Cartel versus Merger∗

Procurement practices are affected by the nature of competition among suppliers and by uncertainty about whether suppliers are colluding. A buyer that is dissatisfied with the bids of incumbent bidders, perhaps based on suspicions of collusion, can cancel the procurement and then resolicit bids after qualifying additional suppliers. Recent cartel cases show that cartels devote considerable attention to avoiding such resistance from buyers. We show that in a procurement setting with the potential for buyer resistance, the payoff to a cartel exceeds that of a merged entity. This is consistent with the firm behavior described in the landmark Addyston Pipe antitrust case, where the firms had the option to merge but chose, in the face of buyer resistance, to organize as a cartel instead. ∗The authors thank the Human Capital Foundation (http://www.hcfoundation.ru/en/), and especially Andrey Vavilov, for financial support. We are grateful to George Bittlingmayer for discussions about the Addyston case and providing us with the Transcript of Record for the case proceedings, and we are grateful to Keith Hylton for discussions on cartel law before the Sherman Act. The paper also benefitted from discussions with Ed Green, Barry Ickes, Bill Kovacic, Vijay Krishna, Mike Meurer, and Chip Miller and from the comments of participants at the Bosphorus Workshop on Economic Design. †[email protected], Department of Economics, Penn State University ‡[email protected], Department of Economics, Penn State University §[email protected], Fuqua School of Business, Duke University ¶[email protected], Department of Economics, Penn State University