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There is a widespread belief that investigating and sanctioning cartels reduces prices and contributes to increasing consumer welfare. The logic is simple: if a cartel is sanctioned and dismantled, the illegal conduct ceases and prices return to competitive levels. This assumption also underlies the idea of deterrence — fines must be high enough to make participation in cartels unattractive, and the end result is the restoration of competition on the market.
The problem is that this assumption does not always get confirmed in practice.
How realistic are the expectations with regard to markets “returning to normal” after sanctioning cartels? Do prices really fall? Do consumers actually see tangible benefits? In many cases, the answer seems to be: not necessarily. Or, at least, the effects are not always as visible and direct as we would expect.
Several studies conducted in different countries and in very diverse markets show that sanctioning cartels, even through severe penalties, does not always produce the effects that consumers or competition authorities expect.
In this post, I decided to review some of these studies. The purpose is not to suggest that fighting cartels is useless. On the contrary, competition enforcement produces multiple positive effects. However, understanding the real effects of the interventions of competition authorities can help us avoid exaggerated expectations and, perhaps, initiate a more serious discussion about additional mechanisms for restoring competition after dismantling cartels.
But what are the actual effects of cartels on prices?
Before turning to the studies on the effects of cartel enforcement, it is worth reiterating one important thing: the negative effects of cartels on prices are very well documented.
In 2005, American researchers John Connor and Robert Lande analysed approximately 200 studies, covering over 600 cartels, and the effects of cartels on prices.1
Their main conclusion was that the median overcharge generated by cartels was approximately 25%: 17–19% for internal cartels and 30–33% for international cartels.
Another study conducted by Oxera for the European Commission in 2009 indicated a median overcharge of approximately 18% of the price of the products affected by the cartel.2
A similar conclusion was reached by Florian Smuda in 2012, estimating that the average overcharge due to cartels on the European market is 20.7%, and the median is 18.37%. 3
Therefore, the negative effects of cartels on prices are well established. The more complicated question is–to what extent does the sanctioning of cartels succeed in eliminating these effects and restoring effective competition in the market?
Michael Sproul (1993): Prices not only do not fall, but even rise after cartel sanctions
In 1993, economist Michael Sproul analyzed 25 cases of cartels in the USA from 1973–1984.4 His conclusion was surprising: in the four years after cartels had been sanctioned, prices were, on average, about 7% higher than the level expected.
In other words, according to the author’s estimates, the authorities’ intervention did not lead to lower prices — on the contrary, the prices observed after the sanctions exceeded the level that the market might have reached in the absence of any intervention. Without going into the details of the economic methodology used, the main conclusion is that the study did not identify the classically expected effect: lower prices as a result of cartel disruption.
In his article, Sproul states that “in the great majority of cases antitrust prosecution does not lead to lower prices.” While admitting that more research is still needed in this respect, he argues that the authorities do not seriously examine these issues: “What is perhaps most surprising is that the Department of Justice has never seriously examined the question of whether antitrust prosecution does in fact accomplish its stated goal of promoting competition and reducing prices. It would not be an exaggeration to say that the government has imposed antitrust laws, vigorously prosecuted them, and steadily extended their reach and severity, without ever checking to see whether they work.”
The Air Freight Cartel: Post-Cartel Tacit Collusion
Another interesting example is the Air Freight Cartel — one of the largest international cartels ever uncovered. It was investigated by both the US Department of Justice and the European Commission. Essentially, it was a global agreement between major airlines to set additional charges, including a fuel surcharge.
In 2022, Douglas Turner published a study on the evolution of these surcharges after the cartel was dismantled.5
The study showed that the surcharges introduced during the cartel period did not disappear even after the completion of the investigations, nor did their size decrease. One of the proposed explanations was that, during the cartel period, the companies developed a particular methodology for calculating surcharges, and this methodology continued to shape market behaviour even after the formal dissolution of the cartel.
In other words, the cartel changed the way the market functioned, and certain forms of tacit coordination continued to exist even after the anticompetitive agreement ceased.
The Spanish Fuel Market: Passing on Fines to Consumers
In February 2015, the Spanish competition authority fined five of the country’s largest fuel suppliers €32.4 million for fuel price-fixing.
A few years later, in 2019, a study was published on the evolution of prices after the fines were imposed.6
The results were unexpected. Instead of falling, the prices at the stations operated by the companies involved in the cartel increased. Meanwhile, the prices set by the companies that were not part of the cartel did not increase much. In other words, the price increases were recorded mainly at the companies that were subject to the investigation.
While the increase was not very large — about 1.5 cents per liter — given the market share of the companies involved (about 60% of the market), the authors estimated that the loss suffered by consumers could have reached up to EUR 80 mln. By comparison, the fines imposed were around EUR 32 mln.
Is it all really that bad?
Although there are many examples of prices not falling after cartels being sanctioned, there are also situations where government interventions produce visible positive effects. Some studies show that prices can return to competitive levels, and the overall effects on markets can still be beneficial.
