Cartel success and institutions. The Finnish Cotton Cartel, 1903–1939

Abstract

This article uses institutional theory to interpret collusive behaviour in the pre-World War II cotton cartel in Finland. The findings do not support the optimistic view of the institutionalists about the efficiency of economic institutions in boosting cooperation. Only one (the conciliation mechanism) of the four institutions identified in the cotton cartel could check opportunism to a certain degree, although it too lacked effective enforcement characteristics. This article argues that, in cartels, the motivation to follow institutions is fundamentally different from other environments, particularly trade. Besides institutions, organisational solutions, such as a sales agency that removes individual firms' discretion over pricing decisions, are needed to enhance cartel stability.

Keywords::

• cartel
• collusion
• institutions
• Finland
• enforcement
• organisation
• opportunism

Notes

^1.Stigler, “A Theory of Oligopoly”, 46. See also Frank and Bernanke, Principles of Microeconomics, 277; Genesove and Mullin, “Rules, Communication, and Collusion”, 383; Gupta, “Why did Collusion Fail?”, 533–534; Levenstein and Suslow, “What Determines Cartel Success?”, 45–46; Peters, “Managing Competition in German Coal”, 419.

^2. Levenstein and Suslow, “What Determines Cartel Success?”, 44, 49–57.

^3.Levenstein and Suslow, “Determinants of Cartel Duration”, 456; Pindyck, “The Cartelization of World Commodity Markets”, 155; Suslow, “Cartel Contract Duration”, 725–730.

^4.Greif, Institutions and the Path to the Modern Economy, 32; Hodgson, “What Are Institutions?”, 1–13; Kallioinen, The Bonds of Trade, 14–23.

^5.Greif, Institutions and the Path to the Modern Economy, 128–138; Mantzavinos, Individuals, Institutions, and Markets, 86–89.

^6. See, for example, “Trade Without Law”, and “Trade, Institutions, and Credit”; Greif, Institutions and the Path to the Modern Economy; Kallioinen, The Bonds of Trade;Milgrom, North, and Weingast, “The Role of Institutions”.

^7.Greif, “The Fundamental Problem of Exchange”, 254.

^8.Suslow, “Cartel Contract Duration”, 706, 709. In the Netherlands, it was not until the Economic Competition Act of 1958 that cartel contracts could no longer be enforced under civil law. In Finland, this was realised as late as 1988, in the Act of Competition Restrictions. Bouwens and Dankers, ‘The Invisible Handshake’, 758–759; Fellman, “Kilpailupolitiikka koordinoidussa markkinataloudessa”, 157.

^9.Kallioinen, The Bonds of Trade, 131–138.

^10. For a more detailed description of this method, see Kallioinen, The Bonds of Trade, 28–35.

^11.Genesove and Mullin, “Rules, Communication, and Collusion”, 380.

^12. Cartels are here defined as agreements, both formal and informal, between independent firms of the same branch, which are designed to restrict production and raise prices.

^13.Kuisma, “Government Action, Cartels, and National Corporations”, 258; Schröter, “Small European Nations”, 193, 196. The first competition law in Finland was passed in 1958, in line with various other European countries where anticartel legislation dates from the 1950s. In the interwar Finland, there was no legislation aimed at protecting the domestic cartels, such as the Norwegian trust law of 1926 or the Dutch Business Agreements Act of 1935. Bouwens and Dankers, “The Invisible Handshake”, 751–755; Sandvik and Storli, “Confronting Market Power”, 233, 245–246; Virtanen, Market Dominance-Related Competition Policy, 230–234.

^14.Schröter, “Cartelization and Decartelization in Europe”, 141.

^15. We do not have quantitative information about the market shares of the companies in the turn of the century. However, according to an investigation conducted by the cartel itself, Finlayson & Co. was clearly the biggest firm having a share of 35% of the total production of the six firms, between 1924 and 1928. The figures of the other firms were, respectively, 19% for Forssan Puuvilla, 14% for Lapinniemi, 12% for Vaasan Puuvilla, 11% for Porin Puuvilla, and 9% for John Barker & Co. Turku Provincial Archives, Barker & Co., the Cotton Ring, 17 and 24 Jan 1929; The board of Barker & Co, 16 March 1929; Nikula, Vaasan Puuvilla, 172–174.

