Alcance

Levenstein and Suslow (2006) stated that "perhaps the least studied, but most important issues, are the effect that cartels have on investment and productivity". As Bridgman et al.

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(2009) discussed, the study of welfare losses from cartels has focused almost exclusively on the losses from higher prices, not from productivity losses (or gains). In the literature on cartels, the debate on whether cartels promote or hinder productivity growth is still ongoing.

Promotional effect of cartels on economic development

Most export cartels, especially those from developing countries, are comprised of small to medium-sized businesses and their aim is to increase the value of exports by reducing costs, sharing risk and improving products (Sweeney, 2007). Levenstein and Suslow (2006) claimed that, if prices have to be set at a competitive level, which is possibly lower than the long-run average total cost, firms will find no incentive to invest, especially if the investment is industry- or firm-specific. Instead, if prices are to be stabilised at profitable levels, especially in industries with high fixed costs or in industries that are prone to cut-throat competition, firms will have more incentive to invest to improve productivity growth in the long run.

Empirically, Symeonidis (2003) argued that, in the case of British cartels in the twentieth century, investments in fixed capital are positively correlated with cartel formation.

It was Robert Liefmann, in his seminal 1932 work on cartels, who discussed extensively how cartels might promote economic development. Liefmann (1932) "generally considers cartels as favourable for an industry". He further concluded that "my observations of German economic life over a space of ten years lead me to conclude that there is absolutely no sign of stagnation under the influence of the cartels...cartels...were in some of the most important German industries actually a principle cause of the rapid economic development which has characterised the last decades... (Liefmann, 1932, 87)". He claimed that the rationalisation of production and marketing by cartels served the interests of a general enhancement of the productivity of the German national system by "smooth[ing] the transition process of technical improvements". A cheapening of production could be achieved by the agreements

to standardisation of methods, processes and products and division of activity. Moreover, cartels were much needed in highly specialised industries where risks were higher.

Liefmann (1932) also dismissed the argument that preservation of smaller and weaker firms under a cartel were inefficient. He said that the competition process by which these firms are driven out is ruthless and always associated with "a long-drawn-out struggle involving heavy losses for all parties". During what he called the intensive competitive suppression (excess competition), the older means of production are unable to realise their amortisation and are forced to withdraw through competitive warfare. Those who are hurt the most by the warfare are weaker firms. Instead of preserving weaker firms, an existence of export cartels could instead lead to the process of (horizontal and vertical) integration and hence a bigger firm. In reality, the evidence of vertical integration was found in Germany in the iron and steel industry. The integration was a reaction of the raw material cartels in a key input industry, i.e., coal industry. Specifically, the coal syndicate in 1924 attempted to integrate iron works into their business in order to make better use of their coal.

Moreover, Robert Liefmann also claimed that export cartels, through some agreements such as purchasing and sharing new patents, could slow down the amortisation process of the existing means, by which the process prevents overcapitalisation (accumulating more capital than is necessary for the industry, often through repetitive investment) in an industry.

In other words, export cartels allow members to share the advantages of a new invention and prevent exploitation and competition-based violence. An example of this was a purchase of the Owens bottle production patent by the bottle combine discussed earlier. Moreover, he further claimed that an attempt by firms to increase their quotas was mainly achieved through an amalgamation of smaller firms into bigger firms not by internally expanding its capacities. Examples of amalgamations were bottle, potash, cement and other industries in the late nineteenth century. In the mining industry, cartelisation was actually inducing

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integration of some firms and creating "greater" competition among more even competitors.

This "fresh" competition would "prevent the extreme kind of monopoly".

Webb (1982) later on studied the relationship between cartels and the growth of the German steel industry between 1879 and 1914. The main conclusion was that cartels reduced the risk of capital-intensive technology investment, thereby enhancing productivity. A similar conclusion was also proposed by William J. Baumol in his work on the Dutch economy, which stated that cartels helped reduce risks in high-tech industries through cooperation in technology production (Baumol, 2004). These risk-sharing arguments are in line with the inverted U-shaped relationship between competition and innovation, proposed by Phillipe Aghion. In Aghion et al. (2009), excessive competition increases the risk that rents are insufficient to cover the investment in innovation. Empirically, cartels helped stabilise and increase investment and productivity in some industries such as the shipping cartels in the liner industry. The study by Stephen Craig Pirrong used an example of the six liner markets (as defined by the US Maritime Administration [MarAd], with three routes inbound to the United States and three outbound between 1983 and 1985) (Pirrong, 1992; Sjostrom, 1989).

