On the Workings of a Cartel: Evidence from the Norwegian Cement Industry

Using the institutional set-up of the Norwegian cement industry, in particular its sharing rule, we are able to identify the workings of a cartel in some detail. Given data on prices, production, and exports, we are able to identify marginal costs as well as the effectiveness of the cartel. We compare our marginal cost estimates, which are derived from an equilibrium condition, to detailed cost accounting data, and find that our estimate of marginal cost is very much in line with the data. We then show that the cement cartel has been ineffective in the sense that the sharing rule induces “overproduction” and exporting below marginal costs. In this sense it is consumers, not firms, that benefit from the sharing rule. We find that the ineffectiveness of the cartel is becoming so large that domestic welfare of a merger to monopoly would in fact be positive at around 1968, which is exactly when the merger actually took place! However, we also show that competition would have resulted in even higher welfare gains over the entire sample.