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

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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.” The reasoning behind this by the court was that a naturally competitive market would result in price sink to an inoperable level which would not be beneficial to the manufacturer, consumers or the economy.

The cartels which resulted from this ranged from complex formal contracts to gentlemen’s agreements. However these cartels were not necessarily monopolistic or stable, and forms of competitions did still exist in some areas.

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Although no exact figures are available for the number of cartels in this period the economic historian Jűrgen Kocka estimates that “there were 4 cartels in 1875; 106 in 1890; 205 in 1896; 385 in 1905.” This unquestionably shows a rapid growth in cartels in the late 19th and early twentieth centuries, but it is unlikely that the clarified legal position alone did this. Hence there must be other factors encouraging a growth in cartels in this early period.

        Cartels had multiple positive functions for the German businesses which competition did not have, which encouraged them to collude rather than use ...

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