Patrones de Diseño

the cost of the cartel (g 2 R⁺) is an irreversible and direct cost which a firm needs to bear after making a decision to form an export cartel, regardless of the decision of the other firm or the levels of parameters (e.g., resources and multipliers). the cost of the cartel formation consists of two elements: proposing and executing costs, denotedr and e respectively (i.e., g = r + e).

The proposing cost (r)

The proposing cost (r) is the cost which a firm has to pay up-front when it decides to form an export cartel regardless of the choice of the other firm.

The proposing cost consists of the physical investment that a firm needs to make in order to signal its commitment to a cartel negotiation, i.e., a prior commitment for credibility.

A prior commitment is one of the measures to relieve or prevent the so-called hold-up problem (Rogerson, 1992). The hold-up problem in export cartel formation occurs when both parties (firms) are unsure about the outcome of the agreement due to different reasons, including unpredictable external factors, lack of trust, uncertainty of contract execution, and asymmetric information (Klein et al., 1978). For example, a firm may propose to limit its output in the subsequent quarter. However, the other firm may be reluctant to agree as it will have no direct control over the first firm’s production, once the agreement has been made and, therefore, cannot be certain if the agreement will be binding and the investment, if being made at all, will be worthwhile. In order to make the proposal credible, the proposing firm, therefore, could make a prior and credible commitment by, for example, shutting down or renting out some machines or factories. Therefore, factors reducing/eliminating the costs of

screening potentially complementary information should further reduce the proposing cost (Dyer and Singh, 1998).

The execution cost (e)

The execution cost (e) is the cost which a firm needs to pay to execute it only after both firms decide to form an export cartel. The execution cost normally consists of negotiation costs, legal costs, and investments further to the prior commitment.

Negotiation costs are agreement- or partners-specific costs that both parties have to pay during the process of trying to reach a cartel agreement. Starting at drafting a cartel agreement, firms also need to specify in terms of the agreement, and the processes which could be recursive until the agreement is finally settled. Negotiation costs could be seen in the light of the transaction-cost economics. Private coordination under cartels, like any coordination, has transaction costs. Transaction costs include search and communication costs (e.g., firms need to know each other and, more importantly, each other’s demands and specifications before making an agreement for cartel formation), bargaining and decision costs (e.g., how an activity should be regulated, i.e., at what level the price, the quality, and the quantity of product should be set), and policing and enforcement costs (e.g., the side-payment system by which the firm which violates the quota or an agreement has to compensate the other members).

Negotiation costs could be substantially reduced if member firms know each other well.

They may have a strong personal connections or the firms concerned may have cooperated in one way or another (i.e., have history of cooperation) (Connor, 2007a). To be more specific, history of cooperation lowers the search and communication costs and the bargaining and deciding costs by providing common understandings regarding the agreement, which firms could use as a starting point of the negotiation. The fact that firms produce homogenous products or have similar structures of cost and production process may also promote the

5.3 Parameters 159

likelihood that firms will have the right expectation about each other and, therefore, decrease the negotiation costs (Alexander, 1997; Compte et al., 2002; Häckner, 2000).

Legal costs are the costs of being convicted under the competition (antitrust) law, which is measured by the harshness of the competition law against export cartels (e.g., punishment, legal procedures, and so on) and the capability of executing authorities to enforce the law.

The recent practice, especially in some countries such as the US, is that a decision to form a cartel is sufficient for the firm to be filed or convicted and thus makes the firms concerned pay the legal cost immediately because cartel formation is illegal per se. The act of forming a cartel is sufficient to be proven guilty regardless of intention.

Legal costs may also be incurred when importing or when other foreign countries may exercise their judicial power against the use of export cartels. In this dissertation, the selective use of export cartels by the exporting-country’s government is emphasised. Therefore, export cartels in this dissertation mainly refer to the state-sanctioned export cartels, which may be subject to the dispute settlement framework under the GATT (Martyniszyn, 2012)⁴.

Under the WTO dispute settlement framework, in Article XI of the GATT on the general elimination of quantitative restrictions, members are prohibited from imposing or maintaining any quantitative import or export restrictions. In order for the practices to be considered as governmental measures and subject to the Article, the government has to provide sufficient incentives or disincentives for the practices to take effect, in other words, these practices have to be dependent on government intervention (Jackson, 1988). However, Article XI and other provisions in GATT contain some notable exceptions. These exceptions are mainly the special and preferential treatment provisions (SDT) discussed in Chapter 1. For example, according to Article XVIII: C and D, Article XI is not applied to the quantitative restrictions necessary for the development of a particular industry by a WTO Member in the early stages

4If export cartels were to be formed privately, the topic of extraterritoriality has to be considered. Extraterri-toriality is the competence of a state to make (prescriptive), apply (adjudicative), or enforce (enforcement) rules of conduct in respect of persons, property, or events beyond its territory. See Martyniszyn (2012) for extensive discussion

of economic development, i.e., the so-called infant industry provision (Sweeney, 2007).

These special and preferential treatments are subject to the negotiation between countries and developed countries have no obligation to provide any to developing countries under the GATT. As was discussed in Chapters 2 and 3, the unsuccessful negotiation during the Doha Round regarding the non-reciprocal use of export cartels in developing countries was also initiated under the idea of the SDT on developing countries, as in the Article XVIII as well⁵. Finally, a further investment in addition to the prior commitment is the investment which firms have to make as a fulfilment or an expansion of the ’commitment investment’ (made as a part of the proposing cost (r)). The commitment investment can be made as a proportion of the larger investment as long as it serves the purpose of making the cartel formation proposal credible. Usually, it just needs to be irreversible and reasonably substantial, such that it is not worthwhile for someone who has no intention to follow the export cartel agreement to make. Therefore, once the commitment investment has served its purpose (to make a credible proposal) and a cartel has been formed, firms may need to make a further investment. For example, suppose the prior investment was made in the form of installing new machines to expand its production capacity, additional workers will need to be hired to start the production, once a cartel agreement has been made, which is considered as a part of the execution cost (e).

Therefore, the cost of a cartel consists of two parts–the proposing cost (r) and the execution cost (e). The proposing cost is what each firm has to pay whenever it makes a decision to form an export cartel, whether a cartel is eventually formed or not. Each firm has to pay the execution cost, only when both firms have decided to form a cartel.

5A further discussion on the special and differential treatment (S&D) provisions in WTO agreements and decisions can be found in the the WTO document WT/COMTD/W/196 published in 2013.