^16.The Central Archives of Finnish Business Records, the Sales Agency, correspondence, C. G. Sundell to K. E. Palmén, 18 Oct 1905.

^17.Nikula, Vaasan Puuvilla, 110.

^18.The Central Archives of Finnish Business Records, the Sales Agency, correspondence, Palmén to all the cotton companies, 23 Feb 1903; Turku Provincial Archives, Barker & Co., the Cotton Ring, 2 March 1903.

^19. Palmén was a baron and the CEO of Forssan Puuvilla, the second biggest among the six companies. Palmén had several positions of trust, for example as a representative in the Diet of Finland, from 1888 till 1906. It could be argued that Mr Palmén was the primus motor behind the cartel. In 1903, in a private letter, the CEO of Porin Puuvilla, C. G. Sundell, acknowledged Palmén's role in the founding of the cartel by saying that it was ‘mainly thanks to Your mediation’. The Central Archives of Finnish Business Records, the Sales Agency, correspondence, C. G. Sundell to K. E. Palmén, 10 March 1903.

^20.Turku Provincial Archives, Barker & Co, the Cotton Ring, 19 Dec 1908. Secret price cuts remained a constant problem, see Turku Provincial Archives, Barker & Co, Palmén to Barker & Co, 3 Sept. 1905; the Cotton Ring, 13 March, 17 April, and 22 Dec 1909, 14 Oct 1911, 19 Oct 1912, 21 Aug 1913, 24 Nov 1921, 19 May and 28 June 1932.

^21.Turku Provincial Archives, Barker & Co, the Cotton Ring, 19 Oct 1912, 20 and 30 Aug 1913, 14 Nov and 12 Dec 1914, 21 Feb and 20 March 1924.

^22.Turku Provincial Archives, Barker & Co, the Cotton Ring, 12 Nov and 10 Dec 1925, 19 May 1927, 27 Nov 1930.

^23.Dye and Sicotte, “How Brinkmanship Saved Chadbourne”, 236–247; Genesove and Mullin, “Rules, Communication, and Collusion”, 389–390; Gupta, “The International Tea Cartel”, 152–158; Gupta, “Why did Collusion Fail?”, 536–549; Levenstein, “Do Price Wars Facilitate Collusion?”, 127–135; Levenstein, “Price Wars and the Stability of Collusion”, 130–135; Levenstein and Suslow, “What Determines Cartel Success?”, 57–79.

^24.Turku Provincial Archives, Barker & Co., the Cotton Ring, 21 Dec 1912, 1 March 1913. About similar cases in which the board of the cartel solved breaches, see 2 Feb 1903, 14 Nov 1908, 13 March and 17 April 1909, 14 Oct 1911, 19 and 21 Dec 1912, 24 Nov 1921. 10 Dec 1925, 27 Nov 1930.

^25.Genesove and Mullin (“Rules, Communication, and Collusion”, 391) have found that the American Sugar Institute, in the 1920s and 1930s, used very restricted patterns of retaliation as response to a cheating, much in a same way as the Finnish Cotton Cartel. See also Gupta, “Why did Collusion Fail?”, 549. The Nord-Pas-de-Calais coal cartel during the same period, on the other hand, was held together through a credible retaliation system based on financial penalties, which the cartel effectively applied. Montant, “The Effectiveness of the Nord-Pas-de-Calais Coal Cartel”, 303, 305.

^26.Genesove and Mullin, “Rules, Communication, and Collusion”, 380, 386. See also Dye and Sicotte, “How Brinkmanship Saved Chadbourne”, 236; Pindyck, “The Cartelization of World Commodity Markets”, 156.

^27.Genesove and Mullin, “Rules, Communication, and Collusion”, 387.

