Grossman, P. Z. (1996). The dynamics of a stable cartel: the Railroad Express 1851-1913. Economic survey, 34 (2), 220-236. “I would remind you that internally, with the introduction of the new Dutch competition law, we have decided to cease our activities. We have not been able to do that. We should have distanced ourselves from these activities. I have asked for it several times and I have sometimes been put under pressure by other companies to continue the agreements. (12) As an illustration, we assume that the only three companies that make notebooks opt for a cartel that will determine that the level of maximization of the group`s profits is 120 notebooks. By selling 120 staples, the deal will make a profit of $600.
If the three companies make notebooks at the same cost, each company will produce 40 and will probably receive one-third of the profit ($200). But if their production costs are different, the profit is not evenly distributed. Suppose Company 1 has low production costs, company 2 average costs and company 3 high costs. So in this scenario, Company 1 will produce the most notebooks, say 60, because of its low cost of production; Firm 2 will produce a little less notebooks, say 40; and Firm 3, with its high production costs, will produce the fewest staplers, only 20. As a result, Company 1 receives half of the cartel`s profits (US$300) since it produces half of the production; Firm 2 receives one-third of the profit (US$200); and Company 3 receives one-sixth of the profit ($100). From this point of view, the stability of the cartels depends on the losses and profits received from the fraud compared to the likelihood of possible sanction by other cartel members. As a result, cartels can only achieve stability through a system that, through internal punishment, increases the cost of fraud (Spagnolo 2000; Spar 1994). Cartels must monitor their agreement to detect fraud and punish companies that practice them (Levenstein and Suslow 2006; Connor 2001; Ayres 1987). In order for a cartel to survive, this model assumes that credible sanctions should be imposed to punish deluded members and thus implement the cartel agreement (Ayres 1987; Green and Porter 1984; Stigler 1968).