School School of
Of Economics and and
Administraticm, Helleveien 30,
Business Administration, 30, N-SOiS
N-5045 Bergen,
Bergen,
Nmy
Norway (e-mil:
(e-mail: Frode.Steen@nhh.no).We We would
would like
like toto for example,
3 See, for example, MargaretC. Levenslcin ((1997) for
C. Levenstein for a
a
thank LarsLars Sørgard,
Sorgard, StigStig Tenold.
Tenold, Gorm Grønnevet. the
Gorm Gronnevet, the historical study of of the stability
stability ofof cartels looking at
cartels looking at the
editry Bernanke. as
editorBen Bernanke, as well
well as two
as two anonymousrefereesfor fcy pr—WorLi
pre-World War War II bromine Genesoveand
bromine industry. Genesove Mullin
and Mullin
grovlding detailed
providing detailed andand constructive comments. nis rc-
This re- (2001)) discuss
discuss howhow rules
rules and frequent meetings prevented
and frequent
search has f.3 by the ResearchCouncil of unnecessary
search has been partly financed by of unnecessary retaliations
retaliations among
among the the sugar cartel members
members
Norway through the Institute fcy for Research in Ecmomics and how they
Norway in Economics they maintained
maintaineda collusive price 'Tice level. See alsoalso
and
and Business Administmticm
Administrationand the European European Union
Union Re-Re- Barbara
BarbaraMcCutcheon((1997) 1997) for
fM a discussion on on the
the impor-
impor-
Netwc* grant
search Training Network grant on on "Competition Policy in
"CompetitionPolicy in tance Ofof informationsharing in in cartels, Valery Y,
cartels. Valery Y. SuslOW
Suslow
International
International Markets."
Markets." All nustakes
All mistakes and
and errors
errors are
are the
the (1988)
(1988) provides aa comprehensive
comprehensive list of different
list of different cartels
cartels
of the active
responsibilityof the authors. active inin the inter-WÜ
the inter-war period.
' See
See also
also EdwardJ. J. Green
Green and and Porter
Porter(1984) and Julio
(1984) and Julio 4 Dale K,K. Osborne (1976),
(1976), inin a a seminal
seminal contribution,
contribution,
J.
J. Rotembergand and Garth
GMh Saloner (1986). (1986). refersto
refers to these two problemsas
two problems "the sharingproblem"
as "the problem" andand
2 The cartel
cartel was
was in in place for for the
the period 1992 to
to 1995
1995 and the cc"ltract surface" He also mentions
period 1992 and the "locate the contract problem.He also mentions
Was
was fined
fined on the order
order Of of SI (X) million plus
$100 plus personal fees
fees •&tection"
"detection"and and &terrence"
"deterrence"as as two
two furtherintemal
internalcartel
cartel
and sentencesfcy someof the employees.
employees.TO problems.
problems. The last last two
two are
are unlikely to play
and prison sentences for some of the To expose unlikely to play aa role in the
role in the
the
the cartel,
cartel, the
the FBI
FBI used BOVert cameras
used covert camerasto to
tape Cartel
cartel nrct-
meet- Norwegian
Norwegian cement industry. See
cement industry. also Mukesh
See also Mukesh Eswaran
Eswaran
ings.
ings, providing us us with information on
with detailed information the work-
on the (1996)
(1996) for Study on cartel unity
for a study unity inin the fEe Of
the face of business
business
ings
ings ofof the Lysine cartel.
the Lysine cartel. cycle
cycle effects.
effects.

321
322 THE
THEAMERICAN
AMERICANECONOMIC
ECONOMICREVIEW
REVIEW MARCH
MARCH 2005
2006

rncxiel
model to identify marginal
to identify marginaluy;ts, which in
costs, which turn
in turn market
marketprice.
price. Since
Since the
the world
world market
marketprice rep-
price rep-
allows
allows us
us to
to study
studythe effectiveness of
the effectiveness of the cartel
the cartel resents
resents the
the omnrtunity
opportunitycosts of not
costs of not exBMting,
exporting,
and its impact
and its impact onon consumers
consumersand welfare.
and welfare. the
the common
common sales Office maximizes
sales office maximizes the
the cartel's
cartel's
The Norwegian
Norwegian cement industry was cartel-
industry was cartel- profits
profits by
by equating
equating marginal
marginaldomestic
domestic revenue
revenue
ized in 1923. Our
ized in Ourempirical
empiricalanalysis
analysis is based
based On
on with
with the
the World
world market price.' As
market price." As a result, aa
a result,
available data for
available data for the cartel
the cartel of 1955—
of 1955- lower
lower world market price
world market price implies that
that the
the cartel
cartel
period implies
1968.
1968. In 1968. the
In 1968, the three firms that
three firms that had
had formed
formed allocates
allocates more
more prcxiuction
production to the
the domestic
domestic mar-
mar-
the cartel
the merged to
cartel merged to form
form a monopoly. In
a monopoly. In addi-
addi- ket, which reduces
ket, which reduces the the cartel's
cartel's domestic
domestic rents rents
tion to the cartel period (1955-1968), we also
tion to the cartel (1955—1968), we also (to
(to the
the benefit
benefit of of domestic consumers).
domestic consumers).
have data
have data for the subsequent
for the subsequentmonopolymonopoly period Methcdologically,
Methodologically, the
the main
main contribution
contribution is is
(1968-1982).
(1968-1982). the way in
the way in which
which we identify marginal
we identify marginal costs,costs,
Coordination
Coordination Of of thethe cartel's
cartel's activities
activities was was which is
which the basis for
is the for our
our complete
complete welfarewelfare
achieved through
achieved through the the common
common sales sales OIT1ce
office AJS A/S analysis.
analysis. This paper uses
This paper uses a a structural
structuralapproach
approach
Portland
Portland Cementkontor
Cementkontor and and such Other cross
such other cross to
to study
study this
this industry.
industry. As As usual,
usual, the structural
the structural
industry information
industry informationsharing sharing and and cmrdination
coordination approach
approachdoes not not rely
rely on direct
direct cost data, but
data, but
institutions as Norwegian
institutions as Norwegian Cementforening. InCementforening. In rather
rather infers
infers marginal
marginal costsfrom
costs from an equilibrium
equilibrium
principle,
principle, the
the cartel
cartel had
had to
to decide
decide on
on the
the total
total condition.
condition. To To addadd credibility
credibility to the the structural
structural
amount Of
amount cement sold
of cement sold domestically
domestically and and on on aa estimates
estimates of marginal
marginal costs,
costs, we then
then compare
compare
sharing
sharing rule,
rule, which
which determineshow
determines how the rent
rent is our estimates to
our estimates to separate accounting
separate accounting data data on on
split up among the cartel
cartel members.
members. In
In this
this pa-
pa- Using rather
costs. Using ratherdetailed
detailedcost cost accounting
accountingdata data
split up among
by the the Norwegian
Norwegian case-we case—we (such as
(such as cost data on
cost data wages, electricity,
on wages, electricity, and and
per-motivated by
study
study a particularsharingrule that appearsto be
a panicular sharing rule that appears material inputs)
material inputs) we
we are
are able
able to
to compare our
compare our
rather reasonable
rather reasonable from from the the cartel's
cartel's m)int point of estimate
estimate Of of marginal
marginal cost
cost With
with an
an accounting
accounting
view:
view: the the cartel
cartel decides
decides to to reward
reward domesticdomestic cost index.
cost index. The results are
The results are very
very encouraging,
encouraging, in in
market
marketsharesshares basedbased on on the
the members' share share of Of the sense that that accounting evidence evidence is stronglystrongly
total capacity. An important
total capacity. An importantaspect of the car-asprct Of the car supportingour our structural estimate.
structuralestimate.
tel's
tel's sharing
sharingrule rule was
was thatthattotal
total capacity
capacitywas was notnot By
By contrast, the paper by
contrast. the paper by Steen and and Lars
Lars
restricted. Whenever total domestic
restricted.Whenever total domestic production prculuction Sørgard
Sorgard (1999), which also investigates the
(1999), which also investigates the
exceeded
exceeded the the domestic
domestic sales set by
sales set by the
the common
common Norwegian
Norwegian cement cement industry,
industry,is is aa reduced
reduced form form
sales
sales office,
office, the
the excess
excess output
output was
was exm»rted
exported at at analysis.
analysis. Theyney do do notnot useuse an an explicit
explicit "uilib-
equilib-
current
currentworldworld market
marketprices.prices. rium model
rium model to to identify
identify marginal
marginal costs. costs. As aa
Following this
Following this institutional
institutional setup of of thethe Nor- result of
result thc equilibrium
of the equilibriumapproach,approach. we are are also
wegian
wegian cement industry, industry, we consider the deci- able to provide a
able to provide a completecomplete welfare
welfare analysis and
analysis and
sions of
sions of the
the members Of of the cartel
cartel inin aa simple
simple study
study the workings
workings of a cartel
cartel in some detail.
detail.
two-stage analysis. First, each cartel
cartel member
member There
There are are aa number
number of Of related
related papers
papers thatthat
two-stage analysis. First,
decides how much much capacity have
have studied
studied the the setup that is is present
present in in the
decides how capacityto install,
install,taking
takingthe the setup that the
sharing rule rule into
into account',
account; that that is,is, each mem- mem- Nonvegian
Norwegiancement cement industry.
industry. Carl Davidson and
Carl Davidson and
sharing
ber's domestic
domestic quota quota is bcsedbased on the member'smember's Raymond
Raymond J. Deneckere
Deneckere (190 (1990) look look at game
at a game
share
share of total Norwegian
of total Norwegian production.
production. Second, Second, where firms tacitly
where firms tacitly collude
collude on
on price
price but
but compete
compete
the cartel
the cartelcollectively decides decides (through
(throughthe the com-
com- in capacity. Building
in capacity. Building on on work
work by by Jean-Pierre
Jean-Pierre
mon salesoffice)
mon sales office) how how much much of of total prcxiuction
total production Benoit and
Benoit and Vijay
Vijay Krishna
Krishna (1987),
(1987), they show
they show
to allocate to
to to the
the domestic
domestic market.market. that equilibria
that equilibria exist where firms will carry ex-
firms Will carry
As
As we will see below, this sharing
we will see below, this sharingrule will
rule will cesscapacity
cess capacity order supportcollusive out-
in order to support out-
create an incentive to "overproduce"
create an incentive to "overproduce"and export and export comes
comes (see
(see also Martin J.
also Martin J. Osborne
Osborneand Carolyn
and Carolyn
(even when marginal
(even when marginal LUts costs are
are above the world world Pitchik, 1987).
Pitchik, 1987). TheyThey do do not
not explain
explain why why firms
firms
market
marketprice), since
since each
each memlrr
member of
of the
the cartel
cartel cannot
cannot collude
collude in capacity, but
in capacity, but rather
rather cite
cite aa
price),
increases
increases its its share
share of of the
the domestic
domestic rent. rent. This
This number Of
number of examples
examples where firms firms are in a situ situ-
overproduction
overproduction reduces
reduces the
the cartel's
cartel's effective-
effective-
ness
ness in in the sense Of
the sense of lowering
lowering profits
profits to to the
the
cartel. Moreover, we Will show
cartel. Moreover, we will show that effective- that effective- We assunr
assume that the world Cement
that the cement price is exogenous,
5 We exogenous,
nessdependsto
ness dependsto a a very
very great
greatextent
extent on on thethe world
world which is
which reasonablefor
is reasonable for a
a countrylike Norway.
like Norway.
VOL
VOL.06
96 NO.
NO. 11 ROLLER AND STEEN:
ROLLERAND STEEN:ON
ON THE
THE WORKINGS
WORKINGSOF
OF A
A CARTEL-
CARTEL:CEMENT
CEMENTINDUSTRY
INDUSTRY 323