The Vitamins Cartel
In the late 1990s, an international cartel between major vitamin producers was discovered in the US and the EU. The cartel aimed to fix prices, allocate market shares, and coordinate production volumes.
In 2005, a group of researchers analyzed the evolution of prices in this market to examine what happened after the cartel was dismantled.7
The authors observed that, in many cases, prices fell after the intervention of the competition authorities. At the same time, the study showed that the evolution of prices depended very much on the market structure and on the number of competitors present in the market outside the cartel.
Where there were only two main producers (with no major competitors outside the cartel), prices remained high even after the cartel was broken up. In contrast, in markets where there were three or four significant participants, prices returned to competitive levels much more quickly.
The study therefore suggests that the formal break-up of a cartel does not automatically guarantee an immediate return to effective competition. At the same time, the existence of competitors (especially if they occupy a significant market share) who did not participate in the cartel can play a key role in reducing prices after the investigations are completed.
Mexico: The Overall Positive Effects of Competition Enforcement
In 2022, a group of World Bank experts analyzed the effects of competition law enforcement on the Mexican economy.8
The authors analyzed the evolution of a number of economic indicators — sales, wages, employment, profit margins, and productivity — in sectors that were investigated by the Mexican competition authority.
While the study did not identify direct effects on price reduction, the authors found that, after the competition authority’s interventions, the sectors subject to enforcement action experienced, on average, increases in sales and wages, as well as reductions in profit margins.
In other words, the positive effects of competition enforcement were reflected in the overall improved performance of markets and the reduction of excessive market power, rather than in a simple and immediate reduction in prices. The authors also state that sanctioning anticompetitive practices is associated with increased productivity across the industry.
Conclusions
The conclusion that emerges from these examples is that reality is more complex than slogans like: “Break up cartels and prices will fall”. In practice, things are often much more complicated.
In many cases, prices do not fall even after cartels are sanctioned. Sometimes, the coordination mechanisms created during the cartel period continue to influence the market even after the official termination of the agreement. In other situations, the highly concentrated structure of the market allows prices to remain high even without explicit contacts between companies. And sometimes, part of the costs of sanctions end up being passed on to consumers.
But this does not mean that fighting cartels is useless. On the contrary, the studies analyzed show that competition enforcement can produce important positive effects: limiting excessive market power, stimulating competition, increasing productivity, and improving the overall performance of the economy.
At the same time, the lack of rapid and visible effects on prices raises the question of whether sanctions alone are always sufficient to restore effective competition. Perhaps, in some cases, additional post-investigation mechanisms are also needed: market monitoring, analysis of post-cartel behavior, or assessing whether alleged ‘tacit coordination’ may in fact conceal the continuation of the cartel or a concerted practice.
But that is perhaps a topic for another post…
- Lande, Robert H. and Connor, John M. and Connor, John M., How High Do Cartels Raise Prices? Implications for Reform of the Antitrust Sentencing Guidelines. Tulane Law Review, Vol. 80, 2005, American Antitrust Institute Working Paper No. 01-04, Available at SSRN: https://ssrn.com/abstract=787907 ↩︎
- Quantifying antitrust damages. Towards non-binding guidance for courts – Study prepared for the European Commission; Oxera, December 2009, pag. ix, Available here: https://www.oxera.com/wp-content/uploads/2018/03/Quantifying-antitrust-damages-3.pdf ↩︎
- Smuda, F. (2012). Cartel Overcharges and the Deterrent Effect of EU Competition Law. ZEW Discussion Paper No. 12-050; Available at: https://www.zew.de/fileadmin/FTP/dp/dp12050.pdf ↩︎
- Sproul Michael, Antitrust and Prices, Journal of Political Economy, 1993, vol. 101, issue 4, 741-54 ↩︎
- Turner, Douglas, The Impact of Cartel Dissolution on Prices: Evidence from the Air Cargo Cartel (June 14, 2022). Available at SSRN: https://ssrn.com/abstract=4114672 or http://dx.doi.org/10.2139/ssrn.4114672 ↩︎
- González, Xulia, Moral, María J., Effects of antitrust prosecution on retail fuel prices, International Journal of Industrial Organization Volume 67, December 2019; Accessed at: https://oai.e-spacio.uned.es/server/api/core/bitstreams/a89d2455-adc9-4a93-b884-5ef6a467cf1c/content ↩︎
- Kovacic, William E. and Marshall, Robert C. and Marx, Leslie M. and Raiff, Matthew E., Lessons for Competition Policy from the Vitamins Cartel (September 2005). Available at SSRN: https://ssrn.com/abstract=818744 ↩︎
- Reed, Tristan; Pereira Lopez, Mariana De La Paz; Urrutia Arrieta, Ana Francisca; Iacovone, Leonardo. Cartels, Antitrust Enforcement, and Industry Performance: Evidence from Mexico (English). Policy Research working paper; no. WPS 10269; Impact Evaluation series; Paper is funded by the Knowledge for Change Program (KCP) Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/099455012222225128 ↩︎