Cartel Stability and the Joint Executive Committee, 1880-1886

JEL Classification L92 and L10

Ignacio N. Lobato
Patrick P. Walsh

Department of Economics, London School of Economics, London WC2A 2AE and Department of Economics, Trinity College, Dublin 2, Ireland


Abstract

In this paper we analyse a railroad cartel run by the Joint Executive Committee (JEC) in the United States in the nineteenth century. The JEC was a cartel whose members anticipated a periodic fall in demand due to competition from the Great Lakes. In a simplified situation we model the optimal price setting behaviour of a cartel that fully anticipates a large and prolonged (infinite) switch to a lower level of demand. We show that joint profit maximisation is not sustainable as a perfect equilibrium before the switch (in the lakes closed regimes). We also show that an optimal cartel may have had to revise its official rate downwards in the periods leading up to the infinite switch in demand. Empirically we show that the number of weeks leading up to the opening of the lakes is a significant factor in explaining downward price revisions by the JEC in lakes closed regimes. Unanticipated demand shocks and entry of new firms are also found to be significant factors. The factors that determine price revisions in the lakes open regimes cannot be analysed due to insufficient data points and control variables.


Acknowledgements

This paper was initially prepared as an exercise for the Phd students of Prof John Sutton at the LSE. We thank John Sutton for setting up the project and for his help and comments. We thank Robert Porter for the use of his data set. We also thank Mike Harrison, Francis O Toole and Paddy Waldron for useful suggestions. This paper was given at the European Assosiation for Research in Industrial Economics conference in Tel Aviv in 1993 and to the Belfast Economics Workshop at Queens University Belfast. We thank all participants for their comments.