Cartel Arrangements Research Articles

The Australian Football League's Recent Progress: A Study In Cartel Conduct And Monopoly Power

Over the last twenty-five years, the Australian Football League (AFL), and its predecessor, the Victorian Football League (VFL) has become a central feature of the Australian sporting landscape by creating and managing a national competition. However, in the 1980s it was a Melbourne-based league facing serious structural and financial problems as player costs exploded. At the same time, a number of clubs were unable to trade profitably, and the richer clubs were toying with the idea of forming a break-away competition. The transformation of the AFL from a parochial suburban competition to heavily commercialised national league is analysed through the prism of cartel structure and conduct. It is concluded that first, even in its previous guise as the VFL, it adopted many cartel-like features, including controls over player transfers, fixed admission prices, and gate equalisation policies. Second, the establishment of a governing Commission in 1984 strengthened its monopoly power, and enabled it to set a singular vision for the game's development. This vision, in turn, enabled the AFL to create a national participation program that became the envy of every other sport association in Australia. Third, in achieving this outcome, the AFL tightened its authority over its member teams, administrators, coaches and players. Finally, within this cartel arrangement, member clubs surrendered their autonomy in return for an assurance that they would share the benefits from the AFL's growth and national expansion. In short, the AFL has strategically exploited its cartel features and monopoly power to become Australia's dominant sports league.

A Test of Competition in Brazilian Banking

This paper implements an empirical test of market power for Brazilian banking based on Bresnahan (1982) and Lau (1982). A dynamic version of the test is applied. The results show that the banking industry in Brazil is highly competitive, although the perfect competition hypothesis is rejected. The hypothesis that Brazilian banks behave like a cartel arrangement is also rejected.

Why is the international accounting rate system in terminal decline, and what might be the consequences?

This paper looks at the incentives and opportunities existing in the provision of international telephony and argues that the present accounting rate system is unsustainable. The paper also provides a framework within which current or proposed regulations governing trade in international telecommunications services can be analysed. The enormous profits available in this sector, together with developments in digital and fibre optic technology, are resulting in a breakdown of the Implicit cartel arrangements which have largely prevented operators from on-selling services (a type of arbitrage). However, liberalization by only part of the world will give rise to a potentially serious new problem—monopoly opportunism by operators in non-liberalized countries. The paper analyses this and other potential problems that can be expected to arise in the future.

Cartels and the Incentive to Cheat: Evidence from the Classroom

The axiom of human nature alluded to by Stigler has led the demise of most cartel arrangements. It is well known that each cartel member has a tremendous incentive to cheat on production limits to maximize profits. However, if each member exceeds production limits, the price must fall and the cartel collapses. Much of what economists teach about cartels can be illustrated with a simple example familiar to all students-the curve on their midterm exam score. The purpose of this article is to illustrate several points about cartel behavior with the example of the curve on an exam.

From Manchester to Massachusetts via Mulhouse: The Transatlantic Voyage of Aniline Black

