Exploring the Relationship Between Business Cycles and Cartels

Open Access
Pegher, Jennifer
Area of Honors:
Bachelor of Science
Document Type:
Thesis Supervisors:
  • Robert Clifford Marshall, Thesis Supervisor
  • David Shapiro, Honors Advisor
  • cartels
  • economics
  • business cycles
  • collusion
  • Antitrust
The goal of this paper is to understand the relationship between cartel formation and the business cycle, looking to predict the profitability of collusion with respect to changes in macroeconomic activity and demand factors. After an overview of the principles of cartel behavior and a review of previous research and historical cases, I begin with an observational analysis of European Commission cartel decisions from 1984-2008. I map the start dates to macroeconomic data, but the evidence does not substantiate any one predicted pattern or provide a causal explanation. I then move into a theoretical analysis, developing models to determine the profit stream from colluding versus choosing to deviate with respect to a dynamic level of demand. The model predicts that firms gain the most profit by deviating at the beginning of an economic expansion. By assuming that deviation decisions inversely mirror collusion decisions, the model implies an increased expectation for firms to decide to collude at the onset of a contraction. The final section is a practical analysis of US Steel, a firm currently under investigation for alleged collusive behavior. A margin analysis of the firm’s financials supports and estimates the magnitude of the increased profits from participation in a cartel. Two regression models test the correlation between profit streams and overall Gross Domestic Product and product-specific demand. The results imply a positive relationship, corroborating the game-theoretical analysis. Taken as a whole, the three analyses suggest that an understanding of the business cycle and the current state of the economy can be used to relieve some of the uncertainty regarding cartel behavior, especially for prosecutors during cartel investigations.