Governing the Cartels – An Institutional Exploration

Governing the complex institution of a business cartel is a highly involved topic. Operating outside the legal sphere, the cartel firms simultaneously need to harmonize prices and quantities, avoid discovery by the authorities, but also ensure that no member cheats on the others. This exploratory paper applies the Ostromian 'governance of the commons' perspective to study the internal organization of cartels. It formally derives a novel interpretation of a cartel’s excess profit as a common pool resource. It uses a parsimonious theoretical model to demonstrate how complex governance decisions may become for the involved agents once one loosens the modeling restrictions on the agents’ norms, habits, and individual incentives within collusive agreements. By doing this, the paper sheds new light on the economic analysis of collusion and provides many starting points for research at the intersection of managerial governance and industrial organization