Academic journal article Economic Inquiry

The Dynamics of a Stable Cartel: The Railroad Express 1851-1913

Academic journal article Economic Inquiry

The Dynamics of a Stable Cartel: The Railroad Express 1851-1913

Article excerpt

I. INTRODUCTION

The economic literature contains ample theoretical justification for the possibility of stable cartels - for example, Osborne [1976] and Porter [1983a] - but little in the way of empirical evidence about how stable cartels actually behave. There is, of course, good reason for this shortcoming: few stable cartels have ever existed. Cartel members find it too attractive to violate agreements in order to capture market share. In Eckbo's [1976] study of fifty-one formal cartels, the median lifetime of a cartel was only five years; the mean was hardly better at 6.6.(1) In general, the dearth of stable cartels creates a problem for application of cartel theory.(2)

This paper, however, examines the exception to the rule, what was probably the most successful cartel in U.S. business history: the railroad express cartel. The express cartel persisted for more than half a century, by one reckoning from 1851 to 1913. During that time, the five firms of the cartel agreed on prices, territory, and governance procedures, and maintained a relatively stable environment within the industry. Moreover, all five firms earned profits in virtually every year of the cartel's existence, even during periods when the economy as a whole slipped into depression.(3) Periods of stress were present in the cartel, but they tended to be short lived and contracts, while subject to revision and dispute, were never wholly abandoned.

Aspects of the success of this cartel can be illuminated by various models in the industrial organization literature, including some that explicitly treat cartel stability. Yet most of the literature on stability is deficient in that it typically examines only one kind of strategic interaction. As this case shows, long-run success involves many strategies, and other factors including the institutional framework, the structure of costs, the nature of internal transactions, and the character of the technology. The cartel's stability also was a dynamic process in which the organization acted continually to maintain conditions favorable to survival.

This paper will focus on two key elements in the success of the express cartel - elements that would seem necessary for long-run stability in any cartel: (1) proficiency at deterring (or at least, limiting) entry from outside, and (2) ability to prevent defection among the members. In fact, deterrence and control are linked in the case of the express, and the linkage was crucial to this industry's success. The key feature was the creation and management of a joint distribution network. This network, it will be shown, was the source both of the cartel's market power and of its internal stability. After a brief historical overview, the paper will examine the effects of the cartel's distribution system - how it promoted a stable cartel.

II. OVERVIEW: THE ORIGIN AND HISTORY OF THE EXPRESS CARTEL

The railroad express industry controlled the parcel post service in the United States from 1839 until 1913. During that time, the express provided the only established way of transmitting a parcel in the United States. The industry also obtained economies of scope by combining parcel service with financial courier operations. The express offered direct delivery of consignments and promised a full warranty on the contents.

In its first decade, local express firms sprang up along key rail and steamship routes. Once established, many express franchises were contested by new entrants. At this time, fixed costs were small encouraging entry efforts, but incumbents often fought newcomers with price wars that drove out the entrant, led to the bankruptcy of the incumbent, or resulted in a merger.(4)

By 1850, two large regional firms, the Adams and American express companies, had developed. Despite their histories of price warfare against potential competitors, the two firms decided against conflict and in 1851 signed their first cartel agreement. …

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