Cartel Stability and Cartel Breakdown: Insights from the German Cement Industry

The survival of a cartel is continuously jeopardized by several sources of instability. Although there is plenty of evidence showing the creativity and audacity of cartels to control such sources of instability, numerous cases of cartel breakdowns suggest that these strategies to maintain supracompetitive prices sometimes result in failure. In this article, we complement a characterization of important industry developments during and after the German cement cartel from 1991 to 2002 with theoretical and empirical evidence on two particular sources of cartel instability: first, an external threat in the form of (substantially cheaper) cement imports from selected Eastern European countries. Second, an internal threat in the form of a significant expansion of production capacity by one cartel member in combination with an unexpected downturn in the demand for cement. In particular, we provide well-founded explanations on how the cartel managed to overcome the external threat to cartel stability in the mid-1990s, however, eventually failed to solve the internal stability problem that occurred in the early 2000s.