The East German Cement Cartel: Cartel Efficiency and Policy After Economic Transformation

Abstract

In 2003 the German Antitrust Commission (GAC) proved the existence of a cartel in the German cement industry. The German cement producers involved in the case were fined $661 million* for having established quotas to extract additional rents. One of the main centers of this cartel was in East Germany, where the East German Cement Combine with its giant facilities had been sold, in the early 1990s, to four large producers by Treuhand in the process of privatizing the economy. All defendants conceded having formed a cartel only in this market. This paper challenges the GAC's argument of excess revenue in the East German market. We argue that legal evidence does not necessarily translate to economic evidence. Demand for cement is realized in geographical and, to a more limited extent, product space. Without cartels, we would expect monopolistic competition to prevail. Any transition in a market regime from a cartel to postcartel period must be traceable in the individual firm's demand function, which differs from the clients' demand function because of costs for spatial and product differentiation. Within the framework of an econometric model, we cannot identify any structural changes in demand. Most likely, imports from Poland and Czech Republic were dumped into the East German market, and some medium-sized producers were responsible for the cartel never working. The paper also shows how difficult it is to generate competition in certain industries, even in a well-established market economy such as that of West Germany. The openness of the economy—that is, transborder shipments—is decisive for competition.