Impacts of Cartels in Low-Income Countries

The research team constructs a database on cartels in developing countries to carry out a quantitative assessment of the economic effects of cartels on growth, which will inform regulators on the potential for competition law enforcement to contribute to economic development. 

Detecting cartels is a key issue for anti-trust authorities in developed countries, since cartels can cause welfare losses for consumers and purchasers of productive inputs. In developing countries cartels may be even more harmful, because the higher prices they generate can drastically affect the real income of the poor. Whether developing countries should devote more resources to enforcing competition law is, however, less clear. Implementation does, of course, require significant resources, which might be more productively spent for other purposes. The issue then is the impact of cartels on growth and welfare in developing countries. This research project aims to carry out a quantitative assessment of economic effects of cartels on growth in developing countries. It will also provide the information necessary to assess the potential for competition law enforcement to contribute to economic development.

During the first phase of the research the team constructed a database on hardcore cartels in selected developing countries. The researchers asked competition authorities in these countries to provide the basic micro and macro data necessary for to estimate cartel impact. Although these countries do not include many low income countries, the results will nevertheless be applicable to them and useful to their policymakers. For each country, the basic data set includes a list of major hardcore cartels for the period of 1995 to 2005, and for each cartel, data on prices and market shares of the colluding companies at least for one period of the cartel’s existence.

In addition, the research team has access to a unique database on cartels, which complements the data collected through the survey. This data will be used during the second phase to estimate the economic impact of each of the cartels. The researchers will first calibrate the parameters of the cartelized market using a model of an oligopoly with differentiated products market where firms compete in prices. Estimates of the parameters for market supply and demand will allow them to simulate the hypothetical (counterfactual) competitive market conditions and compare it to the existing cartel. This will yield estimates of the welfare losses due to the higher prices and the shifts in sectoral production as a result of output restrictions. Summing across the cartels in a given country will give us an estimate of welfare losses relative to GDP.