Collusion and the "Old Boys Club"

David J. Balan, Federal Trade Commission
Manfred A. Dix, Louisiana Division of Administration

Abstract

This paper begins with the assumption that collusion can be sustained by means of sincere group loyalty among members of a cartel, and that such loyalty can be inculcated into others. We show that inculcating loyalty into potential entrants can increase profits for both the incumbents and for the (loyal) entrants, particularly if the experiences that serve to inculcate loyalty also bestow valuable industry-specific human capital on the recipient. This can allow the incumbents to blockade non-loyal entry and can also allow incumbents to profitably expand the cartel even absent an entry threat. It appears that, in the presence of genuine loyalty, activities that are typically associated with an “Old Boys Club” can increase collusive profits.