^28.Turku Provincial Archives, Barker & Co., the Cotton Ring, 16 Nov 1911, 22 Feb 1915.

^29.Milgrom, North, and Weingast, “The Role of Institutions”, 3, 7.

^30.Podolny and Scott Morton, “Social Status, Entry and Predation”, 42. See also Podolny, “A Status-Based Model”, 830–835.

^31. On average, the cartel had a meeting once every month. Turku Provincial Archives, Barker & Co., the Cotton Ring, 1903–1932.

^32.Levenstein and Suslow, “What Determines Cartel Success?”, 45–46.

^33. It could be argued that the cartel was the only social network that bound the participants together. The extensive records of the Cotton Cartel do not indicate that the participants met elsewhere except for the cartel's meetings. For example, the Association of the Finnish Industries, founded in 1921, aimed at guarding the interests of the domestic industries by lobbying for a more protective customs policy. From the beginning, the Cotton Cartel joined the Association. However, within the Association, the cartel's participants were active mainly by providing statements arguing for the importance of raising import tariffs. Moreover, only the chairman represented the Cotton Cartel in the Association's meetings. Stjernschantz, Porin Puuvilla, 146.

^34.Granovetter, “The Impact of Social Structure”, 34.

^35. In 1934, the six Finnish cotton companies produced ca. 250 different cotton fabrics and 28 types of cotton yarn. Moreover, these main products were divided into an endless number of different weights and widths. The Central Archives of Finnish Business Records, the Sales Agency, 14 March 1935.

^36.Kaukovalta, Forssan puuvillatehtaan historia, 256.

^37.Turku Provincial Archives, Barker & Co, the Cotton Ring, 17 and 24 Jan 1929; The Central Archives of Finnish Business Records, Tampereen Puuvillateollisuus Oy, 26 Nov 1929, 11 Jan, 11 Feb, 8 March, 2 and 13 Oct, 1930, 11 Nov 1931.

^38.The Central Archives of Finnish Business Records, the Sales Agency, correspondence, 7 Sep, 13 Oct, 3–4 Nov 1932.

^39.The Central Archives of Finnish Business Records, the Sales Agency, annual reports 1933–1938.

^40.The Central Archives of Finnish Business Records, the Sales Agency, correspondence, 20 Aug 1936.

^41.The Central Archives of Finnish Business Records, the Sales Agency, correspondence, the Sales Agency to Forssa Ltd. 20 Nov 1936, market report II/1937.

^42.Turku Provincial Archives, Barker & Co, the Sales Agency 1932–1934, the Sales Agency to Barker & Co., 28 Nov 1932.

^43.The Central Archives of Finnish Business Records, the Sales Agency, annual report 1938, market report II/1939.

^44.The Central Archives of Finnish Business Records, the Sales Agency, annual meeting 13.3.1939. Unfortunately, we do not know how much the sales costs of individual firms were reduced by the introduction of the Sales Agency. However, in the case of Vaasan Puuvilla and Porin Puuvilla, in the 1930s, the total salary costs remained almost constant in relation to the gross income of the two firms. Nikula, Vaasan Puuvilla, 192; Stjernschantz, Porin Puuvilla, 267.

^45.Levenstein, “Do Price Wars Facilitate Collusion?”, 112; Levenstein and Suslow, “What Determines Cartel Success?”, 67, 74; Lundqvist, “The Making of a National Cartel”, 51.

^46.Suslow, “Cartel Contract Duration”, 719–720.

^47.Turku Provincial Archives, Barker & Co., the Cotton Ring, 2 March 1903.

^48. According to Levenstein and Suslow (“What Determines Cartel Success?”, 69), historical findings indicate that the cartels that control the distribution of goods, through a joint sales agency or some other mechanism, appear to be more stable.

^49.Hadfield, “The Many Legal Institutions”, 175; Hodgson, “What Are Institutions?”, 15.

^50. C.f. Greif, Institutions and the Path to the Modern Economy, 15–16, 151.