Analyzing market workability with the CFD-Concept.(RESEARCH NOTE)

JEL L10 . L60

Whoever examines real markets in a comparative static way (in a neoclassical manner) assumes for the interpretation of the data (prize-quantity combinations) that at least a short-term equilibrium is given. However, this assumption is critical because in real markets disequilibrium prices are possible as well. To test whether the observed price is an equilibrium or disequilibrium it is required to estimate demand and supply functions, which is only possible under strong assumptions. In contrast to that, the Coordination Failure Diagnostics Concept (CFD-Concept), developed by Grossekettler (1982, 1999, 2005, 2008), is based on disequilibrium indicators, which can be used to analyze the workability of real markets.

One reason for non-workability of markets is the formation of cartels. We use indicators of the CFD-Concept to develop a System of Cartel Markers, including prices, capacities utilization, rates of return and capacity growth rates. We focus our analysis only on permanent illegal cartels or so called hardcore cartels, where the members explicitly agree to coordinate their prices, quantities and investments on capacities.

In comparison to other approaches existing so far, which examine mostly just one variable (for example the price or market concentration) for detecting cartels, the CFD-Concept uses a system of symptoms and examines a combination of indicators, which affect different market processes. In the first step, we introduce the expected behavior patterns of cartels and develop a System of Cartel Markers: low level of capacity utilization, slackness of price adjustments to exogenous shocks, excess rates of return, nearly constant capacities, lower variance of price changes and capacity growth rate changes. Thereupon, we present methods to test these markers.

For our analysis, we use data from the ifo Institute for Economic Research (Munich), the Bundesbank and the Federal Statistical Office of selected German industries from 1978-2007. We find significant differences in the process patterns between competitive markets (German Machinery-, Automobile-, Chemical- and Electrical Industry) and the German Cement Industry as an example of a cartel. The analysis of the German Cement Industry indicates significant differences in the behavior patterns during the cartel phase and the phase of competition. In particular, the cartel phase could be identified by constant excess rates of return, lower price volatility and constant capacities.

Further research of more cartel markets would be useful to verify evidence of our System of Cartel Markers, which then can be used by antitrust authorities as a tool for providing an initial suspicion of a cartel.

Published online: 15 November 2008

K. von Blanckenburg A. Geist

Institute of Public Economics, Muenster University, Wilmergasse 6-8, 48143 Muenster, Germany e-mail: 12kobl@wiwi.uni-muenster.de

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