Predicting Cartel Formation

Abstract

This article distills insights about cartel formation from 41 cases prosecuted by the European Commission between 2001 and 2010. The case studies examine the events occurring in the industries prior to the cartels' set-up and identify the following potential causes for cartel formation: Changes in prices, demand and customer conduct, capacity utilization, increased imports and entry by competitors, and events in the legal and regulatory environment of the firms. Cartel formation is not necessarily triggered by events negatively impacting the firms' profitability, however, profit shocks and the resulting (expected) disturbance in the market seem to trigger collusive behavior. Factors that are commonly deemed to destabilize cartels, like entry of new competitors or buyer power, may foster cartel formation.