Job Market Paper

  • Cartels, Entry and Productivity: Evidence from the Chilean Nitrate Cartels [PDF]

This paper studies the effect of cartels on the quantity and quality of new firms in an industry with low barriers to entry. Since cartels generate artificially high profits, low productivity firms may be tempted to enter a cartelized industry, eroding the industry's productivity and reducing total surplus in the long-run. We use cartels in the early twentieth century's nitrate industry to quantify these effects. Results show that cartels increase the number of new plants by more than four plants per year, and that production units that entered during cartels were significantly less productive, in a magnitude equivalent to a loss revenue of $400k for a median-sized plant in the industry. Counterfactual simulations establish that, had cartels not occurred, 25% of the new plants would have postponed or canceled their entry to the industry. Moreover, low barriers to entry are shown to cause a reduction of 39% of total cartel profits for incumbent cartel members. Results point to a complex interaction between barriers to entry, productivity, net entry, and cartel profits, with important potential policy implications for antitrust agencies.