ation
ation Of
of "semi-collusion,"
"semi-collusion,"or
or as
as itit is also called, L
I. The
The Norwegian
is also called, NorwegianCement
CementIMiustry
Industry
"mixed
"mixed games."
games." (See
(See James
James A.
A. Brander and
Brander and
Richard
RichardG, Harris, 1983.)
G. Harris, 1983.) They also state
They also that
state that The Norwegian cement
The Norwegian cementcartel
cartelhas
has several
severalfea-
fea-
"it
"it isis well-known
well-known that
that even
even inin cases
cases of
of overt
overt tures and institutionalarrangementsthat
tures and institutional arrangements that allow
allow
collusion
collusion (such
(such as the German
as the Germancement cartel in
cement cartel in us to learn more
to learn more about thethe workings
workings of cartels.
of cartels.
the
the 1920s
1920s and
and 1930s,
1930s, oror the
the Texas oil industry
Texas oil industry There are
There are relatively
relatively few
few empirical
empirical contributions
contributions
in the 1930s)
in the 1930s) firms
firms find
find itit exceedingly
exceedingly difficult
difficult on cartels,
on cartels, which
which is is not
not due
due to
to lack
lack of of interest,
interest,
to collude in
to collude in capacities"
capacities"(emphasis
(emphasis added)
added) (see
(see but rather
but rather lack
lack Of data. Given
of data. Given the legality of
the legality Of the
the
Davidson
Davidson and Deneckere, p.
and Deneckere, p. 523).
523). Frederic
Frederic M.M. Norwegian cement cartel, we
Norwegian cement cartel, we have a large have a large
Scherer (1980, pp. 370—71) writes.
Scherer (1980, pp. 370-71) writes, "In Ger- "In Ger- amount
amount of Of primary
primary datadata allowing
allowing us us to
to do do aa
many
many during
duringthe
the 1920s
1920s and 1930s, shares
and 1930s, shares were
were completeanalysisOfthe
complete analysis of the effectsOfthe
effects of the cartel.
cartel.6 6
allocated
allocated onon the basis Of
the basis prcnluction capacity.
of production capacity. The first
first Norwegian
Norwegian cement
cementplant,
plant, AJSChris-
A/S Chris-
Cartel
Cartelmembers
memberstherefore
thereforeraced to increase
racedto their
increasetheir tiania Portland
tiania PortlandCementfabrikk
Cementfabrikk(CPC),(CPC), was was es- es-
sales
sales quotas by building
quotas by building more
more capacity."
capacity." tablishedin
tablished in 1892.'
1892.7 AtAt the
the endof World War
end of World War I, I,
Gwen its
Given its empirical relevance, this
empiricalrelevance, this paper
paper pro-
pro- three
three new plants were established in
plants were established in Norway: Norway:
vides
vides some evidence
evidence on the workings
workingsof Of the
the in-
in- AIS
A/S Dalen
Dalen Portland-Cementfabrikk
Portland-Cementfabrikk(DPC) (DR) in
in
centive
centiveto "overinvest"
"overinvest"in in capacity.
capacity. Our
Our empirical
empirical 1916,
1916, CE
CE-NO NO Portland
Portland Cement
Cement AJS
A/S in
in 1917,
1917,
findings
findings are
are asas follows. The cement
follows. The cement cartel
cartel has
has and a fir-rnin
firm in northern Norway, Nordland
northernNorway, Nordland Port- Port-
ineffective in
been ineffective the sensethat
in the sense thatthe
the sharing
sharing rule
rule land
land Cementfabrikk
CementfabrikkA'S A/S (NPC)
(NPC) in
in 1918.
1918. The
The
induces "overprcxluction"
induces "overproduction" and ex'Mrting (txlow
and exporting (below capacity
capacity expansion,
expansion, combined
combined withwith thethe reces-
marginal costs).
marginal We further
costs). We furthershow
show that the ineffec-
thatthe ineffec% Sion in Norway
sion in Norway beginning
beginning in 1920, led
in 1920, led in in the
the
livenessOf
tiveness sharingrule
of the sharing rule was increasingover
increasingover early 1920s to a domestic capacity
early 1920s to a domestic capacityamountingto amounting to
time,
time, that
that is,
is, ConsumersFenefitedmore
consumers benefited (relative to
more(relative to almost twice the
almost twice the domestic
domestic demand
demand(see Frithjof
(see Frithjof
monopoly),
monopoly), while
while prcxlucerswere
producers were losing
losing both do-
do- Gartmann.
Gartmann, 1990, p. p. 114).
114). The
The mismatch
mismatch be- be,
mestically and
mestically and inin the expon market.
the export market.In In this
this wnse
sense tween
tween capacity
capacity and
and demand
demand triggered
triggered pricea
a price
it was
it was consumers,
consumers,not not firms,
firms, whowho benefited
benefitedfromfrom war
war and later the
and later the establishment
establishment Of A/S
of AIS Norsk
Norsk
the sharing
the sharing rule. rule. Finally,
Finally, we we find that the
find that the Portland
Portland Cementkontor 1923, joint
Cementkontor in 1923, a joint sales
sales
ineffectiveness of
ineffectiveness of the
the cartel
cartel was becoming so
was becoming so office for the three firms
office for firms in southern Norway Norway
large
large that
that domestic
domestic welfare
welfare of
of a
a merger
merger to to (CPC, DPC,
(CPC, DPC, andandCE-NO).
CE-NO). FiveFive yearslater,
years later,NPC NPC
monopoly
monopoly was
was in
in fact
fact positive
positive at
at around
around 1968,
1968, became
became aa member
memberof of the
the common
common sales office as
sales office as
which is
which is exactly
exactly Whenwhen thethe merger
merger actually took
actually took
place!
place! Our Our results suggest
Suggestthat that the merger
merger to
monopoly took
monopoly took place
place exactly
exactly whenwhen aa benevolent
benevolent f'In
6 In addition
additionto
to annual
annualrefx.rtsfm Clwistiania
reportsfrom ChristianiaPortland
domestic dictator—ignoring adjustmentcosts—
dictator-ignoring adjustmentcosts--
C—tfabrikk
Cementfabrikkand NORCEM, we have
NORCEM,we have aa detailed
detailed industry
industry
history written by
history written by Gartmann
Garunann (190
(1990) and busirxss knowl-
business knowl-
would have
would have imposed a merger. merger. edge
edge from Such sources as Peter
from such Peter ( 1973),
We conclude, Lorange (1973).
We conclude, however,
however, by by stating
stating that there
that there 7 technology in
The technology this industrywas gradually imprcw
in this improv-
was another
another alternative
alternativeto to an
an outright
outright merger,
merger, ing over
over the sampleperiod
ing sampleperiodin Nmy.
in Norway. A
A cementkilnkiln is
is built
built
namely comlEtition
namely competition (a (i lala Cournot).
Cournot). While While thethe as a tubelike oven, and the kiln's kiln's productioncapacitycapacity is is
merger yields positive welfare gains after 1968, primarily
primarily &temined
determined by by thc
the length
length Of of the
the "tube."
"tube."In In the
mergeryields positive welfare gains after 1968, beginning,
beginning, aa kiln
kiln would
would be on on the
the order
orderOf of 20 toto 30 meters
30 meters
we show
we show that that competition
competition wouldwould have have resulted
resulted lcmg,
long, whereas
whereas the the newest kilns installed
newest kilns installed after 1965I wcrc
were
in considerably
in considerably higher higher welfare gains over
welfare gains over thethe several hundred
hundred meters long. In 1920, an ethcicnt
In 1920, rotary
efficient rotary
entire
entiresample.In
sample. In this sense,the
this sense, the mergerthat
mergerthattook mk kiln produced 50,000 tons annually.After
kiln produced After World
World WarWarII,II, the
the
place in
place in 1968
1968 was was only
only second best
second best. correspondingamount was was 150,000 tons, tons. Whereas
whereas in in I1966
H

The paper
The palrr is is organi7Ædas as follows.
follows. We and 1967 thc largest
1967 the kilns at
largest kilns at Dalen
Dalen andand Slemmestad
Slemmestad pro-
organized We begin duced 500,000 tons each. The technology
by presenting the Norwegian cement
cement industry technology also changed
also changed
by presenting Norwegian industry from "wet process"
process" to "dry process"
to "dry process" over this period; the
over this the
and
and the cement cartel.
the cement cartel. In Section
In Section II we
II we discuss
discuss newer dry dry process
process Was was more effæicntefficient and
and required
required less
less
sharing
sharing rules
rules moremore generally.
generally. Section
Section III III pre-
pre- euærgy
energy. ThcThe cnornms
enormousnew new kilns
kilns that use today
that are in use today have
have
sents the model
model and and some a capacity of more than I million tons kiln. nonc
sents the some useful
useful comparative
comparative capacity more than 1 million tons per kiln, but none
statics.
Of these was
of these installed in
Was installed in our sample period. period. Gradually.
statics. The
The empirical implementation and
empirical implementation and re-re-
expansionof kiln sizx, togetherwith with the fact that
Gradually,
thatolder kilns
sults are presentedin Section IV. Concluding expansionof kiln size, together the fact older kilns
sults are presented in Section IV. Concluding only
only gradually
gradually were phased out IS
as they became nonprofitable,
remarks
remarksare are inin Section
Section V. V. techÆOlogy
madetechnology improvementsrelatively
relativelysmoothin in Norway.
324 THE
THEAMERICAN
AMERICANECONOMIC
ECONOMICREVIEW
REVIEW MARCH 20th
MARCH2006

well.
well. CE-NO
CE-NOwas
was acquired by DPC
DPC in
in 1927 (see
1927 (see As
As we
we mentioned
mentioned above,
above, the
the Common sales
common sales
acquiredby
Gartmann,
Gartmann,1m), which increased
1990), which DPCs mar-
increased DPCs mar- office and the sharing rule createdan
sharingrule created an incentive
ket
ket share to the
share to the level
level of
of CPC.
CPC. to
to export.
export. Let
Let us look at
us look at exports.
exports. The three
The three
The Norwegian
The Norwegian cement industry has
cement industry has been
tRen firms' expu)rls fell gradually during
firms' exports fell graduallyduring the 1930s,the 1930s,
cartelized through the
cartelized through the common
common sales office
sales office from more
from than 50
more than Ikrcent of
50 percent of total
total domestic
domestic
since 1923.
since 1923. The reason for
The reason for the
the creation Of the
creation of the production
production approximately percent of
to
to approximately 10 of do-
do-
sales
sales office
office was clearly to
was clearly remove competition:
to remove comlktition: mestic
mestic production at at the
the Irginning
beginning of World
World
"Both
"Both companies(in
companies (in the south)
south) had to sacrifice
sacrifice War II.
War II. In
In the
the mid-1950s,
mid-1950s, exBMts
exports grew
grew rapidly,
rapidly,
something
something on the altar
altar of collaboration.
collaboration. The and
and in the late 1960s over 40 percentOf
in the late 1960s over 40 percent of domes-
domes-
sales
sales office primary task
office primary task was toto organize the
organize the tic prcxluction was
tic production was exported.
exported.In In 1968,
1968, the three
the three
sales
sales in
in a better way,
way, to
to prevent cross-transpor-
preventcross-transpor- firms merged and
firms merged and established
establishedthe firm Norcem,
the firm Norcem,
tation
tation and unprofitable conurtition.
and unprofitable AJS Norsk
competition.A/S Norsk andduring 1970sNorcem
and duringthe 1970s Norcem eliminated
eliminatedexcess
excess
Portland
Portland Cementkontor
Cementkontortcx'k
took care
care of
of the
the sales
sales capacity.
capacity.
for
for both factories [CPCand
both factories DR]. Later
and DPC]. Later 11928]
[1928] Norwegian
Norwegian exmyts
exports predominantly went to
predominantly went
also
also the
the Northern
Northernfirm's
firm's sales
sales [NPCI
[NPC] were in.
were in- non-European
non-Europeanmarkets, such as
markets,such as South
South America,
America,
cluded through a common
cluded througha common sales agent in Trond-
agent in Trond- North America, and
North America, and Africa.
Africa. The
The reason Why
reason why
heim"
heim" (Gartmann, 1m, p.
(Gartmann, 1990, p. 46).
46). This implied
This implied little cement was
little cement was exported
exported to
to Other
other European
European
that
thatas
as of 1928.
1928, all
all cement
cement was
was sold
sold through
throughone countries
countrieshmsbeen
has been explained through a retalia-
explained through retalia-
agency, and
and no cement
cement was
was sold
sold directly from
directly from tion
tion game. Essentially,
game. Essentially, competition is
is a
a multi-
multi-
agency,
the factories. In
the factories. In particular,
particular, the common
common sales market
market game
game where credible
credible threats
threats to enter
Office
office determined
determinedtotal
total domestic
domestic sales and set
sales and set each
each other's
other's markets prevent firms
marketsprevent firms from enter•
from enter-
domestic
domestic quotas
quotas according
according to
to each
each firm'
firm'ss total
total ing Othercountries(see,for
ing othercountries(see, for example,Röller
example, and
Riller
ycapacity (domestic
capacit (domestic prcxluction
productionplusexports).
plus g
exports).8 Hans
Hans W.
W. Friederiszick,
Friederiszick, 2003). Karl Aiginger
Karl Aiginger
After establishing the common sales
After establishing sales Office,
office, and Michael Pfaffermayr
and Michael Pfaffermayr (1997)
(1997) undertake
undertake a
more institutional
more institutional tiesties were
were deve10'Xd.
developed. InIn 1927,
1927, study
study of
of the
the competition in
in the
the cement
cement and
and
Norsk Cementforening
Norsk Cementforening (NC) (NC) was was founded,
founded. NC
NC paperindustriesandstate:'The cementindustry
paperindustriesand state:"Thecement industry
was an
was an institution
institution (funded
(funded by by the
the industry) that
industry)that is faced
is faced with
with limited
limited geographical
geographical comlRti
competi-
coordinated
coordinated standards, tion.... We are
are confident that the EU is the rel-
standards, lobbiedlobbied government
government tion.... We confident that the EU is the rel-
committees, and took part in
committees, and took part the education
in the education Ofof evant
evant geographicmarket for the paper
geographicmarketfor industry;
paperindustry;
engineers and cement workers.
workers. Gartmann
Gartmann for cement
for this is
cement this is clearly
clearly not the case"
not the case" (p.
(p. 263).
263).
engineers
(1m,
(1990, p. p. 47)
47) claims
claims thatthat "the
"the sales
sales otTlceand
office and As aa tesult,
result,Nomegian exmuts
Norwegianexports went
went to
to non-Eu-
non-Eu-
NC were
NC were forerunners
forerunnersto to the
the full
full merger
mergerinin 1968.
1968. ropeanmarkets
ropean marketsin orderorder to prevent
prevent possible
possible re-
Norcem came
Norcem came to to aa finished
finished table
table arrangement
arrangement taliation from neighboringEuropeancountries.
taliation from nei*ring Eurolxa_n countries.
With
with coordinated sales sales andand information
information al- al- Let
Let usus now
now 100kat
look at impotts_A
imports. A further
further impli•
impli-
ready
ready established
established over a long period."
long period." In
In the cation Of
cation of the
the EurolEan
European stalemate
stalemate was that
that there
there
beginning,
beginning, only only the two big producers in the
big producers were few
were few impons
imports(at (at least from Other
least from otherEuropean
European
joined NC,
south joined NC, but later the northern
but later northern firm
firm countries) into
countries) into Norway.
Norway. In In addition,
addition, there
there were
were
entered.
entered.9 also
also few imports
importsfromfrom other
other parts
parts Of
of the world.
world.
The reason for
The reason this was
for this that the
was that the domestic market
domestic market
was
was protected
protected both
both by high
by high tolls and by
by rela-
rela-
8AS long as
8 As long as prices
prices are
are higher than
than Short-nmmarginal
short-runmarginal
COSt(Which
cost (which isis the case, see
the case, See below), it
it is to use all
is optimal to
the installed
the installed Such that
such that capacity
capRity equals
equals production.
production.
capacity
Storage founded in 1928, whose task was to "collaborateon
on prices
Storage IS is not an option
not an optvon eitl-er,
either, due to limited
limited storage
Storage founded in 1928, whose prices
capacity for
for cement. According to to the
the annual frcm
cement. According annual report from rebates 10
and rebates to prevent
prevent non serious producers
non serious prcxtucers to
to enter
enter the
NORCEM in
NORCEM in 1968 (p.
(p. 9):
9): "Because the capacity for Storing
capacity for storing market"
market"(Gartmann,1990, p. p. 62).
62). In thesamefashion.NC
In the same fashion, NC
finished cement ISso ensured
ensured that
that the
the local concrete
concrete mixers, whichwhich were small
finished cement is so small,
small, producticmhæs
productionhas to conformquitequite were small
closely
closely to
to sales." The sharing rule can
sharingrule Canthus
thus also be consid- firmsoften
often organizedin in local Oligopltes, producedaccord-
local oligopolies, accord.
ered
ered aa pr€x'uction ing
ing to
to quality
quality standards. In 1964 these
these firms
funs founded
founded a
productionsharing rule,
sharing rule. standards.In
9
9 The cement producersStarted
producersstartedseveral
several O therinstitutions
other institutions collaboration body.
body, the "local concrete-nuxcrs
the "local concrete-mixers institute,"
institute."
as they moved into
as they into downstreamactivities.
activities. For
For instance, the institute. however, had
The institute, had its
its secretariat
secretariatin the same
in the same Offices
offices
production of cement
cement productsas tubes and panels had their as
as NC,
NC, suggesting
suggesting thatNC NC played a ratheTratherinfluentialrole
role in
productionof
own
own body. coordination Ofthe
the cement industry
industryduring
duringthc cartel period.
body, the
the "cementptoducers
producersprice
price corydination
coordinationbody" coordinationof the cartel
vol- 96
VOL. 96 NO.
NO. /1 ROU_ER AND
ROLLER AND STEEN:
STEEN:ON
ON THE WORKINGS OF
THE WORKINGS OF AA CARTEL CEMENT INDUSTRY
CARTEL:CEMENT INDUSTRY
325

