Market power and cartel formation: Theory and an empirical test

Antitrust enforcement makes it difficult to test theories of cartel formati on because most attempts to form cartels are blocked or kept secret. Howeve r, federal laws allow U.S. produce growers to operate marketing cartels thr ough devices called "marketing orders." These cartels use quantity controls and quality standards to raise prices of fresh produce. Some growers have adopted marketing orders, and others have not. This paper develops and test s a positive theory of the adoption of marketing orders. The theory suggest s that growers in a region are more likely to adopt a marketing order if th e demand for fresh produce is inelastic, the growers' market share in the f resh market is large, there are barriers to entry and expansion, the fracti on of the output the growers ship to the fresh market is not too large or t oo small, growers are homogeneous, and large cooperatives exist. Probit ana lyses support these hypotheses.