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Cartel Theory and Cartel Practice: The Case of the International Aluminum Cartels, 1901–1940

Published online by Cambridge University Press:  15 September 2014

Espen Storli
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Abstract

The study of cartels is important to economists as well as business historians, but, on the whole, there has been little cross cultivation between the two academic fields. This article examines cartel theory developed by economists in the context of the historical case of international aluminum cartels in existence before 1940. By analyzing three basic theoretical questions—when cartels appear, when they break down, and when they are successful—in light of the empirical evidence of the aluminum industry, the article argues that economics and history, although they have very different approaches, can profit from using each other's methods when studying cartels.

Type
Research Article
Information
Business History Review , Volume 88 , Issue 3 , Autumn 2014 , pp. 445 - 467
Copyright
Copyright © The President and Fellows of Harvard College 2014 

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References

1 The Informant!, released in 2009 and directed by Steven Soderbergh, starred Matt Damon as a cartel conspirator turned FBI informant.

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7 Influential contributions can be found in Levenstein, Margaret C. and Salant, Stephen W., eds., Cartels, two volumes of the International Library of Critical Writings in Economics (Cheltenham, 2007)Google Scholar.

8 For instance, there have been sessions dedicated to cartel research at all of the European Business History Association's annual conferences since at least 2006. At the 2011 conference in Athens there were two dedicated cartel sessions.

9 Margaret C. Levenstein and Peter Z. Grossman are exemplary scholars who have trained as economists, but bridged the gap between history and economy by employing archival sources and economic models. See, for instance, Levenstein, 's work on the bromine cartel, “Do Price Wars Facilitate Collusion? A Study of the Bromine Cartel before World War I,” Explorations in Economic History 33, no. 1 (1996): 107–37CrossRefGoogle Scholar; and Grossman, 's “The Dynamics of a Stable Cartel: The Railroad Express, 1851–1913,” Economic Inquiry 34, no. 2 (1996): 220–36Google Scholar.

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11 A number of works have narrated the history of international aluminum cartels; the most influential have been Stocking, George W. and Watkins, Myron W., Cartels in Action: Case Studies in International Business Diplomacy (New York, 1946)Google Scholar; and Marlio, Louis, The Aluminum Cartel (Washington, D.C., 1947)Google Scholar. Stocking and Watkins take a clear polemical stance against cartels, but a number of factual errors blemish the account. As a response to Stocking and Watkins, Marlio describes in detail how the cartels functioned. However, despite having first-hand information about the cartel as a former Pechiney director and chairman of the aluminum cartels from 1926 to 1939, Marlio leaves out a number of issues. This account is mainly based on the latest analysis of the international aluminum industry presented in Espen Storli, Out of Norway Falls Aluminium: The Norwegian Aluminium Industry in the International Economy, 1908–1940 (Ph.D. diss., Norwegian University of Science and Technology, Trondheim, 2010). The thesis is based on access to a wide range of original sources, and in important aspects it gives new interpretations of the basic narrative of the aluminum cartels.

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14 Alcoa (Aluminum Company of America) was called Pittsburgh Reduction Company until 1909; Pechiney was originally called Compagnie des Produits Chimiques d'Alais et de la Camargue, but it was popularly known as Pechiney, a fact the company acknowledged in 1950 when it officially changed its name to Pechiney, Compagnie des Produits Chimiques et Electrométallurgique, Paris.

15 “A very intensive cartelization.” Karl Erich Born includes the original cartel agreement in Internationale Kartellierung einer neuen Industrie: Die Aluminium-Association, 1901–1915 (Cologne, 1994), 81–90Google Scholar. In addition, Born had access to the correspondence archive of AIAG's president at the time.

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26 Born, Internationale Kartellierung einer neuen Industrie, 32–35.

27 I discuss the different attempts at reaching an agreement in Out of Norway Falls Aluminium, 39–41.

28 Born, Internationale Kartellierung einer neuen Industrie, 22.

29 Symeonidis, “In Which Industries Is Collusion More Likely?” 46.

30 A consolidation process reduced the number of French producers from seven to two prior to the establishment of the 1912 cartel; see Hachez-Leroy, Florence, L'Aluminium français: L'invention d'un marché, 1911–1983 (Paris, 1999), 41–48Google Scholar.

31 Leslie, Christopher R., “Trust, Distrust, and Antitrust,” Texas Law Review 82, no. 3 (2004): 542Google Scholar. The original quote is: “Through repeated plays, players can learn to trust each other. Trust is not static; it is often evolving. Historical and economic research shows that ‘trust changes over time—developing, building, declining, and even resurfacing in long-standing relationships.’” See also Leslie's discussion of sequential plays on page 522.