tively
tively high
high transi%jrt
transportcosts.
costs. For
For instance, in 1959
instance,in 1959 ended. We
ended. We would therefore expect "overproduc-
would therefore ''overproduc-
the cost was 8 NOK
NOK per
per ton. This approx•
This was approx- tion"
tion" to emergeemergeonly only in the the mid-1950s.
mid-1950s.
imately
imately 99 percent of the
the factory price. CPC
factory price. CPC [.et
Let us us taketake aa first I(K'k at
first look at the data. Fig-
the data. Fig-
considered
considered this this aa significant
significant toll barrier. (CPC
toll barrier. (CPC ure I shows domestic prcxluction
ure 1 shows domestic productionand domestic and domestic
Annual Report,
Annual 1959,
Report, 1959, p. 4). p. 4). It
It is therefore
therefore no consumption of
consumption of cement
cement for for the period 1955 1955 to to
surprise
surprise thatthat importswerelow.10In
imports were low.10 In addition, addition, 1968. FromFrom 1955 to 1968, production
to 1968, pruiuction increased
increased
there was
there was aa relative high transport
relative high transport cost cost to Nor-
to Nor- by 150
by 150 percent, whereas Norwegian
percent, whereas Norwegian consump-
consump-
way, primarily due
way, primarily due toto thethe trade
trade pattern
patternduringduring tion increased
tion increasedby by only
only 50 50 Ekrcent.
percent.By By 1968,
1968, this
this
this Norwegian boats
this period. Norwegian boats had had excess
excess capac-
capac- led to an export of some
led to an exportof some 828,000 tons, almost as tons, almost
ity for
ity for bulk
bulk leaving Norway,
transportleaving Norway, lowering lowering much as
much as Norway's
Norway's total total prculuction
production in 1955.
in 1955.
transport
transportprices
prices out
out of Norway (some
of Norway (some minimum
minimum There is,
There thus,
is, thus, rather
rather striking
striking evidence
evidence that
that
ballmst is
ballast is inin fact
fact needed
needed for for oversea
oversea journeys).
journeys). overproduction
overproduction took
took place.
place.
By
By contrast,
contrast, for for return trips to
return trips Norway, there
to Norway, there As mentioned above, above, this paper paper focuses
focuses on on
was plenty
plenty of of cargo
cargo fromfrom portsports in in the
the United
United sharing rule
the sharing rule and incentives to explain
and its incentives explain
States,Latin
States, LatinAmerica, I I andAfrica. As a result,
America,"1and Africa. As a result, overproduction.What What about altemative expla-
about alternative expla-
transport
transportcosts to Norway were
costs to Norway considerably
were considerably nations?
nations? In principle, there may be two Other
In principle, there may be two other
more
more expensive (Gartmann,
expensive (Gartmann,1990). 1m). reasons for
reasons for the
the observed
observed capacity increase (see
capacity increase (see
In sum,
In there has
sum, there little import
has been little importof of cement
cement Steenand
also Steen and Sorgard, 1999): Norwegian
Sorgard, 1999): Norwegian pro- pro-
into Norway and
into Norway most of
and most of the
the exmjrts
exports have
have been
been ducersbuilt
ducers built up up high capacity levels
high capacity levels due to un-
to
to non-European
non-Europeancountries.countries. Given Given that that Norway
Norway realistically high
realistically high anticipation
anucipation Of of increased
is
is aa very small produceron
very small on the
the (non-European)
(non-European) future consumption,
future consumption, or they they diddid so to deter deter
world
world market,
market, we
we Will
will assume
assume below that
below the
that the imports.
imports. Let Let us take these alternative explana-
these alternative explana-
(non-European)
(non-European) world
world market
market price
price for
for cement
cement tions in
tions in turn.
turn.
is
is exogenous
exogenous to the cartel
to the cartel decision
decision problem.
problem. Regarding
Regarding the the unanticipated
unanticipated consumption
consumption
This paperfocuseson
This paper focuses on the large large capacity
capacity builtbuilt slowdown,
slowdown, in 1957 the
in 1957 CPC undertook
the CPC undertookaa very very
up after 1955. We
up after We argue
argue that that thisthis is is due
due to to comprehensive and
comprehensive and detailed
detailedten-year
ten-yearforecast
forecast of Of
"overproduction" stemming
"overproduction"stemming from the common from the common Norwegian cement consumption
Norwegian cement consumption (CPC Annual (CPC Annual
sales office and
sales office and the sharing
sharing rule. rule. As As we we have
have Report, 1958,
Report, 1958, pp. pp. 14-28),
14—28),including
including a numbernumber
mentioned
mentioned above, above, the
the common
common sales
sales office
office has
has Of
of different
different economic and and demographic
demographictrends trends
existed
existed since
since 1923.
1923. Prior
Priorto the 1950s,
to the 1950s, however,
however, (such as
(such fertility,fertility, household
household size, average
size, average num- num-
firms
firms hadhad to acquire
acquiregovernment
governmentpermission to to ber of
ber rooms per
of rooms per house,
house, building
building and
and construc-
construc-
undertake capacity investments.
undertakecapacity investments. The The reason
reason forfor tion trends,
tion trends, GNP, GNP, and population growth). growth).
this was that
this was imm)rts Of
thatimports technology to
of technology undertake
to undertake Comparing the
Comparing 1957 forecast
the 1957 forecast withwith actual
actual real-
real-
capacity expansions
capacityexpansions were
were rationed,
rationed, due
due to
to short,
short- ized consumption,
consumption, one finds that
one finds that the forecast
the forecast
agesafter
ages after World
World War
War II.
II. When
When rationing
rationing ended was rather
ratheraccurate
accuratewith with a a margin
margin of error be-
of error
in
in the
the mid-1950s, regulation of capacity
mid-1950s, the regulation capacityalso also low 5 percent
low (except
percent (except for
for 1959).
1959). The
The forecast
forecast
for 1967(made
for 1967 (made in 1957) 1957)predicteda Norwegian
predicteda Norwegian
consumption rate
consumption rate Of I .35 million
of 1.35 million tons, while the
tons, while the
actual consumption
actual consumption 1967 was 1.358 million
in
in 1967 was I million
To the
the extent that we
we saw imports, itit was
was small
small and
1oTo extent that saw imports, and
tons! It It appears that the
thc industry's
industry's ability
ability to
typically seasonal-in
typically seasonal—in Somesome periodsmorecement cement than what appears that
was producedwas needed. "To cover the thc num-consumption predict
predict future
future domestic
domestic consumption
consumption was was ex-ex-
max-consumption
dLTingthe
duringthe fallfall season there was an import import ofof 32,000 100s Of
tons of ceedingly good, gcX)d,making
making an an argurnent
argumentfor for aa dra-
dra-
and as usual in
cement ... and in addition
addition to to this
this some
some minor
minorquan• matic capacity buildup basedbased on
tities of
quan- matic capacity buildup on optimistic
optimistic
tities of special cement that
special cement that is
is not producedin in Norway
Norway Was
was consumption ex1Rctations implausible. If entry
imported"(CPC (CPC Annual Report, 1959, 1959. p.p. 3).
3). In 1959 total
In 1959 consumptionexpectations implausible. If entry
"ochrction was was 1,103,000 tons,
deterrence was the
deterrence motive for
the motive for overproduction,
overproduction,
production tons, suggesting
suggesting an import less
import less
than 3
than 3 percent. The export
export in this year
in this year was 80,000 tons, so we should
should have haveexpectedother
expected other Eurolran
Europeancoun- coun-
Norway was a Et net exporter also also in in 1959. Note
Notc that
that the
the tries to havehavea a similar
similarcapacity expansionat
capacityexpansion that at that
overprodwtion
overproductionin in 1959 Was small
1959 was small compared
compared to to What
what we saw time, as they would
develop during the
the 1960s.
1960s. time, as they would havehave hadhad the
the same
samestrategic
strategic
develop during incentives to deter
" For
instance, Norway importedimported largelarge quantities
quantities Ofof incentives to deter imports. As As can
can be seen seen in
in
bauxite
bauxite from
from Latin
Latin America
America for for the Norwegian
Norwegian alhmaluminium Figure 2, the buildup in other Europeancoun-
Figure 2, the buildup in other European coun-
industry. tries
tries came
came much much later.
later.
326 THE AMERICAN
THE AMERICANECONOMIC
ECONOMICREVIEW
REVIEW MARCH 2rXF,
MARCH 2006

'PRODUCTION CONSUMPTION
2500

2300

2100

1900

1700

co 1500

co 1300

1100

0900

0700

0500
1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968
YEAR

FIGURE
FIGURE l,1. DEVELOPMENT
DEVELOPMENr NORWEGIAN CEMENT
IN NORWEGIAN PRODUCTION AND
CEMENT PRODUCTION AND CONSUMPTION IN
IN THE PERIOD 1955
THE PERIOD 1955 TO 1968

"EXPORTNORWAY
NORWAY "EXPORT EUROPE

1400 35000

1200 30000

1000 25000

0800 20000

uJ u)
0600 15000 u)
uJ

0400 10000

0200 05000

0000 00000

K K K K 1959K K K K 1959K K K K 1959K K K K 1959K K K K 1959K K K K 1959K K K K 1959

YEAR

FIGURE
FIGURE 2.
2. EXPANSION
EXPANSION IN EUROPEAN
EUROPEAN AND
AND NORWEGIAN EXPORTS
NORWEGIAN EXPORTS
VOL 96 NO.
VOL. NO. /1 ROUÆR AND
ROLLERAND STEEN:
STEEN:ON
ON THE
THE WORKINGS
WORKINGSOF
OF A
A CARTEL:
CARTEL:CEMEW INDUSTRY
CEMENTINDUSTRY 327

