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The difficulty in forming and
maintaining cartels means that
these “conspiracies” are less
common than Adam Smith
might have expected. In the
1960s US economist George Stigler
showed that the natural suspicion of
competitors acts against collusion
in a cartel, and that cartels are less
likely to occur as more firms enter
a market. As a result, even in
industries where there are only a few
large producers, such as for video
games consoles and mobile phones,
the preference is generally for
competition rather than cooperation.
Nevertheless, the few cartels
that do exist pose enough of a
threat to the market for governments
to feel the need to intervene. Public
pressure from consumers opposed
to price-fixing drove the move to
“antitrust” legislation (see right)
during the 20th century, outlawing
cartels in most countries. Because
of the difficulty of proving collusion,
many of these laws offer immunity
to the first member of a cartel to
confess—just as in the prisoner’s
dilemma—offering yet another
incentive to break up the cartel.
This tactic was notably successful
recently, when Virgin Atlantic
Airlines, worried by an investigation
into price-fixing of Atlantic flights,
confessed its collusion with British
Airways, who were heavily fined.Government approval
Some libertarian economists, such
as Stigler, are skeptical of the need
for such laws, given the instability
of cartels. Governments are often
ambiguous about cartels, seeing
some forms of cooperation as
potentially desirable. For example,
while IATA’s price-setting policy
was considered collusion, OPEC
has sometimes been seen in a more
benign light as a trade bloc whose
policies lead to stability. The same
argument has been put forward in
defense of public cartels in certain
industries, such as oil or steel, in
countries during times of depression.
When regulated by governments,
cooperation between producers can
stabilize production and prices,
protect the consumer and smaller
producers, and make the industry
as a whole more competitive
internationally. Public cartels such
as these were common in both
Europe and the US during the
1920s and 1930s, but mostly
disappeared after World War II.
National cartels are still a feature
of the Japanese economy. ■THE AGE OF REASON
Antitrust laws
Cartels, like monopolies, are
generally seen as harmful to
the efficiency of free markets
and a threat to overall
economic well-being. Most
governments have attempted
to prevent this kind of collusion
by legislation in the form of
antitrust or competition laws.
The first such intervention
was in the US in 1890, when
the Sherman Act outlawed
every contract or conspiracy
that restrained interstate or
foreign trade. This was
followed by further antitrust
laws including the Clayton Act
in 1914, which prohibited local
price cutting to “freeze out”
competition. Economists have
tended to be skeptical about
antitrust legislation, which is,
in any case, often difficult to
enforce. They point out that
cooperation does not always
lead to collusive practices,
such as price-fixing and
bid-rigging, and many believe
that much “trust-busting”
legislation has been motivated
by political pressure rather
than economic analysis.Mobile phone operators in the
Netherlands were investigated for
suspected cartel practices in 2011,
including price-fixing mobile data
bundles for prepaid phones.
Economists have their
glories, but I do not
believe that antitrust
law is one of them.
George StiglerThis 1906 cover of a political paper
lampoons US politician Nelson
Aldrich for building a “web” of tariffs
to protect US goods from foreign
competition and raise local prices.