The International Copper Cartel, 1935–1939: the good cartel?

Abstract

A legacy of the pre-Great Depression period was the development of new copper capacity outside the USA. In order to avoid the utilization of this excess capacity in a competitive and possibly pyrrhic way, on March 28, 1935, the International Copper Cartel was formed. While production of cartel members was limited by the use of quotas in times of lower demand, during booms, the cartel removed all quotas in order to restrict the entry of the competitive fringe into the industry. In fact, many authors have considered the latter as a return to non-cooperative conduct. An alternative view, introduced by Montero and Guzman (J Ind Econ 58(1):106–126, 2010), is that cooperation among members in booms could have been related to output-expanding strategies with the purpose of restricting entry of the competitive fringe in the industry through their own output expansion. In this paper, a theoretical model is developed in order to differentiate between cartel behavior in the presence of a competitive fringe during booms when firms are not cooperating. It shows that the price elasticity of the cartel supply should be smaller in booms than during recessions, when a non-cooperative behavior is considered in booms, while this may or may not be the case if firms continue cooperating—through an output-expanding cooperation—during booms. The price elasticity of the International Copper Cartel supply is then estimated using an econometric model, and found to be significantly larger in booms than in recessions. This supports the conclusion that members of the cartel cooperated during both booms and recessions. This finding raises the possibility that the International Copper Cartel of 1935–1939 actually could have enhanced social welfare by reducing price volatility, while also having little effect on the secular level of prices.