We
We therefore
therefore conclude that the
conclude that the incentives
incentives general view
view at the time
time was
was that all mergers
that all mergers
general
created
created byby the
the cartel's
cartel's sharing
sharingrule the most
rule is the most were good.
were gcxxi. As a result,
result. there
there was
was no visible
visible
plausible explanation for
plausible explanation for the
the large
large capacity
capacity in-
in- opm»itionto
opposition to theNORCEM
the NORCEM mergerin 1968.13
merger in 1968.13
vestments
vestments in Norway.
in Norway.
Given
Given thethe incentives
incentives created
created by by the
the sharing
sharing II.
II. Sharing Rules in
SharingRules in Practice
Practice
rule in
rule the mid-1950s,
in the mid-1950s, one may may wonder
wonder why
why the
firms
firms did not merge
did not earlier than
merge earlier than 1968.
1968. A A rea-
rea- The Norwegian cartel
The Norwegian cartel was subjectsubject to
to aa very
very
sonable
sonable explanation
explanation is the existence
is the existence of other
of other formal agreement
formal agreementwhere where the the market
market sharing rule
sharingrule
institutional
institutional agreements
agreements thatthat had
had been agreed
agreed was implemented with rigor. This
was implementedwith rigor. This can be illus- can illus-
upon. particular,the firms entered
In
In particular, the firms entered into
into two
two trated by
trated by the factfact that
that CR CPC and DPC imple-
and DPC imple-
long-term
long-term agreements
agreements in in 1957
1957 andand 1962.
1962. InIn mented side
mented payments to
side payments to adjust
adjust for
for sales
sales that
that
these contracts, the
these contracts, the firms
firms were
were tied together
tied together were in
were in excess
excess Of the firms'
of the domestic market
firms' domestic market
even more strongly.
even more strongly. "When
"Whenthe the industrial firms
industrialfirms share.
share. TheThe background
backgroundfor for this
this was
was that DPC
that DPC
start
startaa market
marketcollaboration
collaborationisis it
it natural
naturalthat this
thatthis had better
had better export facilities (such as
facilities (such loading
as port loading
led
led to increased
increasedcontact and
and exchange of views
exchange of views technology). This
technology). This need
need for for these
these market
market divi-
divi-
also within
also within other fields of
other fields of the
the firms' activities.
firms' activities. sions and organization of
sions and organization of the exports was the was
In
In the
the cement industry, this
cement industry, this led
led to an extension
an extension bluntly
bluntly stated
stated by
by the industry:
industry: "CPC's
"CPC's deliver-
deliver-
of
of the collaboration, both with
collaboration,both regards to
with regards par-
to par- ies
ies to its ordinary,
to its ordinary,domestic
domestic market market increased
increased
ticularities
ticularities and more general
and more general issues. Common
Common from
from 464,000 tons tons inin 1963
1963 to to 484,000 tonstons in in
purchases,
purchases,standards
standardsof cement types, common
of cement common 1964.
1964. In addition, it delivered 54,000 tons to
In addition, it delivered 54,000 tons to
packaging
packagingwas agreedupon. This
was agreed upon. This was
was particular
particular DPC's customers,
DPC's customers, whichwhich implied
implied thatthat DPC's
DPC's
formalized in
formalized in the
the agreement
agreementof Of 1957,
1957, and
and even
even export
export incremeedwith
increased with an
an identical
identical amount.For
amount. For
more so
more so With revision of
with the revision Of the
the agreement
agreement in in this indirect
indirectexport,
export,CPC compensatedDPC DPC ac-
1962" (Gartmann,
(Gartmann, 1990, p. 115).
115). CPC
CPC them. cording to the the ordinary
ordinaryexport prices"
1962" 1990, p. them- cording prices" (p. 13).
(p. 13).
selves described
selves described the
the agreement
agreementin in their annual
their annual There
There are
are several
several similar statements
similar statements in other
in other
report
report (1962,
(1962, p. 7) as
p. 7) as "an agreementthat
"an agreement that has annualreports.
annual reports.14 I
as main
main object
object to govern
govern aa good collaboration
collaboration
between the cement
between the cementfactories
factoriesto
to obtain
obtainaa rational
rational
solution of
solution of the industry's production
the industry's prculuction and
and distri-
distri-
bution 1932 extension outlawed
1932 ivcly low prices
prices in order
order to
bution tasks."
tasks." Interestingly,
Interestingly, the
the 1962
1962 agree-
agree- excessively to
•prevent
"preventexcessively profitability in
excessively low profitability the industry."
in the industry." Con•
Con-
ment,
ment, called "the seven-year
called "the seven-year agreement,"
agreement," lasted
lasted Sumer interests were practically
sumer interests practically irrelevant this cutel-
irrelevantand this cartel-
until December 31,
until December 31, 1968.
1968. Hence, the merger
Hence, the mergerinin friendly practice continued up up to Wcmd War
to World War I (Helge W.
1968 came at aa time
friendly practice (Helge W.
1968 came at time when
when either
either aa new
new market
market NcMdvik, 1995).
Nordvik, I In 1953,
In 1953. Norway
Norway issued
issued a new law
a new law on on
agreement
agreement had
had to
to be negotiated an
negotiated or
or an alterna-
alterna- competition—the
competition-the so—called price law.
so-called price law stated very
law. The law very
tive industry structure
structure created. general
generalobjectives
objectives on competitionissues, but bu: once
once again
again the thc
tive industry created. As losses from
As losses from was quttc
exporting authorities'practicewas quite cartel friendly. Due
cartelfriendly. Due toto lack
lack of Of
exporting were
were mounting
mounting (as Will show
(as we will show be- resources,the the authorities
authoritieswho who were
were responsibleat at the time
the time
low) and
low) and other
other agreements
agreementswere running out
were running out in
in (the ••Priqlirektoratet")
"Prisdirektoratet") did not really
did not really focus onon the
the an11ysis
analysis
1968, a merger
1968, merger to monom)ly
monopoly was ultimately
ultimately Of markets (Jan
of markets (Jan A.A. Halvorsen and Steinar Undrum, 1995). 1995).
implemented. Interestingly.
Interestingly,the authoritiesthemselves concludedas latc
the authorities concluded as late asas
implemented. in 1982 thc law from did warrant cartel
Another factor
Another factor allowing merger to monop-
monop- in 1982 that the "pricelaw from 1960 did not warrantcartel
allowing a merger ccmtroL" However, during
control." during thethe 1980s
1981Bthe Views
the political views
Oly in 1968
oly in 1968 waswas that
that antitrust
antitrustconcerns
concernsvis-å-vis
vis-ai-vis changed and merger
changed merger control Wasintroducedin
control was in Norway by by
tlæ
the merger
merger werewere unlikely
unlikely toto be
be significant in
significant in 1988.
Norway
Norway at
at that
that time, as an effective
time, as an effective merger merger searchedthrough
13 We have searched througholdold newspapersfrom that that
control time and found no indications that large
time large customers
customers were were
controldid not exist
did not exist and
andconsumers
consumersdid did not
not play
play
much
much of Of aa role
role in in concerns. The opposed to merger in
to the merger in 1968.
competition concerns.12 The 14 In the following
In the following threethree annual wc can
can find
reports we find
similar statements:••In Midition CPC
"In addition CPC supplied
supplied 73.1"
73,000 tons tons
in 1965,
1965,against
against 54,000 in 1964, by by WayOf
way of indirectexport
12 fact. Norway had no real merger
merger control in 1968.
In fact, no real control in to DPC's customers"
to customers" (1965(1965 report,pp. 13—14); dellV•
13-14); "The deliv-
The first
first formal law dealing
dealing With Ex.licyin
with competition policy in cries in
eries went up
in 1966 went up to
to 580,000 tons. inclusive an
tons, inclusive an indirect
indirect
NCYway
Norway was the "trustlaw"approved in 1926, [n 1932, export Of of 70.0
70,000 tons" (1966 report, p.
approved in 1926. In 1932, export p. 13);
13); and finally:
and finally:
Norway
Norway passed
passed an
an extension
extension to
to the trustlaw that
the trustlaw that allowed "In 1967 exported 632,000 tons tons were
Were exported. Our
Our com-
com-
exported.
authorities
authoritiesto cartelize industries by
by law. InIn addition,
addition. the PanyICPCI
pany [CPC]has indirectlytakenpartin in this exportorxration
operation
328 THE
THEAMERICAN ECONOMIC
AMERICANECONOMIC REWEW
REVIEW MARCH
MARCH2006
2006

There are
There are Other
other examples
examples Of
of similar
similar sharing
sharing There
Thereare, Of course,
are, of course, Othersharing
othersharingrules, rules, most
most
rules
rules that have been
that have been used
used by
by Other
other cartels.
cartels. We
We notably geographic
notably geographic market market segmentation.
segmentation. An An
have
have already
already mentioned
mentioned the
the German
German cement
cement example Of this is the marine construction
example of this is the marine constructionand and
cartel
cartelof the 1920s
of the 1920s and 1930s. Another
and 1930s. Another example
example transportation cartel,
transportation cartel, where
where the the conspirators
conspirators
is the
is the domestic
domesticcartels in Japan,
cartelsin Japan, Which
which allocated
allocated reached an
reached an agreement
agreement to to all(Rate
allocate customers
customersand and
quotas relative capacity,
quotas accordingto relative capacity,and led to agree
agree on pricing heavy-lift
pricing heavy-lift derrick
derrick barge
barge and
excess
excess capacity in many related marine
marine construction
construction servlceS
services in the ma-
ma-
capacity in many Japanese
Japanese industries
industries related in the
during the 1950s
during the 1950s and
and 1960s
1960s (se
(see Akihiko
Akihiko Mat-
Mat- jor oil and gas prcxiuction
jor oil and gas production regions of the regions of the
sui, 1989).
sui, 1989). world. 1 7Two firms ownedall
world.17Two firms owned all (six) heavy-lift (six) heavy-lift
Another prominent case
Another prominent case Of
of aa cartel
cartel that
that di-
di- derricks
derricks in in the
the world.
world. In In 1997,
1997, thethe twotwo firms
firms
Vided the market
vided the market according to prcxluction
according production ca-
to ca- (and
(and one
one of
of the
the firm's
firm's subsidiaries)
subsidiaries) were
were ac-
ac-
pacity
pacity is the so-called Lysine
Lysine cartel which
cartel which cused
cused of of regional
regional market
market sharing
sharing and
and price
price
operatedin
operated in the pericxl
period 1992—1995.
1992-1995. According
Accordingto fixing.
fixing.
Griffin
Griffin (2001), cartel members typically
cartel members typically met
met Geographic
Geographic sharing
sharing rules have Other
rules have other incen-
incen-
late
late in
in the
the year in order
year in order to
to determine
determinehow much
how much tive problemsthan
tive problemsthan the one studied in this
this paper,
paper,
each prcxiucer had
each producer had sold
sold in
in the preceding
preceding year.
year. such as When
such as economic growth
when economic growth varies
varies consid-
consid-
The members then
The members then proceededby by estimating
estimatingthethe erably across regions.
erably across regions. Since
Since cement prcnluction
cement production
market
marketgrowth for
for the
the uixoming year and
and allo-
allo- is
is Observable,
observable,itit cancan bebe measured
measuredand andthe market
the market
growth upcoming year
cated the growth
cated the growth among themselves. The
among themselves. The inter-
inter- can easily be divided.
can easily divided. UsingUsing production
production as a
national
national Lysine
Lysine cartel
cartel did
did not face the
not face the same
same sharing
sharingrule
rule will
will ensure
ensurethat regional differences
thatregional differences
incentive problem as the domestic Norwegian
incentive problem Norwegian in consumption patterns
in consumption patterns will
will affect the individ-
affect the individ-
cartel, both because
cartel, both because Of its international
of its international nature
nature ual
ual cartel
cartelmember's profitability in
member'sprofitability in a symmetric
symmetric
and because cartel
and because canel members
membersdid not use
did not use aa com.
com- way.
way.
mon distribution
mon distributionsystem. However, the
system. However, the Lysine
Lysine
cartel still
cartel still faced
faced the
the common
common cartel problem of
cartel problem of 111.
III. The
The Model
Model
how to
how to limit cheating.I
limit cheating.15
The
The most recent examples In
In this section, we
we describea a simple
simple rncnlel
model to
most recent examples of of production- this section, to
sharing rules are found in the
the agricultural illustrate how
how sharing can be used to identify
identifythe
sharingrules are found in agriculturalcoop-
coop- illustrate sharing can be used to the
eratives (Mats A. Bergman, 1997). TheThe United
United effectiveness
effectiveness of of aa cartel.
cartel. We
We model
model cement
cement as as aa
eratives (Mats A. Bergman, 1997).
States had 5,800 farm
States had farm marketing
marketing and and supply
supply homogeneousgcx»d.The
homogeneous good. The domestic cement in- in-
cooperatives in
in 1986
1986 (Richard
(Richard J.
J. Sexton, 1986).
Sexton, 1986). dustry is
dustry characterized by
is characterized by a demand curve,
curve,
P(QD),where is the domesticquantity andP
According to Bergman, there were 4,536 pri-
According to Bergman, there were 4,536 pri- P(Q), where QD is the domestic quantityandP
mary cooperatives
ccxjperatives in in Germany
Germany alone alone inin 1997.
1997. is the
is domestic price.
the domestic price. WeWe assume that the
assume that the world
world
mary
Similar
Similar arrangements market forfor cement is perfectly
perfectly competiti
competitive,With
ve,
arrangementsare found in
are found in many
many other
other market cement is with
European countries.
countries. Typically, the world
the world market
market price
price exogenously
exogenously given
given by
by R.
R.
European Typically, cooperatives
purchase Finally, we we assume that P(O)
P(0) > R and that there
purchase whatever
whatever their members have
their members have been Finally, assume that R and that there
able to prtxluce are no imports.
inw•ts.
able to produce and and then
then dazide
decide howhow much
much toto are no
sell at home. The rest is sold
sell at home. The rest is sold (often (often at
at much
much There
There areare N
N domestic
domestic firms,
firms, which
which operate
operateaa
lower prices)
lower prices) on world
world markets.
markets. Since the co- legal
legal cartel.
cartel. The
The cartel
cartel decides
decides on total
the total
usually cannot
cannot restrict their mem-
restrict their amountof
amount of domesticallysold
domestically sold cement.Q",
cement, QD, and and
operatives usually
bers'
bers' production, the the incentive
incentive structure
structure isis
analogous
analogous to to our
our setup.
setup.16
keting explicitly exempt
keting cooperativesare explicitly exempt from
from prohibitions
that regulate other
that regulate other firms (Bergman. 1997).
firms (Bergman, 1997).
17Hcny-lift
"7Heavy-lift derrick
derrick bargesare floating crane
barges are floating vessels
crane vessels
by delivering cementto
to DPC's domestic area"
area"((1967
I report. With a
with a capacity toto lift
lift heavy
heavy structures,such as the decks of Of
by deliveringcement report,
p. 15). offshore oil platforms. in
oil platforms, in a marine environment.The con-
volume then became the
15 The volume allocation agreement then became the spiracyoriginally
spiracy originally targeted contracts in the North Sea.but Sea, but
basis for
basis for an annual
annual "budget"
"budget" for
for the
the canel.
cartel, aa reporting
rcponing and
and grw
grew to includeprojectsin
to include projectsin the theGulf OfMexico
Gulf of andthe
Mexico and Fu
the Far
auditing function East. Information
Informationon this cartel
cartel can be found, for
for instance.
auditing function and
and a compensation schemescheme (Griffin.
(Griffin, East. on this instance,
2001). DepartmentOfJustice'
in the Department of Justice's s press
press releaseof
of December22, 22.
16 In
In several
several countries
countries(e.g., Denmark, Finland,Sweden,
Sweden, 1997 (see http://www.usdoj.gov/atr/public/press_releases/
1997 http://vww.usdoj.gov/atr/publvc/press_releases/
(e.g., Denmark,
1997/1325.htm)_
France, Germany, and the Netherlands),
and the Netherlands),agricultural mar•
agriculturalmar- 1997/1325.htm).
VOL 96 NO.
VOL. NO. /1 ROUÆR AND STEEN:
ROLLERAND STEEN:ON
ON THE
THE WORKINGS
WORKINGSOF
OF AA CARTEL:
CARTEL:CEMENT
CEMENTINDUSTRY INDUSTRY 329

