Summary of JOIE article (15 November 2024) by W. Benedikt Schmal, Economic Theory Group, Ilmenau University of Technology, Germany. The full article is available on the JOIE website.
Corporate cartels are known for their capacity to manipulate markets while avoiding legal scrutiny, presenting themselves as fascinating examples of organisational innovation in illegal domains. This paper extends the concept of polycentric governance—traditionally applied in public administration—to understand how cartels sustain themselves. By dissecting their internal governance structures, the paper challenges conventional economic theories on cartels and emphasises the role of their internal governance structures in analysing their persistence and breakdown.
Corporate cartels are shadow institutions, thriving on collusion to inflate profits while harming consumer welfare. Industrial economics often simplifies cartels as entities solely optimising profits, ignoring their nuanced governance mechanisms. This work fills the void by applying the concept of polycentricity, derived from Ostrom’s studies of decentralised governance. The paper’s central hypothesis is that cartels succeed in part because of polycentric structures—multiple overlapping decision centers that balance autonomy and coordination.
The paper provides empirical evidence for this framework using data from 191 cartels disclosed by the OECD between 2012 and 2018. The paper argues that polycentric governance may explain why larger cartels are surprisingly stable and less severely punished, even under legal scrutiny.
Polycentricity in Cartels: A Theoretical Framework
Polycentric governance, as articulated by Ostrom, consists of three interrelated dimensions: multiplicity of decision centers, institutional frameworks of overlapping rules, and spontaneous order. These can be adopted to explain how cartels operate:
- Multiplicity of Decision Centers: Cartels consist of multiple firms acting as independent decision centers. These firms must align their actions to sustain collusion while maintaining enough autonomy to prevent hierarchical dominance. For example, decision-making in cartels often cascades through various levels, from top executives to regional managers. This decentralization ensures resilience, as each participant’s incentive to comply outweighs the temptation to defect.
- Institutional Framework: In cartels, rules emerge informally through negotiations and are “enforced” internally via mutual trust and self-interest. Unlike legally binding contracts, cartel agreements rely on self-regulation, with members incentivized to adhere to collusion due to the fear of exposure or retaliation. Schmal highlights how these frameworks create overlapping systems of authority, blending formal business practices with illicit collusion strategies.
- Spontaneous Order: Cartels evolve dynamically, incorporating or excluding members as market conditions shift. Schmal describes how cartels navigate competitive pressures, ensuring that entrants either integrate into the collusion or face exclusion. This adaptability contributes to their longevity, often in ways that defy traditional economic predictions.
Empirical Insights: Stability, Size, and Sanctions
The empirical analysis of the paper yields three surprising findings that align with the polycentric governance framework:
- Stability Despite Size: Traditional game theory posits that larger cartels are inherently unstable due to increased incentives for individual members to defect. However, the OECD data do not reveal any significant correlation between the number of cartel members and its duration. This suggests that polycentric governance—through dispersed authority and mutual interdependencies—offsets the destabilizing effects of size.
- Concave Sanctions: Penalties imposed on cartels increase with size but at a diminishing rate. This can be attributed to the complexities of assigning culpability within larger, decentralised cartels. By distributing decision-making across multiple layers, larger cartels create ambiguity around accountability, reducing the legal exposure of individual firms.
- Third-Party Involvement: Many large cartels engage trade associations or consulting firms to coordinate activities. While these entities can enhance communication and monitoring, they may also centralize decision-making, introducing monocentric elements that weaken the cartel’s resilience. The paper’s findings suggest that third-party involvement neither significantly stabilizes nor destabilizes cartels but raises intriguing questions about its role.
Implications for Antitrust Policy and Theory
By framing cartels as polycentric systems, it challenges the simplistic view of cartels as fragile alliances prone to collapse under pressure. Instead, cartels emerge as sophisticated, adaptive organizations capable of balancing autonomy and coordination.
For policymakers, the findings underscore the need for more nuanced strategies to dismantle cartels. For example, leniency programs—where cartel members disclose collusion in exchange for reduced penalties—might inadvertently strengthen cartel governance by incentivising mutual trust. Additionally, the concave relationship between size and sanctions suggests that enforcement a1gencies need to develop new tools for holding larger cartels accountable.
Conclusion: Rethinking Collusion Through Governance
The paper “Polycentric Governance in Collusive Agreements” reframes the study of cartels, offering a compelling narrative that marries theoretical innovation with empirical rigour. By unveiling the hidden governance structures that sustain collusive agreements, the paper provides a fresh lens through which to understand these elusive organizations.
Such cartels are not just profit-maximizing entities but intricate systems of cooperation operating in the shadows of legality. Understanding their governance is not just an academic exercise – it is a critical step toward crafting effective policies to curtail their harmful effects on markets and society. The paper is a pioneering contribution to this endeavour, and it hopes to inspire further research into the complex interplay of governance and collusion.