Is the Tariff the ‘Mother of Trusts’?: Reciprocal Trade Liberalization with Multimarket Collusion

This paper examines the impact of reciprocal trade liberalization on collusive conduct between domestic and foreign firms interacting in several markets. In our benchmark model, which deals with a symmetric homogenous-goods oligopoly, we show that in the absence of trade barriers an efficient collusive agreement involves equal division of the market in each country. When trade costs are introduced, the most profitable cartels entail minimizing trade costs and this requires only domestic firms to divide each market among themselves. However, such cartel agreements are also the most difficult to sustain because they result in the highest deviation incentives. In other words, trade costs create a tension between the profitability of collusive agreements involving asymmetric market shares and incentive constraints. We show that, when the monopoly output level is unsustainable under free trade, the relationship between global constrained-efficient profits and trade costs in non-monotonic. For small trade costs, reciprocal trade liberalization renders multimarket collusion causes more profitable. In contrast, when trade costs are large, trade liberalization reduces profits. This allows us to prove that reciprocal trade liberalization in not always welfare-improving. We also extend this analysis to consider the implications of product differentiation for market conduct and welfare. ___________________________ Eric W. Bond, Department of Economics, Pennsylvania State University, University Park, PA 16802; phone: (814) 863-0315; e-mail: [email protected] Constantinos Syropoulos, Department of Economics, Florida International University, University Park, DM-321, Miami, FL 33199; phone: (305) 348-2592; e-mail: [email protected] A 1944 report by the Kilgore Committee which identified 105 products that had been identified in antitrust proceedings as being part of international cartels (Nussbaum, 1986). Examples of international cartels involving US and foreign firms that have been successfully prosecuted include a food and food additive cartel (operating from 1991 to 1995), a vitamin cartel (1990 1999), and a graphite electrodes cartel (1992-1997). The aforementioned cartels had significant impacts on prices in the U.S market, with the food additive cartel having been estimated to raise the price of citric acid by 30% and the price of lycine by 70%. The US Department of Justice (2000) reports that prosecution of participants in the food and feed additives cartel resulted in the imposition of a $100 million fine on the Archer-Daniel Midlands company, a U.S. firm, and a $50 million fine on a subsidiary of a German firm. In 1999, the government collected a record fine of $500 million from F. Hoffman-La Roche, a Swiss company involved in a conspiracy to fix the price of vitamins.