on
on aa sharing
sharing rule.
rule. In
In our Norwegian
our case, the Norwegian market to
market to the
the world
world market price. Note
marketprice. Note that that the
the
cartel
cartel decided on aa sharing
decided on sharingrule
rule that
that apERarsto
appearsto marginal cost
marginal cost Of of capacity
capacity (c)(c) does
does not not enter
enter the
the
rather reasonable
be rather reasonable from
from the the cartel's
cartel's point ofOf first-order
first-order condition
condition for
for thethe domestic
domestic market market
view:
view: the the cartel
cartel decides
decides to to reward domestic
reward domestic equilibrium. As
equilibrium. As aa result, we cannot
result, we follow the
cannot follow the
market
market shares based on
shares based on the
the members' share share Of
of standard approach
standard approach and
and identify marginal
identify marginal costs
costs
total Norwegian capacity
total Norwegian capacity (i.e.,
(i.e., exports plus
exports plus do-
do- from equation
from equation (1). We will Will return
return to this point point
mestic
mestic sales). Most importantly,
sales). Most importantly,the the cartel
cartel does below.
below.
not restrict individual capacitydecisions.
not restrictindividual capacity decisions.'8 18We
We By
By contrast,
contrast,the world market
the world marketprice price R R enters
enters
therefore let firms decide on how
thereforelet firmsdecide on how much capacity much capacity (l), as it is the
(1), it the opportunity oplxutunity cost of not
of not exporting.
to build
to build noncooperatively. As a result,
result, the the world
world market
market price price plays
plays thethe
In
In terms
terms of timing, we
of timing, we analyze
analyze a simple
simple two-
two- usual role
usual role of marginal costs.
of marginal Implicitly differ-
costs. Implicitly differ-
stage game.
stage game. stage In
In stage one,
one, cartel
cartel members
members make
make entiating (1),
entiating (1), itit is
is straightforward
straightforwardto to show
show thatthat
noncoolRrative
noncooperativecapacity decisions, anticipating
capacity decisions, anticipating aQD/aR< < O.
0. Accordingly,
Accordingly, the
the lower
lower R,
R, the
the
aOQlaR
the sharing rule.
the sharing rule. Denote
Denote thethe capacity
capacityby by firm
firmii as
as lower is domestic price. In
lower is the domestic price. In particular,when particular, When
qi where
where ii = l,1,..., , N. N. The
The productionsharing sharing R is
R is below
below c, the cartel's
c, the cartel's price
price is is below
below the the
qi
rule
rule is is then
then Sisi q')
q/il qi,qi, such that Si
such that is the
si is the monopoly
monopoly price price defined by
by the usual monopoly
monopoly
domestic market share Of firrn
firm i.i. In Stage two,
two, condition p -— cc = O.
domestic market share of In stage condition P'QM ++ P 0. InIn this
this case,
case, the
the
the
the common
common sales sales office
Office cooperatively allocates
cooperativelyallocates ineffectiveness
ineffectiveness of Of the
the cartel leads to
cartel leads to lower
lower do- do-
thedomestic
the domestic output output QD. This Thisimpliesthatse
implies that siQD mesticpricesandprofits,
mestic prices and profits,19 19andto
and to a a higherdo-
higher do-
is firm
firm i'si's domestic sales, while
domestic sales, while thethe remaining
remaining mestic consumer
mestic consumer surplus. surplus.
output,q,
output, -—s,Q0,is availablefor
siQD, is available for exporting. The
The previous discussion illustrates
previous discussion illustrates that that the
the
qi
The profit
The function of
profit function firm i is comlk)sed
of firm composed of
of cartel's effectiveness
cartel's effectiveness to keep prices
to keep prices monop-
at
at monop-
domestic
domesticprofits
profits and
and returns
returns from
from exENMing,and
exporting,and Oly levels
oly levels in in domestic
domestic markets
marketsis is reduced
reduced when when
is
is given by
given by R is low. It It is interesting
interesting to ask under what
under what
conditions the
conditions domestic price
the domestic price is equal
equal to a price
price
Tri= P(QD)siQD—cq,
- cqi +
+RR • (qi
(qi —
- SiQD)
siQD) level
level that
thatwould
would have emerged
emergedunder symmetric
undersymmetric
Cournotcompetition.
Cournot competition. Let Let qCqc denote
denote the thefirms'
firms'
where cc is
where the marginal
is the marginalcost Of capacity,
cost of capacity, which
which symmetric
symmetric Cournot
Cournot output,
output, defined
defined by
by
we assume
we assume to be identical
to be identical across firms.
across firms.
(2) P'qf+P-c=o.
P'qc + P c = 0.
A. The
A. The Domestic Allocation Decision
Domestic Allocation Decision (rhe
(the
Common Sales Offce)
CommonSales Office) Prices
Prices in
in aa symmetric
symmetric Cournot game are
Cournot game are
higher than in cartel outcome
higher than in the cartel outcome if if cc -—
[n stage
In stage two,
two, the
the common
common sales
sales office
office sets
sets P'(Nq)qc > R — - Using
Using linear
linear de-
domestic
P'(QD)QD.
domesticquantity, by
quantity,by mnfaxIri. Wi.Note
Note that
that firms'
firms' mand,
mand, this
this can be written
can be written as
as ((N
((N + 1)/2)(a — -
domestic
domestic sales
sales are
are pr*jrtional
proportionalto to the
the capacity
capacity R)2 > (a —c)2,wherea
> (a - c)2, where a is
is thedemand
the demand intercept.
intercept.
share,
share, so that firms
so that will agree
firms will agree on
on the choice of
the choice of We
We therefore find that
thereforefind that the cartel is
the cartel is less
less effective
effective
industry domestic
industry domestic sales. Assuming
Assuming that
that export- than a noncooperative
than nonccKFative domesticdomestic Cournot
Cournotsolu-
solu-
ing Occurs(seetk'low) QD <
ing occurs (see below) QD < 2 qi, we arriveat we arriveat tion (in
tion (in the
the senseof lower domestic
sense of lower equilibrium
domestic equilibrium
the following first-order
the following first-ordercondition
condition for
for the
the do-
do- prices) when
prices) When R is low,
low, c is high,
high, and When the
and when
mestic market
mestic market allocation: market structureis
market lessconcentrated(high
structureis less concentrated(high N). N). AA
cartel using
cartel using a production-based
prcnluction•basedsharingsharing rule
rule
(1) P'QD + P - R = 0. may thus result
may result in even
even lower domestic prices prices
That
Thatis, the cartel
is, the cartelallocates domestic output
allocatesdomestic output
by equating marginal revenue
revenue in the
in the domestic
domestic TO see the impact Of of R on domestic
domestic profits,
by equatingmarginal 19TO profits,implicitly
implicitly
differentiate the domesticindustry
differentiate profit function
domestic industry profit function 110 =
IfD
POD-- F F -- cQD,which
whichyieldsall/aR= = +
pQD yields 11/aR (aO/aR)(QDP' +
p —
P c), which
- c), which is positive.
positive. mis implies that
This implies domestic pro-
that domestic pro-
18 Since fu-msalways
firms always produceup up to
to capacity,we assunw
we assume ducer surplus
ducer Will fall with
surpluswill With lower
lower world market
prices. The
that thc
that the marginal
marginalproduction
productioncost of cement is lowlow encnigh
enough intuiticm for this
intuition this result
result is that when R
that when R falls
falls below c,
c, paces
prices
that firms
that firms are
are capacity
capacity constrained.
constrained. get closer
closer toto noncooßrative
get noncooperativeprices.
330 THE AMERICAN
THE AMERICANECONOMIC
ECONOMICREVIEW
REVIEW MARCH 21"
MARCH 2006