From Manchester to Massachusetts via Mulhouse: The Transatlantic Voyage of Aniline Black ANTHONY S. TRAVIS During the 18th and 19th centuries the introduction of new technologies into countries anxious to industrialize or retain their competitiveness in existing markets was the principal feature of modernization in Europe and North America, especially in the textile industry.1 The routes of this technology transfer were varied. They involved industrial espionage, legal and illegal exports of machinery and designs, patent agreements (and infringements), and cartel arrangements. Sometimes transfer occurred because a particular invention was not appreciated, or readily applicable, in the country of its origins. In the case of the dyestuff (or pigment) known as “aniline black,” many of these elements are present. Its discovery in Lanca­ shire, Great Britain, was a consequence of the rise of a new hightechnology industry, the production of synthetic dyestuffs. However, its widespread application was delayed for over a decade because the process was much better suited to the traditional methods of printing with hand blocks than to the new high-speed steam-driven roller printing machines to be found in Britain’s northwest and, in increas­ ing numbers, in the United States (see fig. 1). The result was that Dr. Travis is deputy director of the Sidney M. Edelstein Center for the History and Philosophy of Science, Technology and Medicine at the Hebrew University ofJerusalem, where he is senior researcher in the history of technology. He wishes to acknowledge the assistance of Jean Ayton, archivist, and Richard Bond, local studies officer, both of Manchester Central Library; Kenneth P. Magee, historical archivist, Zeneca Specialties, Manchester; Moshe Ron, former curator, Sidney M. Edelstein Library, the Hebrew Uni­ versity of Jerusalem; and Elisabeth Vaupel, curator of the Chemistry Section, Deutsches Museum, Munich. The Technology and Culture referees provided much useful criticism. 'Nathan Rosenberg first tackled the issue of technology transfer in “Economic Development and Transfer of Technology: Some Historical Perspectives,” Technology and Culture 11 (October 1970): 551-75. For the impact on the early U.S. textile industry, see David J. Jeremy, Transatlantic Industrial Revolution: The Diffusion of Textile Technologies between Britain and America, 1790-1830 (Cambridge, Mass., 1981). A useful survey of the 19th century will be found in David J. Jeremy, ed., International Technology Transfer (Aldershot, Hampshire, 1990).© 1994 by the Society for the History of Technology. All rights reserved. 0040-165X/94/3501-0001$01.00 70 The Transatlantic Voyage ofAniline Black 71 Fig. 1.—Mass production of printed cotton goods was based on the adoption of power-driven machinery in the early 1800s. Mechanized calico (cotton) printing was quickly established in Britain and the United States, but less rapidly in many parts of mainland Europe, where block printing, which was associated with better-quality goods, remained prevalent until the 1870s. This determined where the first aniline black processes could be introduced with moderate success. (George S. White, Memoir ofSamuel Slater, the Father ofAmerican Manufactures. Connected with a History ofthe Rise and Progress of the Cotton Manufacture in England and America. With Remarks on the Moral Influence ofManufactories in the United States [Philadelphia, 1836], p. 395, detail.) aniline black first became popular among printers on mainland Europe, where mechanization was less rapid, from as early as 1862— 63. These printers were not slow in appreciating, and profiting from, the beneficial qualities of the brilliant black, that unlike the other coal-tar colors was far more suited to cellulosic material (cotton) than to animal fibers (wool and silk). The earliest true synthetic dyestuffs were prepared by oxidizing the amino compound aniline, made in two steps from benzene that was extracted from coal tar (since the benzene was contaminated with other hydrocarbons, additional amino compounds, especially toluidine, 72 Anthony S. Travis were also present). William Perkin discovered the first aniline colo­ rant, later known as “mauve,” in 1856. It was formed in low yield, and the main product was an intractable black precipitate. Three years later a brilliant aniline red, known as “fuchsine” in France and “Magenta” in Britain, appeared in the streets of Paris and London and was soon transformed into no less fashionable blues and violets. The violets, obtained by August Wilhelm Hofmann in his laboratory at...

Lighting the Path to Profit: GE's Control of the Electric Lamp Industry, 1892–1941

Founded in 1892, General Electric set out to dominate the American electrical industry. This article is an explanation of how the company accomplished this goal in the highly profitable electric lamp (“light bulb”) market. GE's techniques included technology leadership through in-house development and the purchase of patent rights, discriminatory agreements with suppliers based on market power, and cartel arrangements of various sorts, both foreign and domestic. The article shows how one company was able to use financial and market power, combined with early control of a rapidly developing technology, to gain and then hold a major American market for half a century.

Protectionist policies as the regulation of international industry

The political feasibility of protectionist policies that regulate international industry derives from the absence of overt collusion among domestic import-competing producers. The regulation of international industry cannot be explicit since governments would thereby be perceived to be approving (or instigating) international collusion. Hence, voluntary export restraints have been popularly presented with a focus on the difficulties confronted by domestic import-competing producers and a de-emphasis on the mutual gains to domestic and foreign producers from monitoring by a foreign government of a restrictive export cartel arrangement. Similarly, trigger-price mechanisms have popularly been explained in terms of the need for anti-dumping measures to preserve ‘fair’ competition. Likewise, the involuntary export tax derived in the first instance from an administratively validated (but, as demonstrated by Kalt's econometric analysis, contentious) complaint of ‘unfair’ foreign competition. Voluntary export restraints, trigger-price mechanisms, and involuntary export taxes are however protectionist devices, the beneficiaries of which can transcend national jurisdictions, and which have in common the characteristic that the gains to domestic industry interests derive from the regulation of foreign competitors.

