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What factors encouraged firms to collude rather than compete in Germany1880- 1939?

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Introduction

What factors encouraged firms to collude rather than compete in Germany 1880- 1939? In Germany in the post industrialization era modern industrial enterprise was clustered into three sets of industries: Heavy industrial machinery (electrical and non-electrical), chemicals and metals. In these industries, Germany was amongst global 1st movers and recovered the quickest after WW 1. The form of collusion most practice in Germany throughout this period was cartels, these varied dramatically in both size and organization. Collusion can be defined as; a form of non-price competition involves two or more firms deliberately contracting in order to protect the price of their good or goods. The major benefit of collusion is that because the firms do not attract customers through price competition abnormal profits can be made. One of the major events that shaped the formation of cartels (a form of explicit collusion) in Germany was the 1887 ruling by the Reichsgericht that contractual agreements made between colluding firms were enforceable by law. These agreements the German high court explained "were not only in the interests of those who signed them but were also in the public interest."1 The reasoning behind this by the court was that a naturally ...read more.

Middle

These arrangements can also enable small firms to diversify and share risks. After the1887 ruling, the idea of collusion was welcomed by the new breed of industrialists as the onset of the 1873 depression had caused prices for industrial goods to fall for a twenty year period. In addition to this it was becoming harder and harder for these firms to compete as new firms entered the market place. It was in this period that the practice of cartels grew most rapidly. By the political unification of Germany in 1871, the country already had an extensive rail network. This spurred both related businesses, such as iron, coal and steel which were used in the production and running of the rail network as well as businesses that benefited from improved transport links, for example banking. Alongside Germany's strong craft tradition, and her comprehensive educational system with both academic and technical schools, lead to a very rapid period of industrialization. With the onset of the depression in the early 1870's, German firms were experiencing slower and slower growth. Firms began to change their aims from expansion to simply protection of their existing markets. ...read more.

Conclusion

Opponents of cartels have alleged that they have driven competing firms out of existence, reduced volume of trade, raised prices to consumers, and protected inefficient members from competition. Cartels were blamed for having benefited German aggression by furnishing markets, profits, and technical data to Germany before World War II. Supporters of cartels claim that they protect the weaker participating firms, do away to an extent with limitations on trade resulting from high tariffs, distribute risks and profits equitably, stabilize markets, reduce costs, and hence protect consumers. To say collusion in the form of cartels were a substitute for competition would be incorrect, within these cartels competition still existed. Each firm within a cartel would be forced to negotiate for their market share and the prices that would be charged. How well each firm did in these negotiations would most likely signify the profits that would be made for the rest of the year, so each firm would competing to be allocated a large market share. In addition to this, new innovations and research still occurred as each firm sought to gain more productive efficiency in order to cut their margins and gain extra profit. 1 Pg 423 Scale and Scope 2 pg 423 s+s ...read more.

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