than a
than a nonccxverative
noncooperativeCournot
Cournotmarket.
market.In Sec-
In Sec- Sumer
sumer surplus,
surplus,but the impact
but the impact on
on profitability
profitability is
is
tion IV
tion below, we
IV below, we will
will test
test whether
whether this was the
this was the ambiguous.
ambiguous. This trade-off can also be repre-
This trade-off repre-
case in
case Norway.
in Norway. sented
sented graphically. We illustrate
graphically.We illustrate the
the cartel
cartel and
and
As we have seen, seen, the sharing
sharing rule
rule induces monomylyequilibrium Figure 3. The monop-
monopoly equilibriumin Figure monop-
m»sitive
positive domestic welfare
welfare effects. These
These gains
gains oly
oly outcome
outcome is the
the usual solution when
usual solution when mar-
mar-
have tradedoff,
have to be traded off, however, againstlossesin
however, againstlosses in ginal
ginal revenue
revenue meets
meets marginal
marginal cost,
cost, yielding
yielding a
the
the export
export markets.
markets. TheThe scope of this ineffi-
of this ineffi- price Pm and
price and quantity
quantity T.Q'. No
No export will
will take
take
ciency will delRnd
ciency will depend on on the total amount
the total amount ofof ca-
ca- place in
place in monopoly equilibrium,since the world
since the world
pacity
pacity thatis installed,which is a functionof
that is installed, which is a function of the
the price R
price is below
R is below marginal
marginal cost
cost of
of capacity.
capacity.The
The
incentives to
incentives to gain
gain aa bigger
bigger share
share Of
of domestic
domestic cartel
cartel solution is the price-quantitycombination
solution is the price-quantity combination
profits.
profits. We
We now
now turn
turn to
to capacity
capacity decisions.
decisions. (Pcart, Qcart) where marginal revenue
where marginal equals R.
revenue equals R.
Exports
Exports are
are given by
given by the
the difference
difference between
between
B. Firms' Capacity
B. Firms' Capacity Decisions
Decisions total
total domestic production, Q,
domestic production, Q, and the domestic
and the domestic
quantity
quantity sold,
sold, Qca".The
The change
change in consumer
in consumer
In stageone,
In stage firms decide on their
one, firms their individual
individual surplus
surplusby moving from
by moving from cartel
cartel to monopoly
monopoly is
capacity
capacity by
by solving
solving max
max I}ri.
{ The
The first-order
first-order therefore
thereforegiven by the
given by sum of the areas
the sum areasA and
andC.C.
condition
condition isis The impact on producersurplus
The impact surplus given by A
is
is given by A
minus plus the
minus B plus the saved
saved export loss,
loss, D. Finally,
D. Finally,
QD the
the change in welfare
welfare is D-B-C, which is
change in D-B-C, which
(3) (1 - s) — (P
(1 (P -- R)
R) +R-c=O
+R- c= 0 ambiguou
ambiguous. s.
Q Given
Given that
that the
the effectiveness
effectiveness (in
(in terms
terms Of
of car-
car-
where the first
first term,
term, (1 tel profitability) of
Of the Norwegian cement
the Norwegian cement cartel
cartel
where the (1 -— si)(QDIQ)(P —
- R),
R), tel profitability)
constitutes the incentive
incentive to due to the is in theory
is in theory ambiguous, we
we now
now turn
turn to
to the
the data
data
constitutes the to export due to the ambiguous,
sharing rule. Note that if the marginal in
in an attempt
attempt to evaluate the trade-off
trade-off
sharing rule. Note that if the marginalcost cost ofof
capacity c
c is
is below
below R
R for
for all
all capacity levels, empirically.
empirically.
capacity capacity levels,
then (3)
then (3) can never be
can never be satisfied
satisfied and and capacity
capacity
investments tend toward infinity. Empirical Implementation
Implementation
investments tend toward infinity. TO To concen- IV. Empirical
Irate
trateOnon an interior solution,
an interior solution, we we Will
will assume
assume thatthat
cc is
is above R (see below). As a result, the loss in
above R (see below). As a result, the loss in is Often
As is often the case in empirical
empirical studies of
market
markettrhavior.
behavior,one
one does not have
does not have reliable
reliable data
data
the export
export market
marketis EL EL = (Q (Q — - QD)(c — R).
- R).
We
We have
have already for marginal
for marginal costs.
costs. Marginal
Marginalcosts costs are
are then
then in- in-
already seen that the
seen that the impact
impact of of the
the
world market
world market price
price R R on domestic profits
on domestic profits is ferred through
ferred equilibrium behavior
through equilibrium behavior (usually
(usually
negative. By By contrast, the impact through
througha first-order
first-order condition
condition such as equation
negative. contrast,the impact Of of R on profits
R on profits equation
in the export marketis ambiguous.Implicitdif-
in the exl%yrtmarket is ambiguous. Implicit dif- (2)), provided
(2)), provided that
that an
an estimate of
estimate Of demand
demand is is
ferentiation yields
ferentiation yields aEL/R
öEUdR = — [8(Q - available.
available. ForFor example,
example, estimation
estimation Of
of lu)th
both the
ORI(c
QD)/
aR](c — R) -— (Q
- R) (Q — - QD).
QD). The The first
first term
term is is monopoly and
monopoly and the
the Cournot
Cournotequilibrium
equilibrium(such (such as as
(2)) would need to procæedin
(2)) would need to proceed in this fashion.this fashion.
positive, which
which isis thethe loss
loss from
from increased
increased ex- ex-
ports below costs.20
costs.20The secondterm term is is nega-
The second The lack
The lack Of of data
data on marginal costs
on marginal costs is is no no
nega-
tive, which decreases the loss due
due to the
to the different
different inin the
the case
case Ofof the Norwegian cement
the Norwegian cement
tive, which decreases the loss
increase in export price R. We thus find
find that
that industry. In
industry. our case,however,
In our case, however, we can use use the
export price
even
even though the impact institutional setup
institutional setupof of the
the sharing
sharingrule to identify
rule to
thoughthe impactof aa higher
higherR R on on domes-
domes- identify
tic
tic profitability is
is positive, the
the effect
effect on
on total
total marginal cost,
marginal cost, even
even without
withoutestimating
estimatingdemand.
demand.
profitability positive,
profitability is ambiguous,While while tlæ
the impact on To
To see this, considerthe first-ordercondition
see this, consider the first-order conditionfor for
profitability ambiguous, impact
domestic consumersurplus capacity choices
choices by by firms
firms (3).
(3). Since there is
domestic consumer surplusis negauve.
negative. capacity
Overall, we find
find that
thata cartel
cartelusing excess capacity,
excess capacity,capacity
capacity choices
choices by by individual
individual
Overall,we using a capacity-
capacity- cartel members
based sharing
based sharing rule
rule leads to higherdomestic
leads to higher domestic con- con- cartel membersdo do not
not affect
affect the domestic
the domestic allo-
allo-
cations by
cations by the common sales
the common office (see
sales office (see (l)).
(1)). AsAs
a
a result,
result, domestic demand conditions
domestic demand conditions are are irrel-
irrel-
evant for
evant the capacity
for the capacity choices
choices andand wewe can iden-
can iden-
20 Implicit
Implicit differentiationof (3) yields. after
(3) yields, after some ma-
nipulatjon, that 18(Q —
- > O, That is, fu-JMexport tify marginal costs without demand
tify marginalcosts without demand estimation estimation
nipulation, that [a(Q QD)/aR] 0. is, firms
Whenever
more whenever R increases.
R increases. from
from (3).
(3).
 ROLLER
ROLLERAND
AND STEEN:
STEEN:ON THE WORKINGS
VOL
VOL.96 NO. 1
96 NO. 1 ON THE WORKINGSOF A CARTEL
OF A CARTEL:CEMENT
CEMENTINDUSTRY
INDUSTRY 331

Pm
"
I
"CU
"1
A

Pcart

liiiiii,
r~:it
1: : :j : : : : : : o

"D" c=Pcomp
R

P=A-BQ

Qm ,MR=A-2BQ
iQcart Qcomp

Qd!Q

F)GURE 3.
FIGURE 3. WELFARE
WELFAREANALYSIS—CARTEL AND MONOPOLY
ANALYSIS-CARTELAND MONOPOLY

Our identification of
Our identification of marginal
marginalcosts
costs rests on
rests on the following
the following Autoregressive
AutoregressiveDistributed
DistributedLag
Lag
the existence
the existence of of the
the cartel's sharing rule,
cartel's sharing which
rule, which (ADL)
(ADL)formulation for
fordemand:
formulation demand:
produces an
produces incentive to
an incentive to export. We will
export. We test
will test
this assumption
this assumption below
below by checking
by checking Whether
whether ex-
ex- (4)
(4) pt =
P, = +
+ + + ßzZ,
porting takes place in equilibrium. 3DQf + IQD Qt- + zZt
porting takes in
place equilibrium. 3o
+ ßnz-l+ypt-,+e,
IozZt,- + yPt,-I+ st
A. Demand
A. Demand
where
where ZZ is an exogenous
exogenous variable affecting do-
variable affecting do-
While marginal costs
While marginal are not
costs are not needed for the
needed for the mestic demand
mestic demand Of of Cement.
cement. WeWe useuse the
the Nome-
Norwe-
estimation
estimation Of
of the domestic market
the domestic market equilibrium
equilibrium gian
gian construction
constructionand and building
building index
index (BC)
(BC) as as a a
we do
do need
need an
an estimate Of demand.
estimateof demand. In
In this
this Z variable
Z variable and and various
various other cost shifters
other cost shifters as
(1),21we as
section, estimatedemand
section,we estimate using data
demandusing data from
fromboth
both instruments.2Thedataandsummary
instruments.22 The data and summarystatisticsstatistics
the cartel period
the cartel pericxl and
and the monopx.ly periodresult-
the monopoly result- are presented in
are presented Table I1 (we
in Table Ap-iRndix for
(see the Appendix for
ing from
ing from the
the domestic merger. We
domestic merger. We estimate
estimatetYæ
the detailed information
detailed information on
on data sources and
data sources and vari-
vari-
demand
demandby by instrumental variables using
instrumentalvariables using data
datafrom
from able definitions). Specification (4)
definitions). Specification (4) is is anan
both periods,
both Fxriods, that is, we
thatis, we assume
assumethat
thatthe structure
the structure ADL(I ,1) specification.
ADL(1,1) specification. The most common
common mo-
mo-
of domestic demand
of domestic demand hashasben
been stable
stableover this time
over this time
IRricxi. Given
period. Given the homogeneity of
the homogeneity of cement,
cement,we we use
use
22
A
A possible concern
concern With using BC
with using BC as an exogenous
variable is its potential cndogeneity
variable With cement
endogeneity with cement quantity
quantity
and paces.
and However. the
prices. However, the gross
gross output
outputofof the
the cement
cement indus-
indus-
Recall,
however, that the
21 Recall, that both the monopoly and
and the try hts
try less than I1 percent weight
has less weight in
in the BC index.
the BC e.g., in
index, e.g., in
Courno•t
Cournotequilibriumneed an an estimate Of marginal costs
of marginal costs ofof 1960 the weight
1960 the weight was
was 0.8
0.8 percent. The
The exogeneity
exogeneity of cost
of cost
Capnity, as well
capacity, well as demand,
demand.This
This is
is thc
the usual
usual model, i.e..
i.e., aa Shifters is given by
shifters by the fact that production
prcxluction is not directly
directly
market without
market without the
the Sharing rule.
sharingrule. determinedby costs (see
by costs (seeequation
equation (1)).
332 THE AMEmcAN
THEAMERICAN ECONOMIC
ECONOMICREVIEW
REVIEW MARCH
MARCH2fXF,
2006

TABLE
TABLEI—SUMMARY
1-SUMMARY STATMtCS FORTHE
STATISTICS MAIN VARIABLES
THEMAIN VARIABLES TABLE2—Tuo-SrAGE
2-Two-STAGE LEAST
LEASTSW ARESESTIMATES
SQUARES OF
OF
AND THE
AND THECOST
COSTSHIFTHs
SHIFTERSFOR
FORTHE
THEPERIOD
PERIOD1955 TO 1982
1955 TO 1982 DEMAND

Variable
Variable Mean
Mean std. dev.
Std. dev. Min
Min Max
Max Coefficient Standard
Standardeerror
t•ror

R 316.12
316.12 89.469
89.469 22754
227.54 524.42
524.42 —8.13E-04••
-8.13E-04**
QD (3.61E-04)
P 524.44
524.44 106.944 359.08
359.08 706.29
706.29 -0.212
-0.212 (0.315)
(0.315)
CBt
Z 1597.99
1597.99 419.370
419.370 1108.39 2319.92
2319.92 0.543"
0.543** (0.265)
(0.265)
Pt- 1
1393830 2N242,4
1393830 799078
294242.4 799078 1795089
1795089 6.98E-04••
QD QD-1 6.98E-04** (3.11E-04)
Prodmian
Production 1911776
1911776 651611.2 799878
651611.2 799878 2740169
2740169 0.347
0.347
1 (0.308)
517946
517946 402138.8
402138.8 800 1217277
1217277 CBt-
CONST
CONST 224.330
224.330 (151.100)
Export (151.100)
pricy
Price materials 125 43
125.43 43023
43.023 63,37
63.37 208.38
208.38 0.432
0.432
Adj.-R2
Price
Price electricity 98 34
98.34 41.869
41.869 50.06
50.06 185.82
185.82 1.020
Q1l
& fuel 04
Q4 4.400
Wage
Wage 132952_8
132952.8 45893.94
45893.94 79390.5 211595.3
211595.3 ESR -0.455**
R
E -1.468
Note: All values are deflated using the Norwegian
Note: All Norwegian CPI
CPI Adjustment
Adjustmentspeed ((1I -— -y)
y) 0.457* (0.265)
11985—1001
[1985 = 100] measured
measuredwnNOK,
in NOK, costs
costs are
are nwasured per ton,
measuredper ton,
and wuge:Sare measuredper man
and wages man year. Quantity figures
year. Quantity figuresare
are •* Significant
Significant on aa IO•percent
10-percentlevel.
level.
in tonnes
measuredin tonnes., ** Significanton a 5-percentlevel.
*** Significant
Significanton
on aa 2.5-percent level.
level,