It is also interesting to consider that Dutch economists in the early twentieth century largely supported the use of cartels on the grounds that an accumulation of producer surplus in the short run would induce investments and therefore would benefit the consumers in the longer run (Petit et al., 2015). Cartels (i.e., semicollusion - collusion in some, not all, activities) may improve consumer welfare in the long run through an increase in the variety and the quality of products despite an increase in prices (Fershtman and Gandal, 1994; Fershtman and Muller, 1986; Fershtman and Pakes, 2000). Steen and Sørgard (1999) and Peters (1989) also proposed theoretical models to support the empirical evidence that Norwegian cement cartels and German coal cartels outperformed unrestrained competition in terms of investment. Salin (1996) likewise considered the cartel as a structure by which firms could increase the value of production and improve production processes through the

extra investments made possible by cartels, such as various British industries in the empirical work conducted by Symeonidis (2003).

In some cases, agreements (apart from a cartel agreement) could also be made to specify the type and the amount of investment permitted. The International Steel Cartel (ISC), as discussed earlier, was formed in 1926 to set production quotas with a side payment, in which the member who violates its quota has to pay the penalty ($4 per ton to be precise). Apart from the agreement of quotas, the ISC also "monitored and sought to limit the installation of new production facilities among any of the members (Barbezat, 1990)." The limitation was meant to control the production capacity of members. Given that steel has a low elasticity of supply of capital, firms will all have an incentive to have some excess capacity, by which the cartel’s chances for super normal profits will decrease. Moreover, as the steel producers usually maintain small stocks at a time, the limitation of capacity in the steel industry was necessary to prevent excess capacity, by which the operation of cartels will be more complicated (Hexner, 1976).

Hindering effects of cartels on economic development

On the negative side, the rationale explaining why cartels are detrimental to productivity is largely based on the positive effect of competition on innovation in products, processes, and methods of management, which, in turn, enhance productivity growth (Holmes and Schmitz, 2010; Porter, 2001; Sakakibara and Porter, 2001; Van der Wiel et al., 2010; Van Reenen, 2011). The argument is that export cartel members would have found that the profit of launching new products was too high compared with the incomes they could earn and thus have no incentive for investment. Kaplow (2013) similarly argued that monopoly power acquired from a cartel, unlike monopoly power temporarily established by laws such as the Intellectual Property laws, disincentivises firms from the improvement in productivity to outperform their competitors because "the price elevation (by a cartel) does not reward firms

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to the extent that they outperform their competitors", but it instead reflects the firms’ ability to abstain from competition. Therefore, firms will simply try to abstain from competition to preserve their monopoly power instead of making investments to increase their productive capabilities.

Moreover, cartels are argued to lead to misallocation of production (e.g. quotas and size/capacity restrictions) and to persistence of inefficient firms, which should exit the market in the absence of cartels (Broadberry and Crafts, 1992; Cole and Ohanian, 2004). The misallocation of production was actually discussed in several works such as Liefmann (1932), Patinkin (1947) and Bain (1948). They argued thatexcess capacity was likely under a cartel arrangement, because the quota system strongly stimulated the expansion of production to increase quotas and the existence of a cartel also leads to the entrance of new firms to enjoy the higher profits. It was argued similarly by Stocking and Watkins (1948) and by Liefmann (1932), that firms in a cartel will not stop the expansion of capacity at the point where the marginal efficiency of capital is equal to the interest rate (i.e., the point where marginal benefit of investment is equal to the marginal cost of investment in Neoclassical investment model). Liefmann (1932) also pointed out that excessive capacity is particularly strong when the struggles for quotas is high, when there is an economy of scale, and when the bargaining power over quota relies on capacity. The excess capacity problem, however, could be solved by having a central cartel office to coordinate quota and its auxiliary mechanisms, such as side payments (Patinkin, 1947). For example, the ISC in 1926 also had an agreement to control the capacity of its members.

Zitzewitz (2003) compared productivity growth between the US and the UK tobacco industries from 1890 to 1939. He proposed that the US tobacco industry’s growth rate was lower due to the existence of cartels.Gunster et al. (2011) arrived at a similar conclusion for a sample group of European firms and industries (141 publicly listed firms active in 49 European cartels between 1983 and 2004), using the ratio of sales and employees and

R&D expenditure as measures of productivity. Monke et al. (1987) studied a flour-milling cartel in Portugal in the mid-twentieth century. They claimed that the profits were destroyed due to misallocation of production resulting from quota assignments and limitation of scale economies by the imposition of size restriction. Röller and Steen (2006) investigated the Norwegian cement industry and found that firms found it profitable to produce beyond the assigned quota and export to Europe at a price below the marginal cost of production.

Bittlingmayer (1995) and Taylor (2002) claimed that NIRA cartels in the US during 1930s had a negative impact on efficiency. Moreover, Petit et al. (2015) tested the impact of cartelisation on the total productivity growth in the Netherlands between 1982 and 1998 and claimed that cartels reduced productivity growth during the period. Ma (2011) used competition law enforcement as a proxy of competition to study the cross-sectional data of 101 countries before claiming that competition promoted productivity growth.