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Cartelization, Cartel Breakdown, and Price Behavior: Evidence from the German Cement Industry

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Abstract

We use a unique dataset of about 340,000 market transactions from 36 smaller and larger customers of German cement producers to study the price behavior before and after the breakdown of a German cement cartel. We find that, first, while the cartel agreement was active, cartel members set higher list prices than non-cartel members; however, larger rebates granted by the cartel members led to similar transaction prices. Second, after the cartel breakdown, both cartel- and non-cartel members reduced transaction prices to a far larger extent than list prices. We build on these results and discuss implications for competition policy.

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Notes

  1. There is also a large empirical literature investigating various structural factors which affect the likelihood of collusion. Kaplow (2011) presents an overview of this strand of research.

  2. European Commission (1994), Commission imposes fines on a cement producers' cartel, Press release on 30 November 1994, available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/94/1108&format= HTML&aged = 1&language = EN&guiLanguage = en (last accessed on 16 August 2015).

  3. See European Commission decision of Cembureau.

  4. Decision of the Higher Regional Court, Düsseldorf, VI-2a Kart 2–6/08 OWi, 26 June 2009.

  5. If tacit collusion would have allowed the realization of the same profit levels than under a system of explicit collusion, it would had been irrational to switch back to the hardcore cartel given the risk of heavy fines.

  6. For further general information on the German cement market and cartel, see Hüschelrath and Veith (2014) and Harrington et al. (2015).

  7. Decision by the Higher Regional Court (2009), VI-Kart 1–9/07, para. 37.

  8. Decision by the Higher Regional Court (2009), VI-Kart 1–9/07, para. 9 f.

  9. In sum, CDC data (on average) covers a bit less than 10 % of cement demand in Germany.

  10. We focus on CEM I cement as, first, substitution is hardly possible across different cement types and, second, CEM I makes up the by far largest share (of about 73 %) of total cement demand in the dataset.

  11. The public price index for cement is reported on a monthly basis by the German Federal Statistical Office (FSO). Major German cement producers are provided with a standardized internet-based questionnaire and asked to provide overview information (including prices, quantities and qualities) on one representative CEM I sale activity close to the date of data collection (which is the 15th of a month). As this data collection approach is highly standardized and used across a larger number of cartel and non-cartel members, it offers possibilities for strategic behavior, e.g., with respect to the choice of the invoice handed over by the addressed firms to the FSO. Furthermore, as public data collection demands a continuous approach by each interviewed company, changes in the list-transaction price difference are not reflected in the index.

  12. We use the 12-month moving-average approach as CDC data is much more volatile than public index data.

  13. 84.4 % of the roughly 250,000 market transactions included in the analysis relate to deliveries of quantities between 27 t and 30 t.

  14. The price difference is expressed in percent to ease an interpretation of the estimation coefficients.

  15. Instead of list prices, transaction prices could be used. However, combining both list and transaction prices as explanatory variables is not feasible for collinearity reasons.

  16. In the course of our analysis we also tested the impact of individual annual demand as it may affect both list and transaction prices. However, we were unable to find indications of such a relationship in the dataset used for our analysis.

  17. The interaction term between cartel member and cartel period takes the value of 1 for transactions of cartel members in the cartel period and 0 otherwise.

  18. Therefore, all provider-specific variables cancel out in Table 3.

  19. In case the former cartel members plan to punish the deviating cartel member with substantial price reductions, they might also have incentives to implement this through a reduction in transaction prices – while keeping list prices high – in order to hide their (possibly illegal) actions from the competition authority.

  20. In principle, it is also possible that non-cartel members have suffered due to the cartel agreement (e.g., if the cartel successfully imposed exclusionary practices). See Friederiszick and Röller (2010) for a general discussion and Scott Morton (1997) for empirical evidence.

  21. The position of the cartel outsiders improves as they can profit from the cartel agreement (by charging supra-competitive prices) while it is operating and can keep these (excessive) profits after its breakdown (as long as the fines and damages have to be covered by the cartel members).

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Authors and Affiliations

  1. Competition and Regulation Research Group, ZEW Centre for European Economic Research, P.O. Box 10 34 43, D-68034, Mannheim, Germany

    Kai Hüschelrath

  2. University of Mannheim, L7, 3-5, 68131, Mannheim, Germany

    Kai Hüschelrath

  3. University of Applied Sciences, Schadenweilerhof, 72108, Rottenburg, Germany

    Tobias Veith

Authors
  1. Kai Hüschelrath
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  2. Tobias Veith
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Correspondence to Kai Hüschelrath.

Additional information

We are indebted to an anonymous reviewer and Kenneth Corts, Stephen Davies, Robert Feinberg, David Haddock, Anton-Giulio Manganelli, Stephen Martin, Wallace Mullin, Jakob Rüggeberg, Allen Sanderson, Maarten Pieter Schinkel, David Ulph and Lawrence White for helpful comments and suggestions on earlier versions of the article. The usual disclaimer applies. An earlier version of the article circulated under the title ‘The Impact of Cartelization on Pricing Dynamics – Evidence from the German Cement Industry’.

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Hüschelrath, K., Veith, T. Cartelization, Cartel Breakdown, and Price Behavior: Evidence from the German Cement Industry. J Ind Compet Trade 16, 81–100 (2016). https://doi.org/10.1007/s10842-015-0204-x

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