tivation for using

tivation for using this
this framework
frameworkis is the
the impor-
impor-
tance
tance ofOf accounting for short-run
accounting for short-rundynamics
dynamics inin year.
year. Both
Both the
the relatively
relatively large
large difference be-
difference be-
the
the data.
data.Short-run
Short-rundeviations
deviationsmay
may bebe caused by
caused by tween
tween short-runand long-runelasticities and the
short-run and long-run elasticities and the
such
such factors as random
factors as random shocks,
shocks, sticky
sticky prices,
prices, relatively
relatively low
low adjustment
adjustmentspeed
speed are
are reasonable
reasonable
and contracts.
and By including
contracts.By including lagged
lagged observations
observations for the cement
for the industry. Most
cement industry. Most larger
larger construc-
construc-
of
of the
the endogenousvariables,
endogenous variables, the ADL frame.
ADL frame- tion
tion contracts will be
contracts will longer than
be longer than one
one year.
year.
work also
work also incorporatessuch dynamic
dynamic factors
factors as Hence,
Hence, within
within a year
year there is relatively
relatively little
little
habit
habit formation.
formation.The presenceof
The presence of habit
habit forma-
forma- scope for
for adjustment,
adjustment,whereas
whereas between
between years
years
tion in
tion demand makes
in demand makes static
static models inadequate
models inadequate this scope increases substantially;
this scope increasessubstantially;newnew contracts
contracts
(Robert A.
(Robert Pollak and
A. Pollak and Terrance
TerranceJ. J. Wales,
Wales, 1992).
1992). can be negotiated
can be negotiated and
and other building materials
other building materials
In
In addition
addition to accounting for
to accounting for short-run
short-rundy- dy- chosen.
chosen.
namics,
namics, the
the ADL
ADL model
model yields
yields both
both short-
short- and
and
long-run
long-run demand
demandelasticities.
elasticities. The short-run dc-
The short-run de-
mandelasticityis B.
B. Marginal
Marginal Costs
Costs and
and Consistency
mand elasticity is E} EES = = (1I3QD)(QD/P),While while Consistency
thelong-runelasticity
the long-run elasticity is is givenby
given by Ep, EB = = [(1
[(1 -—
+ QDI)](QD/P)through the steady-state As discussed.
discussed, given the institutional
given the institutional setup
setup
throughthe steady-state and
solution(i.e.,P, Pl_ II andQ? The and the
the sharing rule,
sharing rule, we are
are able identify
able to identify
/)/(ao (i.e., P, = P-
solution and = The
ADL model
ADL model also also provides
provides an anQDtestimate
estimateQI-1). Of
of the
the marginal costs from
marginal (3) as
from (3)
speed
speed Of of adjustment
adjustment(I(1 — - y) which is
y) which is normal-
normal-
ized toto lie QD
ized lie between
between O 0 and
and l.1.
The results for
The results
sented in Table
for demand
demand estimation
estimation are are pre-
pre-
(5) c= ( - s)
Q(P - R) + R
sented in Table 2. The model
2. The model shows
shows no no signs
signs of
autocorrelation;the the Box-Pierce
Box-Pierce test statistic
test statistic is is where ss is
where is the symmetric market
the symmetric market share I/N.1/N. As
low, indicating
low, indicating no first-order or higher-order
first-orderor higher-order is the case in all empirical studies that use
is the case in all empirical studies that use
auttrorrelation
autocorrelation(see (see Q1QI and Q4 in
and Q4 in Table
Table 1). l). The
The equilibrium
equilibriumconceptsto
concepts to identify
identify marginal
marginalcosts,
costs,
adj.R2is 43 IRreent.The shon-runelasticityis
adj. R2 is 43 percent.The short-runelasticity is
we
we depend on on the
the correct
correct specificationOf of (5).
estimated
estimated to to bebe —0.46,
-0.46, implying
implying an inelastic
an inelastic In order to test our
In order our approach,we we provide•two
approach, providetwo
demand.The
demand.The long-run elasticity
long-run elasticity is estimatedat
estimated at consistency
consistency checks.
checks. The first is based on
The first on c > R,R,
—1.47.
-1.47. ThisThis is is in
in line with intuition,
line with intuition, as as Other
other which
which needs to
needs to be
be satisfied for our
satisfied for our model
model to
to
materials
materials like like wood
wood and and metal
metal can can be be substi-
substi- make sense. Figure 4 plots the predicted
make sense. Figure 4 plots the predicted mar- mar-
tuted for cement in the long run.
tutedfor cement in the long run.The adjustment The adjustment ginal capacity
ginal capacity costs
costs (c), the world market
the world market price
price
speed isis estimatedat
estimatedat 0.46, 0.46, which implies that
which implies that46 46 (R),
(R), and
and the
the domestic
domestic (P).
price (P). As
As can
can be
be seen,
seen,
percent
percent of
of a
a short-run
short-run shæk
shock is absorbedeach
absorbed each marginal capacity
marginal capacity costs
costs are
are always
always above
above thethe
VOL
VOL.96
96 NO.
NO. /1 ROLLER AND
ROLLER AND STEEN:
STEEN:ON
ON THE
THE WORKINGS
WORKINGSOF
OF A
A CARTEL: CEMENT INDUSTRY
CARTEL:CEMENT INDUSTRY 333

- Dornestic Price
DomesticPrice WorM Market
-WorldMarketPrice
Price — Predicted Marginal
-Predicted MarginalCosts
Costs

700 700

600 600

500 500

400- 400

0 0
300 300

200 200

100 100

0 0
1955
1955 1gs6
1956 1957 195B
1958 1959 '1960
geo 1961 1962
1962 '1963
g63 1964 '1965
965 1966 1967 1968
YEAR

FIGURE4.
FIGURE4. CONSISTENCY
OF
OF PREDICTED
CONSISTENCY PREDICTEDMARGINAL
MARGINALCOST:
COST:COMPARISONOF D0MBTJc EXF0RT PRICE,
DOMESTICPRICE,EXPORT PRICE, AND
AND PREDICT*D
PREDICTED
M
MARGINALCOSTS
COSTS

world market price,

world market price, implying
implying that
that the data are
the data are cost
cost index given in
index is given in Figure
Figure 6.
6. Again,
Again, one
one can
can
consistent With
with our maintained assumption.
our maintained assumption. see
see that
that the
the (short-run)
(short-run)average
average unit
unit cost
cost mea-
mea-
A further
furtherimEu'rtantconsistencycheck
importantconsistency check Of
of our
our sure
sure is highly correlated
is highly correlated with
with our
our marginal
marginalcost
cost
structural
structuralapproach
approach is based on a comparison
comparison measure
measure derived
derived from the
from the first-order
first-order condition
condition
between predicted marginal
between the predicted marginalcosts
costs recovered (thecorrelationis 0.96).23 It is worthnotingthat
(the correlationis 0.96).23It is worthnoting that
via
via the equilibrium condition (5)
equilibriumcondition (5) and
and other
other in-
in- our measure of
ourmeasure Of marginal
marginal cost
cost isis a long-run meas-
a long-run meas-
formation
formation on
on cost accounting data. Fig-
accounting data. Fig- ure, i.e.,
ure, i.e., it
it includes
includes capacity,
capacity, which
which isis why
why thethe
ure
ure 55 plots three input
plots three input price
price series— electricity
series-electricity marginal cost
marginal line is above
cost line above the average unit
the average unit cost
cost
and
and fuel, wages, and
fuel, wages, and materials-based
materials—based on on ac.
ac- measure in
measure in Figure
Figure 6.
counting
counting data
data sources
sources (see
(see the
the Appendix forfor In sum,
In Sum, we find that
we find information on
that information on account-
account-
details)
details) as well
well as our
our predicted marginal
predictedmarginal cost.
cost. ing
ing cost data is consistent with
with our
our equilibrium
equilibrium
As
As can be seen,
seen, except
except for
for a jump
jump in
in the
the elec-
elec- næasureOfmarginal
measure of marginalcosts,lending
costs, lending considerable
tricity
tricity and
and fuel
fuel costs in 1967, when
in 1967, when the pre-
the pre- credibility
credibilityto to Our
our approach.
approach.
dicted marginal cost also had a small increase,
dicted marginalcost also had a small increase,
the accounting
accounting cost data information
information and
and our
our C.
C. Welfare
WelfareAnalysis
Analysis
(equilibrium)
(equilibrium)marginal
marginalcost are
areremarkably sim-
remarkablysim-
ilar.
ilar. The
The simple
simple correlation
correlation between
between our
our in-
in- Using our
Using our demand
demandand cost estimates,
and cost we are
estimates, we are
ferred
ferred measure
measure of
of marginal cost and
marginal cost and the input
the input able to perform welfare analysis.
performa complete welfare analysis.In
In
factors
factors are 0.93 (electricity
are 0.93 (electricity and fuel), 0.89
and fuel), 0.89
(wage), and 0.82 (materials).
(wage), and 0.82 (materials). 23 The common rægativetrendin both cost
costmeasureswill
measureswill
An alternative is to aggregate
An alternative aggregatethe
the three input
input negative
bias the
thc ccwclation upward. Taking
correlationupward. Taking the first-order
ftrst•order differ-
differ-
factors into
factors into an average
average unit
unit cost per
per ton
ton Of
of ences Of
ences of these COSImeasures
these cost measures yields
yields u Out is
a correlationthat is still
still
cement. The
cement. The comparison
comparisonof
of the aggregate
aggregate unit
unit quite high
quite high (0.59).
(0.59).
334 THE AMERICAN
THE AMERICANECONOMIC
ECONOMICREVIEW
REVIEW MARCH 2006
MARCH

Long run
-Long runMC
MCfrom
frommodel Rmaterials
:Rwage "Relectricity
600 200

180

500
160

140
400

120

O sco
300 100
O
80

200
60

40
100

20

0- 0
1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968

YEAR
FIGURE 5. DEVELKPMENT
FIGURE 5. DEVELOPMENT TN
IN THE
THE MARGINAL
MARGINAL COST
COST PREDICTED
PREDICTED FROM
FROM MODELS
MODELS'' FIRST-ORDER CONDI-DONS AND
FIRST-ORDER CONDITIONS AND THE FACTOR
THE FACTOR
PRICE-sFOR
PRICESFORTHEPERIOD 1955
1955 TO1968
1968
Note: All
All prices and MC
MC as NOK
NOK per
per ton.
ton.

order to
order to analyze
analyzethe impact of
the impact of the
the canel,
cartel,we first
first indicating that
indicating thatthe
the common
common sales
sales office is rather
office is rather
compare
compare the
the cartel
cartel situation
situation to
to that
that of a monop-
monop- effective
effective in keeping
keeping domestic prices
prices close to
oly.
oly. In
In doing
doing so, we use
so, we use the
the long-run
long-run demand
demand monopoly levels.
monopoly levels.
sestimates givenby
estimate given by P, P, = Poßå+ ß*QDQ?
+ P3QDQD + ßZ
+ As a
As a consequence
consequenceof of the
the sharing
sharingrule, domes-
rule, domes-
where ßQD ¯ - = tic consumers are
tic Irtter
are better off
off under
under the the cartel
cartel
where ~0QD (I3QD + I3QD1)/(1 -),
= 3Z,t
P*3
(ßz + — y), and ßW(1
(Pz + 3zl)/(l - y), and pI = o/(1 - y) and - Y) andrelative
relative toto a monolX'ly.
monopoly. The
The cartel's
cartel's ineffective.
ineffective-
we compute
we compute the the monolX'ly equilibrium. Fig-
monopoly equilibrium. Fig- ness is
ness is to
to the
the benefit
benefit of consumers.
of consumers.
ure 7
ure compares moving
7 compares moving from from the cartel to
the cartel to a Figure
Figure 7 also shows that the effectivenessOf
that effectiveness of
monopoly equilibrium
equilibrium for for each
each of of the years
the years the cartel
the declines dramatically
carteldeclines dramaticallyover over time,
time, asas the
the
1955
1955 to
to 1968.
1968. incentive problem
incentive problem becomes
becomes more and more
more and more Ofof aa
As
As can be seen
seen in
in Figure
Figure 7, 7, the
the cartel
cartel is not
not problem for
problem cartel. Interestingly,
for the cartel. Interestingly, the cartel
cartel
effective at all.
effective at all. In particular, losses
In particular, lossesfrom
fromexport-
export- was 01Eratingso
operating so inefficiently
inefficiently around
around 1967that
1967 that
ing
ing are very large.
are very large. Apparently,
Apparently, tlæthe sharing
sharingrule
rule aa merger
merger to to monom)ly
monopoly actually had a positive
actually had
createsa
creates a considerableincentive
considerableincentive problem,problem, lead- effect on
effect on welfare.
welfare. TheThe loss
loss from
from exporting
exportingis is so
so
ingtosignifica
ing to nt n 4
overwxluctio
significantoverproduction and exporting large
and exporting large that
that the
the gains
gains to consumers are
are out-
out-
trlow
below marginal
marginalcosts.
costs. ByBy contrast,
contrast,the
the losses weighed,
weighed, resulting
resulting inin positive domestic
domestic welfare
welfare
in
in the domestic market
the domestic market are
are substantially
substantially lower,
lower, from
from a
a merger to
to
merger monopoly.
Thus far, our
Thus far, Our results
results suggest
suggest that
that the
the timing
timing
of the merger took place
of the merger took place exactly exactly at the right
right
24 These
These patterns are
are consistent
consistent with
with what we find in
what we in
Other
other agricultural CCX5peratives.
agriculturalcooperatives. Members Of coopera•
of the coopera-
rives would be even bettu
tives would off if
betteroff if they reducedcapacity
capacity and
and monopoly price at
monopoly at home
home comßnsatcs
compensatesenough
enough toto make them
sold
sold less
less at home to
at home prevent costly
to prevent costly exports. However, thc
the off than
better off than the
Lhe alternative
alternativeOf oompetltion.
of competition.
 ROLLER
ROLLERAND
AND STEEN: ON THE
THE WORKINGS
WORKINGSOF A CARTEL-
CARTEL:CEMENT
VOL NO. 1
VOL.96 NO. 1 STEEN: ON OF A CEMENTINDUSTRY
INDUSTRY 335