32 Levenstein and Suslow, “What Determines Cartel Success?” 69.

33 The three most important studies that deal with the importance of cartel learning for the duration of new cartels all have different conclusions. Valerie Suslow finds that the probability of cartel failure fell with experience and was unrelated to tenure; Jaime Marquez found no direct effect of experience on cartel lifespan. Andrew Dick concluded that repeat cartels tend to break up sooner than first-time cartels, and he rejects the hypothesis that cartels become more stable with experience. See Valerie Y. Suslow, “Stability in International Cartels: An Empirical Survey,” Hoover Institution Working Paper E–88–7, Stanford University, Stanford, Calif., 1988; Marquez, Jaime, “Life Expectancy of International Cartels: An Empirical Analysis,” Review of Industrial Organization 9, no. 3 (1994): 331–41Google Scholar; Andrew Dick, “Information, Enforcement Costs and Cartel Stability: An Empirical Investigation,” working paper 698, Department of Economics, University of California, Los Angeles, 1993.

34 Stigler, “A Theory of Oligopoly,” 46–47.

35 Slade, Margaret E., “Strategic Pricing Models and Interpretations of Price-War Data,” in Cartels, ed. Levenstein, and Salant, , vol. 2, 519–20Google Scholar. Originally published in European Economic Review 34, no. 2 (1990): 534–35Google Scholar.

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37 Levenstein and Suslow, “Studies of Cartel Stability,” 38. In their joint article from 2006, Levenstein and Suslow provide a similar list of causes for cartel breakdown; the categories used here are a bit different, but still rather overlapping: cheating and disagreement, external shock, entry and substitution, technological change, and antitrust indictment. See Levenstein and Suslow, “What Determines Cartel Success?” 76.

38 Storli, Out of Norway Falls Aluminium, 77.

39 Ibid., 52–53.

40 Haltiwanger, John and Harrington, Joseph E. Jr., “The Impact of Cyclical Demand Movements on Collusive Behavior,” RAND Journal of Economics 22, no. 1 (1991): 102Google Scholar.

41 Storli, Out of Norway Falls Aluminium, 299–300.

42 For examples of this definition, see, for instance, Röller, Lars-Hendrik and Steen, Frode, “On the Workings of a Cartel: Evidence from the Norwegian Cement Industry,” American Economic Review 96, no. 1 (2006): 321Google Scholar; and Kinghorn, Janice Rye and Nielsen, Randall, “A Practice without Defenders: The Price Effects of Cartelization,” in How Cartels Endure and How They Fail, ed. Grossman, , 132Google Scholar.

43 Levenstein and Suslow, “What Determines Cartel Success?” 45.

44 Levenstein and Suslow, “Breaking Up Is Hard to Do,” 12. The figure is based on five different cross-sectional studies on cartel duration.

45 MacKie-Mason, Jeffrey K. and Pindyck, Robert S., “Cartel Theory and Cartel Experience in International Minerals Markets,” reprinted in Cartels, ed. Levenstein, and Salant, , vol. 2, 305, 309, and 328Google Scholar.

46 Dick, “If Cartels Were Legal,” 168.

47 See, for instance, Levenstein and Suslow, “What Determines Cartel Success?” 57.

48 Dick, “If Cartels Were Legal,” 168.

49 Levenstein and Suslow, “Studies of Cartel Stability,” 23.

50 Spar, The Cooperative Edge, 16–25.

51 Levenstein and Suslow, “Studies of Cartel Stability,” 42.

52 VAW was established during World War I as a result of Germany being cut off from aluminum supplies by the main producer nations. After the end of the war, the company slowly established good connections with old established producers, and VAW was a founding member of the 1926 cartel. I discuss the cartel's trouble with the German state-owned producer after 1933 in Out of Norway Falls Aluminium, 305–6. In addition to producing more aluminum than the cartel quotas allowed, the German producer also owed the other cartel members substantial amounts of money, but, after September 1934, the German state restricted the possibilities for moving capital out of the country, and the German aluminum producer was unable to repay its debt. Understandably enough, this caused great concern to the other producers, and virtually every cartel meeting discussed the question of the German debts from 1934 onward.

53 Storli, Out of Norway Falls Aluminium, 154 and 209.

54 Alcoa threatened the European producers with a price war in November 1926, March 1927, and December 1927, while the cartel threatened the North American producer with a price war in April 1930 and again in July 1930. For details, see Storli, Out of Norway Falls Aluminium, 205–11.

55 Storli, Out of Norway Falls Aluminium, 211–15.

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57 Symeonidis, “In Which Industries Is Collusion More Likely?” 46.

58 I analyze the bauxite policy of large producers in “The Global Race for Bauxite, 1900–40,” in Aluminum Ore: The Political Economy of the Global Bauxite Industry, ed.Gendron, Robin, Ingulstad, Mats, and Storli, Espen (Vancouver, 2013), 24–52Google Scholar.

59 Levenstein and Suslow, “Studies of Cartel Stability,” 43.

60 Spar, The Cooperative Edge, 5.

61 Grossman, ed., How Cartels Endure and How They Fail, 4.

62 See Casson, Mark, “Multinational Monopolies and International Cartels,” in The Economic Theory of the Multinational Enterprise: Selected Papers, ed. Buckley, Peter and Casson, Mark (London, 1985), 60–97Google Scholar.