A Legal Campaign: Advertising Freedom and Legal Controls

It is undoubtedly the case that advertising plays a significant part in modern economic life in most societies and many view it as an essential part of the operation of a free market system. Yet it is also the case that our knowledge of how exactly it works and whether the vast amounts spent on it are justified is still uncertain. Lord Leverhulme, the founder of Lever Brothers, is credited with the famous aphorism — ‘one half of advertising does not work but nobody knows which half’ and that perhaps sums up the situation very well. One thing that is generally accepted is that some protection must be provided both to consumers and trade competitors from false or misleading advertising which can lead to market distortions and economic loss to purchasers. Increasingly controversial, however, is the scope and extent of legal and voluntary controls on advertising. In the advertising industry fears are rising about the volume of both national and EEC proposals to restrict or limit advertising and as we move from the '80s, a decade of conspicuous consumption in which advertising flourished, to the caring '90s where environmental issues are to the fore, the advertising industry faces major challenges. Advertising as a whole is facing severe economic and legal challenges after the massive expansion of the 1980's — it is estimated that there was a 4% fall in real terms in UK advertising expenditure in the first quarter of 1990 and an estimated 5% fall in the second quarter. Clients are becoming more demanding and the cosy cartel arrangement whereby advertising agencies made a 15% standard commission on a client's expenditure has gone — commissions are down to 12%‐13% or being replaced by fixed fees. It has been estimated by the Advertising Association that proposed legal restrictions could lead to a loss of £1 bn in revenue for the industry. Multi‐farious pressure groups are campaigning against drink advertising, cigarette advertising and sexism in adverts. The advertising industry's concerns are reflected in a recent report by the Advertising Association — ‘A Freedom Under Threat — Advertising in the EC’. The report indicates a number of areas where legislative controls have been introduced or are proposed to be introduced over the next few years and expresses the fear that controls may be going too far in limiting freedom of ‘commercial speech’. Martin Boase, chairman of the Advertising Association writes in his introduction to the report:

The international telecommunications regime: the political roots of regimes for high technology

The international telecommunications regime provided a multilateral framework that reinforced domestic monopolies and bilateral cartel arrangements in the global market. The regime's epistemic community believed that telecommunications services and equipment were best supplied by national monopolies and that international communications by telephone, telegram, and telex should be jointly provided by monopolists. Strong domestic political incentives reinforced this cognitive framework. When technological innovation triggered a successful political attack on the domestic regulation of telecommunications in a few key countries, the stage was set for a global challenge to the intellectual and political foundations of the regime. Two paths to reform have emerged. Their significance can be assessed by looking at changes in the distribution of benefits from the regime, changes in the manner in which governments delegate power to the regime, and shifts in the epistemic community associated with the regime.

Japan's Economic Impact on the United States

Japan has become increasingly competitive rather than complementary in relations with the United States. Its impact on the U.S. economy stems from structural and policy sources. An important structural source is the vertical anatomy of Japan's foreign trade, which in turn is largely determined by its unbalanced physical endowment. On the policy plane, Japan has pursued a supply-side strategy that is specifically linked to the doctrine of dynamic comparative advantage. Its objective is to achieve international competitive power in U.S. markets, among others. Japan's supply-side approach is thus a precursor of that of the United States. The U.S. version, however, differs from the Japanese in having domestic rather than international priorities. The U.S. response to its persistent trade deficits with Japan has tended to be bilateral and protectionist. The various “voluntary” export restraints Japan has adopted under U.S. pressure have dark implications because of the cartel arrangements by which they are enforced. These arrangements revive and nourish Japan's cartel tradition, similar to that thriving in major European Economic Community (EEC) nations. In the event of serious economic difficulties, Japan and the EEC would be strongly inclined to internationalize and combine their cartels. This would have adverse repercussions on the domestic and external sectors of the U.S. economy.

AGRICULTURAL SELLING CARTELS: RELATIVE CO‐OPERATOR AND NON‐COOPERATOR GAINS*

An analytical framework is developed for assessing the relative gains accruing to co‐operators and non co‐operators in a cartel arrangement involving production quotas. Key parameters determining the relative gains are identified. The values of these parameters in the context of Australian agriculture could result in greater gains for non co‐operators than for co‐operators. Suggestions are offered on some types of information that should be sought in feasibility studies before cartels are established.

