Illegal Cartel Overcharges in Markets with a Legal Cartel History: Bitumen Prices in South Africa

Abstract

AbstractIn recent years, South African competition authorities have initiated a number of price‐fixing cases in markets where cooperation among competitors was legal and often encouraged. These markets present economists with special difficulties when estimating cartel overcharges. Conventional approaches often rely on temporal approaches, where pricing during the cartel period is compared with prices in a competitive period. In markets with a legal cartel history, a competitive price cannot be identified in the period preceding illegal collusion. Structural change also reduces data, and hence the robustness of temporal models. Spatial approaches, where prices are compared with those in other countries, offer a better alternative. The paper studies the performance of temporal and spatial approaches in estimating overcharge in the context of a bitumen price‐fixing case. The results suggest that, while the bitumen cartel may have responded to cost and demand shocks in a similar way to how players in more competitive markets respond, it was still cushioned by a large monopoly premium: the long‐run level of South African bitumen prices are higher than in comparable competitive markets. The findings have implications for the study of transition dynamics from legal to illegal cartel regimes and for the detection of cartels.