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.