THE DETERMINATE SOLUTION FOR BILATERAL MONOPOLY AND THE OPERATION OF CARTELS

In a recent paper in this Journal, Z.A. Spindler has proposed a determinate solution for bilateral monopoly, taking issue with the conclusion of many microeconomics textbooks that both the equilibrium price and the equilibrium quantity are theoretically indeterminate. His analysis relates to what may be termed ‘pure’ bilateral monopoly — in which there is literally only one seller and only one buyer. In practice, however, bilateral monopoly situations frequently are characterised by the existence of some sort of cartel arrangement on one side or the other, if not on both. The purpose of this paper is to consider the circumstances under which Spindler's determinate solution applies to these more general formsof bilateral monopoly.

Insurance Pricing and Its Role in Relation to Economic Theory and Market Management: Comment

In a recent issue of this Journal, Dr. Robert W. Strain explored the problems of pricing as encountered by property-liability insurance companies.' According to his analysis, conventional price theory does not provide a framework which can be used to explain tlhe pricing process. Specifically, Dr. Strain takes the position that a new economic theory must be developed to explain the behavior of prices in the property-liability insurance industry. To support this position, he asserts that the assumptions of general price theory are inapplicable and do not characterize the property-liability insurance industry; that is, pricing in an industry subjected to government regulation, reverse competition, and distorted behavior of demand elasticity theories is not amenable to the case of pure/perfect competition. The purpose of this note is twofold: (1) to suggest that Dr. Strain is correct in his allegation that general price theory does not explain pricing in the propertyliability insurance industry; and (2) to submit that pricing in the property-liability insurance industry is explained by a special case of monopolistic price theory -the cartel arrangement. The cartel portion of the theory of monopolistic com-

Public Policy and Monopoly: A Dilemma in Remedial Action

To those who have followed the efforts of the federal government to promote the welfare by directing economic activity during the past decade and a half, the need for a cohesive, well-defined policy has become increasingly evident. In perhaps no single area of activity has policy been so seemingly incongruous as in the field of monopoly. On the one hand, to obtain a more economical allocation of resources, the Antitrust Division of the Department of Justice condemns industrial structures which give rise to price and output patterns that do not approximate those which would exist under moderately competitive conditions. On the other, to effect a more equitable distribution of income and greater economic stability, Congress has, in effect, created agricultural cartels through a price support and production control program and the executive, judicial and legislative branches of our government have deliberately fostered and created public interest monopolies and strong labor unions. Moreover, the government's encouragement of collective action among industrialists under NRA evidenced a belief that need not always be inimical to the welfare. Hence, one might justifiably conclude that it is the occupational or temporal incidence of and not per se that is bad, and might well ask whether over-all policy toward is to vary with respect to particular markets and various phases of the business cycle, or whether the government has in mind some optimum coefficient of monopoly toward which all economic markets are to be directed. These incongruities in the political economy are not difficult to explain. Governments, both state and national, respond to unequal political pressures with varying degrees of alacrity. They have fostered cartel arrangements and estabsished controls designed to aid those who are politically strong collectively but who individually are economically weak, and have sought to weaken those who are economically powerful but whose political influence (voting power) is weak. Moreover, from the standpoint of law, regulatory and antitrust cases do not present the courts with a single problem. In one, the court passes upon the constitutional authority of governments to regulate an industry; in the other, it decides whether or not a federal statute has been violated. One might even argue defensibly that the courts have interpreted the legislative intent in both a political and legal sense with a certain consistency, yet, the inconsistency with which the government has approached the problem in its economic sense is inescapable. Superficially, the evidence indicates that our policy has been to eliminate extreme forms of both and competition wherever they abide or whatever the circumstances that give rise to them. Actually, since 1930 policy toward seems to have been inextricably submerged in the tri-

International Trade Practices Under the ITO Charter

A FUNDAMENTAL objective of the foreign economic policy of the United States is the establishment by international agreement of common rules of fair dealing which will secure the maximum benefits from international trade for all nations. The particular rules and standards of international trade which we in this country would like to see made universal are, with a few notable exceptions, those which are consistent with the principles of free international trade carried on by the unregimented activities of private enterprise. Specifically we would like to outlaw by international agreement all exchange restrictions on current international transactions, all export subsidies and import quota and licensing arrangements (except those considered necessary for the Department of Agriculture's support price program), all restrictive international cartel arrangements, all tariff preferences (except our own preferences with respect to Cuba) and all state trading activities.