The impact of external forces on cartel network dynamics: Direct research in the diamond industry ☆ Samir Gupta a, ⁎, Michael Polonsky b, 1 , Arch Woodside c,2 , Cynthia M. Webster d,3 a Faculty of Business and Economics, Monash University, P.O. Box 197 Caulfield East, Vic, Australia b School of Management and Marketing, Deakin University, 70 Elgar Road, Burwood, 3125, Victoria University, Australia c Department of Marketing, Carroll School of Management, Boston College, 450 Fulton Hal, 140 Commonwealth Avenue, Chestnut Hill, MA 02467-3808, USA d Faculty of Business and Economics, Macquarie University, North Ryde, NSW 2109, Australia abstract article info Article history: Received 1 March 2008 Received in revised form 1 October 2008 Accepted 1 November 2008 Available online 16 July 2009 Keywords: Cartels External forces Networks Case study This paper describes the impact of external environmental forces on cartel networks. Using a case research approach, this report examines two leading business networks within one industry, over time. The results suggest that (a) bargaining power of intermediaries increases with the advent of new and powerful actors, (b) process activities that cartels previously controlled are being outsourced to new actors sometimes based in developing countries, (c) other actors are acquiring resources once dominated by a cartel, (d) external forces triggered by the illegal diamond trade, such as international regulatory constraints, no longer favour cartels like De Beers, and (e) over time, these and additional environment factors are forcing actors like De Beers who perform rigid process activities to become more flexible. For example, forces are moving cartels which relied previously on hand-picked intermediaries in highly controlled networks to market their products to adopt a flexible market-focused expansion of operations in retail contexts. © 2009 Elsevier Inc. All rights reserved. De Beers had hoped that recent entrants would … recognize the sense of single-channel marketing and will not be tempted to undermine the very factor — predictable and stable prices … which attract them to the industry in the first place; nor that they will commit the cardinal error of assuming that De Beers will act against its own interests and the interest of its shareholders in a competitive world (Nicky Oppenheimer, De Beers' Annual Report 2007 , p. iii). 1. Introduction This article describes the way in which environmental forces affect cartel network structures. In particular, the aim is to understand and explain the dynamics of network behavior resulting, in part, from external forces. This article reports case study research exploring network behavior of two focal firms by mapping network dynamics. The literature explores B2B network actors, processes, and outcomes (Clarke & Mackaness, 2001; Gupta, Cadeaux, & Woodside, 2005; Hamilton & Shergill, 1992). While authors such as Huff, Huff, and Barr (2000) and Venkatraman and Prescott (1990) craft network para- digms to explore strategic events, these studies do not focus on external forces as drivers in network dynamics. This paper advances network thinking by incorporating external forces. The paper begins with a brief review of the literature of cartel network structures. Drawing on IMP literature, two cases demonstrate the impact of Porter's dynamic theory of strategy (1985, 1991) in understanding how external forces impact on actors, process, and resources advances the network paradigm. The paper offers a number of propositions and concludes by advancing network theory based on actors, processes and activities in cartels. 2. Literature review Collusion implies that sellers arrive at an understanding of the quantity and price at which outputs are produced (Bain, 1959). Producers, such as De Beers, form cartels with the goal of limiting competition to increase profits. Scholars have investigated cartels from a number of perspectives: legal (Litvak & Maule, 1980), dyadic (Bloch & Ghoshal, 2000), pricing collusion (Athey, Bagwell & Sanchirico, 2004), relationships (Humphries & Wilding, 2003), and economic barriers to entry (Belleflamme & Bloch, 2004). While Levenstein and Suslow (2006) discuss how and why cartels fail, Griffin (1989) suggests that external forces may also cause cartel Industrial Marketing Management 39 (2010) 202–210 ☆ The authors acknowledge the contribution of Don Bradmore (RMIT) to this paper. ⁎ Corresponding author. Tel.: +61 3 9903 2492; fax: +613 9903 1558. E-mail addresses: Samir.Gupta@BusEco.monash.edu.au (S. Gupta), Polonsky@deakin.edu.au (M. Polonsky), woodsiar@bc.edu (A. Woodside), cynthia.webster@mq.edu.au (C.M. Webster). 1 Tel.: +61 3 9244 6968; fax: +61 3 9251 7083. 2 Tel./fax: +1 617 522 3069/6677. 3 Tel.: +61 2 9850 4857; fax: +61 2 9850 6065. 0019-8501/$ – see front matter © 2009 Elsevier Inc. All rights reserved. doi:10.1016/j.indmarman.2008.11.009 Contents lists available at ScienceDirect Industrial Marketing Management