The discontent cartel member and cartel collapse: The case of the German cement cartel

• Cartel instability depends on allocated versus desired market shares.
• Theory is developed that provides conditions for a firm to initially collude then deviate after which the cartel collapses.
• This hypothesis is examined for the German cement cartel of 1991–2002.
• Cartel member Readymix cheated by cutting publicly observed list prices which caused cartel collapse.

We hypothesize a particular source of cartel instability and explore its relevance to understanding cartel dynamics. The cartel instability is rooted in the observation that, upon cartel formation, the relative positions of firms are often fixed which may lead some growth-conscious members to be discontent. This incongruity between a cartel member's allocated market share and its desired market share may result in systematic deviations and the eventual collapse of the cartel. This hypothesis is then taken to the German cement cartel of 1991–2002. We argue that Readymix was such a discontent cartel member and, using a rich pricing data set, are able to characterize how Readymix deviated, how other firms responded, and how it led to the collapse of the cartel.