-Short
run
ShMtACfrom
data -Long runMCfrommodel
run AC from data run MC from

600

500

400

O 300

200

100

0
1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968

YEAR
FIGLJkE
FIGURE6.6. DEVELOPMENT MARGINAL COST
IN THEMARGINAL PREDICTED FROM
COST PREDICTED FROM MODELS'
MODELS' FIRST-ORDER
FIRST-ORDER CONDITIONS
CONDITIONS AND
ANDTHE
THE
DEVELOPMENTIN
DEVELOPMENTIN SHORT-RUNAVERME
SHORT-RUNAVERAGECOSTS(AC)
COSTS(AC) FROMDATA EORTHE
FROMDATA FOR PERIOD1955
THEPERIOD 1955 10
TO 1968
1968
Note: Wage
Note: Wage, electricity
electricity and fuel.
fuel, and
and materials,
materials,all
all prices
prices and
and MC
MC as NOK per ton.
as NOK ton.

moment, i.e.,
moment, when a
i.e., when a tænevolent
benevolent domestic
domestic dic-dic- for the
for year 1968,
the year I aswell
as asthe
well as the accumulatedrents
accumulatedrents
tator would have imposed a merger. Given the
tator would have inuujsed a merger. Given the over the sample
over the sampleperiod 1955-1968.
likely absence of
likely benevolent dictators
of benevolent dictators in in Nor-
Nor- As can
As can bebe seen in Table
seen in Table 3, domestic consum-
3, domestic consum-
way, one
way, one may
may wonder
wonder why why thethe merger
merger tooktook ers
ers would
would have benefited
have benefited from Cournot
from Cournot
compe-
place in
place in 1968,
1968, i.e.,
i.e., exactly
exactly When
when the net
net benefit
benefit tition,
tition, i.e., the cartel
i.e., the cartel isis not
not so ineffective that
so ineffective that itit
of consumers
of consumers and and firms
firms became
became positive. As As drives domestic prices down to
drives domestic prices down to noncooperative noncooperative
already discussed in Section I,
already discussed in Section I, a reasonable a reasonable levels. On the Other
levels. other hand,
hand, competition would
competition would
explanation is
explanation is the
the existence
existence Of of Other institu-
other institu- have lowered
lowered producer surplus.
producersurplus.
tional agreements
tional agreementsthat that had been agreedto
agreed on a
to In light
In light Ofof this, the wisdom
this, the wisdom of of the
die merger
mergerto to
long-term basis.
long-term basis. As As losses from exporting were
losses from were monom)ly
monopoly in
in 1968
1968 has
has to
to be r&ssessed.
reassessed. The
mounting
mounting and Other agreementswere
other agreements were running running merger
mergermay have come at
may have the right
at the right time,
time,butbut only
only
out in
out in 1968,
1968, aa merger
merger to monopoly was
to monopoly Was ulti-
ulti- if the alternativewas to do nothing(i.e., keep the
if the alternative was to do nothing (i.e., keep the
mately implemented.
mately implemented. Another
Another factor
factor allowing
allowing cartel
cartelin in place).
place). If
If the alternative
alternativewas was toto move
move to to
the
the merger
mergerwas that antitrust concerns
that antitrust concerns vis-ä.vis comgxtition,
competition, neither
neither cartel
cartel nor
nor merger to
to rnonop-
vis-t-vis merger monop-
the
the merger
merger were
were unlikely
unlikely be to
to be significant
significant in in oly would have
oly would have been to the benefit of
the benefit of Norwegian
Norwegian
Norway
Norway at at that
that time. welfare.
welfare. A well functioning
time. functioningcompetition
competitionB'licy policy
Ille previous
The findings suggestthat
previousfindings suggest thatthe merger
the merger authority
authoritywouldwouldhavehave broken
brokenup up the
the cartel
carteland not
andnot
took
took place exactly at
at the optimal time
place exactly the optimaltime for welfare. for welfare. allowed
allowedthe mergerto monopoly(recallthatat the
the merger to monopoly (ruall that at the
This
This conclusion premature, however,
conclusionis premature, however, msit as it ig-
ig- tinæ
time there
therewaswas none,
M)ne, however).
however).
noresthe pcmibility of unnlktition.
nores the possibility competition. Table
Table 3 pre-
pre- In 1968
In 1968alone,the
alone, the welfare gain gain from
from breaking
breaking
sents
sents the comparison with Cournot
Cournotcompetition up the cartel in favor of competition
comparisonwith competition up the cartel in favor of competition was some
was some
336 rHE AMERICAN
THE AMERICANECONOMIC
ECONOMICREVIEW
REVIEW MARCH2006

- Export DSS
loss —Welfare
---Welfare Dorrwstic producor
-*--Domestic producer Surplus
surplus -- — Consurr•r
Consumer suph.JS
surplus
"
50000000

40000000

30000000

20000000

10000000

0
0 1954 1957 1958 1959 1960 1961 1963 1964 1 1 6 1967 1968
1962
-10000000

-20000000

-30000000

-40000000

-50000000
YEAR
FIGURE
FIGURE77. IMPACT
IMPACTOF
OFMOVING
MOVINGFROMAA CARIFL
CARTELTO AA MONOPOLY
MONOPOLY

TABLE
TABLE3—1MPAcr
3-IMPACT ON
ON PRODUCER
PRODUCERSURPLUS,C
SURPLUS, ONSUMER
CONSUMER would benefit 237
would 237 million
million NOK
NOK from
from comlEti-
competi-
SURPLUS,AND
SURPLUS,AND WELFARE(10 NOK)
WELFARE(1000 NOK) lion inin 1968 alone.
alone.
tion
In
In sum,
sum, we we find
find that
that relative
relative to keeping the
to keeping the
u] ated
Accumulated
1955 cartel in
cartel place, the
in place, the merger
merger to to monom)ly
monopoly in in 1968
1968 1955 to 1968
to 1968
was exactly
was exactly what
what a benevolent dictator
a benevolent dictator would
would
Cutel to
Cartel to Cournot have done. The
have done. The picturepicture is rather
rather different, how-
different,how-
com'Rtition
competition
— 106797 —668 ever,
ever, if
if the
the alternative
alternative is
is competition. In
In
competition. this this
frculucer surplus
Producer surplus -106 797 -668 521
521
ConsumerSurplus
surplus
237 350
237 350 1 467
467 765
765 case, the
case, Norwegian cement
the Norwegian industry is subject
cement industry subject
Net welfare effect
Net effect 130 353
130 553 799 244
244 to a
to a considerablepublic
considerablepublic policypolicy failure.
failure.
moncply
Cartel to monopoly
Producer
Producersu 47
47 891
891 189 032
189 032
surplus V.
V. ConclLßon
Conclusion
Consumer surplus
Consumersurplus -36 760
-36 -285 157
-285 157
Net
Net welfare effect
welfare effect 11 131
11 131 -96 125
125
Using
Using aa unique institutional setup
unique institutional setupin
in the
the Nor-
Nor-
wegian
wegian cement industry, we
cement industry, we are
are able
able to study
study
the workings of
the workings of aa cartel
cartel in
in detail.
detail. We
We focus
focus on
on
131
131 million NOK, while
million NOK, the merger
while the mergerto monop-
to monop- the
the cartel's efficiency and, in particular,its
cartel ' sefficiency and, in particular, its shar-
shar-
oly increased welfare by only
oly increasedwelfare by only 11 million
million NOK.
NOK. ing
ing rule, which is commonly
rule, which commonly used in other
other car-
In Other
In words, the
other words, apparent welfare
the apparent welfare enhancing
enhancing tels.
tels. Taking
Taking these
these institutional
institutional factors
factors into
into
merger to monopoly left
merger left 120 million
million NOK
NOK "on"on account,
account, we
we fccus
focus on
on the
the two
two problems that the
problemsthat the
the table"
the table" by
by not allowing competition.
allowing competition. In
In this
this cartel faces: deciding
cartel faces: deciding on
on the
the domestic
domestic quantity
quantity
sense, and on
on the
the distribution
distributionof rents. Given data on
sense, the merger to monopoly
the merger monopoly was a distant
distant and of rents. Given data on
second-best solution. The
The picture domestic
domestic and
and world
world market prices, production,
second-best solution. picture is
is even
even more
more marketprices,
dramatic with regard
dramaticwith regardto consumers.
consumers.While
While do- and
and exports, we are able to identify
exports, we marginal
identify marginal
mestic consumers lose from
mestic consumers from the
the merger
merger (some
(some costs, as
as well as the
well as the effectiveness
effectiveness Of
of the
the cartel
cartel
37
37 million NOK), our
million NOK), our model sugestS that
model suggests that they
they and
and its
its impact
impact on consumersand
consumers and welfare.
welfare.
VOL
VOL.96 NO. 1
96 NO. 1 ROLLER
ROLLERAND STEEN: ON
AND STEEN: ON THE WORKINGS OF
THE WORKINGS OF A
A CARTEL:
CARTEL:CEME,W
CEMENTINDUSTRY
INDUSTRY 337

We
We show
show that
that the cement cartel
the cement cartel has Ewen
been also
also atat FRr-ton
per-tonprices.
prices. (Note
(Note that
that in Figure 5
in Figure 5 la•
la-
inefficient by
inefficient by using
using aa "production"
"production" sharing
sharingrule,
rule, bor cost is calculated
calculated as as a Err-ton
per-ton price
price to be
which creates
which creates an incentive to
an incentive overinvest
to overinvest in
in ca-
ca- directly
directly comparable
comparableto to derived
derived marginal
marginalcost.)cost.)
pacity
pacity and export (below marginal
export (below marginal costs)
costs) in
in Yearly production
Yearly production is
is also
also found
found in in NIS
NIS but but
Order to
order to increase
increase their
their share
share Of
of aa profitable
profitabledo- do- is checked against
is checked against production figures pro-
production figures pro-
mestic market.
mestic market. We We have
have shown
shown that this sharing
thatthis sharing vided by
vided by Norcem
Norcem and production figures
and production figures fromfrom
rule benefits
rule benefitsconsumers
consumers(relative
(relativeto outright mo-
to outright mo- CEMBUREAU.
CEMBUREAU.
nop01y pricing), While producers
nopoly pricing), while producerslose both do- lose do- The
The export price and
export price and thethe three
three cost
cost measures
measures
mestically and in the export
mestically and in the export market. market. are all deflated using the Norwegian
are all deflated using the Norwegian consumer consumer
The domestic welfare welfare implications
implications Of of a price
price index (Cpl), Which is found
(CPI), which found in NAS and
merger to monopoly—which
merger monopoly-which are
are in
in theory
theory am-am- NHS.
NHS.
biguous—are empirically
biguous-are empirically shown
shown to
to trcome
become The
The construction
constructionindexindex we we use as a
use as measure
a measure
INBitive at
positive exactly the
at exactly the time
time of
of the merger, i.e.,
the merger, i.e., in
in of market size
of market is a
size is a volume
volume indexindex ofof gross
gross do- do-
1968.
1968. We We thus find that
thus find that relative
relative to to keeping
keeping the the mestic product in
mestic product in the
the construction
constructionindustry.
industry.It It is
is
cartel in
cartel in place,
place, the
the merger
mergerto to monolN)ly
monopoly in in 1968
1968 derived
derived from NOS National
from NOS National Accounts Statistics
Accounts Statistics
was exactly
exactly what
what aa benevolent
benevolent dictator
dictator would
would (National Accounts
(National Accounts 1865-1960, Table Table 45, 45, and
and
have done.
done. The picture is
The picture is rather
rather different
differentifif thethe Historical Statistics
Historical 1968 and
Statistics 1968 and 1984).
1984). Data
Data for
for
alternative
alternative of
of competition isis included.
included. In In this
this various time
the various time periods are are spliced
spliced byby the
the sim-
sim-
case, the
case, Norwegian cement
the Norwegian cement industry
industryis is subject
subject ple ratio method
ple ratio method to form a
to form a consistent
consistent timetime se-
to a considerable public
to a considerablepublic policy failure. failure. ries.
ries. The index is
The index is collected
collected and and constructed
constructedby by
Jan Tore Klovland,
Jan Tore Klovland, Norwegian
Norwegian SchcX)lOf
School of ECO-
Eco-
APPENDIX:DATA
APPENDIX:DATADESCRIPTION,
SOURCES,AND
AND
SOURCES,
DESCRIPTION, nomics
nomics and and Business Administration.
Business Administration.
CONSTR
CONSTRUCTION
REFERENCES
REFERENCES
The
The data
data were
were collected from
collected from four
four main
main
sources:
sources: Norwegian
Norwegian Industry
Industry Statistics
Statistics (MS),
(NIS), Aiginger,
Aiginger,Karl
Karland Pfaffermayr, Michael.
and Pfaffermayr, Michael."Look-
Norwegian
Norwegian Trade
Trade Statistics
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(NTS), Norwegian
Norwegian ing at
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at the Cost Side
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of 'Monopoly.' " Journal
Journal
Historical Statistics
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(NHS), and
and National Ac-
National Ac- Of
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Industrial Economics, 1997, 45(3), pp.
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counts Statistics
counts Statistics (NAS),
(NAS), all
all published annually
published annually
245-67.
245-67.
by the
by the (Central Bureau of)
(Central Bureau of) Statistics Norway
Statistics Norway Bem»it, Jean-Pierre and
Benoit, Jean-Pierre and Krishna,
Krishna, Vijay.
Vijay. "Dy
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(SSB).
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The Norwegian
Norwegian exm)rt
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NTS, containing
NTS, containing the
the commodity numbers:
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35.22, 25.23, and 2523.
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