One of the most straightforward yet useful questions is ’under which conditions are export cartels always more productive?’ (i.e., export cartel formation is always a Nash equilibrium).
The answer is when firms are facing a high level of the sharing coefficient, i.e., the sharing coefficient exceeds the sharing coefficient threshold (s > ¯s). If shared resources are
5.6 Propositions 171
supplementary, firms may gain economies of scale from combining their shared resources because the factors of production (e.g., the same type of machines) being combined have a substantial increasing return to scale (Evenett et al., 2001). In some cases, combining firms’ negotiation power (e.g., against foreign buyers on prices, delivery details or against the shipping company on shipping rates) could be seen as the use of shared resource across firms.
If shared resources are complementary, firms may get synergic benefits from combining their resources under an export cartel and regulate specific activities, e.g., marketing activities.
For example, one firm might contribute their expertise in the importing country’s market information while the other firm may contribute its analytical skills and human resources in order to attain a better marketing strategy. If these sharing benefits, as measured by the sharing coefficient, are substantial enough (i.e.,s > ¯s), export cartel formation is always a Nash equilibrium.
Therefore,if the sharing coefficient exceeds the threshold, other conditions are vir-tually ignorable. For example, if firms face a high level of the sharing coefficient (s > ¯s), export cartel formation is a Nash equilibrium even in the pro-competition environment (i.e., µbetween< µwithin). In such an environment, even though firms do not have the govern-ment’s support for export cartel formation (µbetween<µwithin) or even though the benefit from competition is high (c > c⇤), cartel formation might still be more productive than competition.
The threshold of the sharing coefficient is not fixed
A word of caution is that the sharing coefficient threshold ( ¯s) is a function of other parameters, including the amounts of both types of resources (a and b), the levels of both types of the multipliers (µbetweenand µwithin), the level of the exclusion coefficient (c), and the cost of cartel (g). Therefore, different situations, which are captured by different sets of parameter values, have different levels of the sharing coefficient threshold ( ¯s). We will consider
interesting situations in which the sharing coefficient threshold ( ¯s) is altered by different values of other parameters in Section 5.7.
5.6.2 "Maximum competition" is just a special case after all
As Amsden and Singh (1994) argued, optimal competition in terms of economic development never achieves maximum competition. In other words, there can be such a thing as excessive competition, the case in which competition is detrimental to economic development. This study, in terms of export cartels, proposes the conditions (Propositions 1 and 2) under which competition contributes to economic development (productive capabilities) less than an export cartel does. When any of these Propositions hold, competition is less productive than export cartels (there is excessive competition) and the government should intervene to limit, in order to promote economic development.
However, there are also situations in which competition should be promoted. One of the situations occurs when the cost of the cartel may exceed the threshold (g > ¯g) due to prohibition by competition law (i.e., an increase in the executing cost (e)). A strict competition law simply imposes a burden in terms of a reduction in payoffs without altering the productive capabilities of firms (mathematically, it imposes a positive real numberg 2 R+ into the payoff). Therefore, the cost of the cartels become excessively high because of overly-restrictive competition law. This is the reason why some scholars argued that competition law is not necessarily beneficial for all developing countries. For example, Chang (2002) disagreed with the view that developing countries need an "American-style anti-trust policy."
Thus seen, it is as if there is a self-fulfilling prophecy in terms of competition law, i.e., the imposition of competition law actually makes competition more valuable than cartelisation, despite the fact that competition is less productive for the overall economy. The unnecessarily high cost of the cartel (g) due to overly-restrictive competition laws is detrimental in at least two ways. Firstly, as the cost of the cartel (g) is independent of the productive capability of
5.6 Propositions 173
firms, it may force firms to compete despite the fact that competition is less productive than cartelisation. Secondly, there is an administrative cost incurred in implementing competition law. Therefore, as the previous chapters argued, an appropriate approach towards export cartels is neither a strict ban nor a laissez faire approach but the selective use of export cartels in different activities and industries.
The other situations in which competition should be promoted are equivalently interesting.
According to Proposition 2, in the pro-cooperation environment (µbetween>µwithin), as long as the cost of cartel is still below the critical value (g 6 g⇤), we only need a sufficiently low level of the exclusion coefficient (c < c⇤) in order to be in a scenario in which export cartels are always more productive than competition. However, if the level of the cost of cartel exceeds the critical level (g > g⇤), we need a certain level of the sharing coefficient to be greater than its threshold (s > ¯s) for export cartels to be more productive than competition.
Therefore, competition is only desirable when there is a pro-competition environment (µwithin > µbetween) and the benefit of sharing resources between firms is not substantial (s < ¯s). Such environments are largely found in the developed economies in which nec-essary public support (e.g., public research institutes) has been well established and firms possess sufficient exclusive resources to be used along with the public supports to enhance their productive capabilities. Alternatively, even when the between-firm multiplier exceeds the within-firm multiplier (µbetween>µwithin), competition could be more productive than an export cartel especially when the sharing coefficient is below the threshold (s < ¯s) and the level of exclusion coefficient is high (c > c⇤). The recent global trend of max-imising competition, therefore, may promote economic development only under limited circumstances.