N. Schmitt et R. Weder, SUNK COSTS AND CARTEL FORMATION - THEORY AND APPLICATION TO THE DYESTUFF INDUSTRY, Journal of economic behavior & organization, 36(2), 1998, pp. 197-220
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.