SUNK COSTS AND CARTEL FORMATION - THEORY AND APPLICATION TO THE DYESTUFF INDUSTRY

We first develop a simple model of entry showing that cartels are more likely to emerge during periods of downturns and in industries with s ignificant sunk costs. Cartel formation is also accompanied by a decli ne in profits. We then use the framework to investigate the emergence of the Swiss dyestuff export cartel during the inter-war period and fi nd empirical evidence that supports the main predictions of the model. The analysis indicates that sunk costs and entry may be important det erminants of cartel formation and are complementary to the traditional cartel stability conditions. (C) 1998 Elsevier Science B.V. All right s reserved.