Antitrust Penalties and the Implications of Empirical Evidence on Cartel Overcharges (original) (raw)
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Revista de Economia Contemporânea
We review recent theoretical literature pointing to the ineffectiveness, in terms of welfare impact, of currently applied sanctioning regimes for cartels by Competition Authorities (CAs). We then provide a comparison of the regimes taking also into account criteria related to ease of implementation and transparency. We argue the case for switching to a penalty regime, in which the penalty base continues to be the currently dominant penalty base of cartel revenue but in which, in contrast to current practice, the penalty rate is based on the rate commonly estimated in order to calculate damages in private damage claims, that is, the overcharge rate.
Penalizing Cartels: The Case for Basing Penalties on Price Overcharge
SSRN Electronic Journal, 2000
In this paper we set out the welfare economics based case for imposing cartel penalties on the cartel overcharge rather than on the more conventional bases of revenue or profits (illegal gains). To do this we undertake a systematic comparison of a penalty based on the cartel overcharge with three other penalty regimes: fixed penalties; penalties based on revenue, and penalties based on profits. Our analysis is the first to compare these regimes in terms of their impact on both (i) the prices charged by those cartels that do form; and (ii) the number of stable cartels that form (deterrence). We show that the class of penalties based on profits is identical to the class of fixed penalties in all welfare-relevant respects. For the other three types of penalty we show that, for those cartels that do form, penalties based on the overcharge produce lower prices than those based on profit) while penalties based on revenue produce the highest prices. Further, in conjunction with the above result, our analysis of cartel stability (and thus deterrence), shows that penalties based on the overcharge out-perform those based on profits, which in turn out-perform those based on revenue in terms of their impact on each of the following welfare criteria: (a) average overcharge; (b) average consumer surplus; (c) average total welfare.
Optimal Cartel Deterrence: An Empirical Comparison of Sanctions to Overcharges
2011
Cartels are the supreme evil of antitrust, overcharging consumers many billions of dollars each year. 2 Many believe that without the antitrust laws a substantial percentage of the economy of every industrialized nation would become completely cartelized. 3 Indeed, one has to reach far outside the field's mainstream to find those who would leave consumers at cartels' mercy by not sanctioning them heavily. 4 The United States imposes a diverse array of sanctions against those who collude, including fines and restitution payments for the firms involved, and prison, house arrest, and fines for the corporate officials involved. 5 Victims of cartels can sue for mandatory treble damages and attorney's fees. 6 Judge Posner called these the equivalent of dropping "cluster bombs" on defendants, 7 and their multiplicity probably has led to the common belief that the
Crime and Punishment: When Tougher Antitrust Enforcement Leads to Higher Overcharge
SSRN Electronic Journal, 2013
The economics of crime and punishment postulates that higher punishment leads to lower crime levels, or less severe crime. It is however hard to get empirical support for this rather intuitive relationship. This paper o¤ers a model that can contribute to explain why this is the case. We show that if criminals can spend resources to reduce the probability of being detected, then a higher general punishment level can increase the crime level. In the context of antitrust enforcement, the model shows that competition authorities who attempt to …ght cartels by means of tougher sanctions for all o¤enders may actually lead cartels to increase their overcharge when leniency programs are in place. We thank S. Ecer, G. Spagnolo, J.Y. Sand, T. Nilssen and seminar participants at the EARIE conference 2012 for constructive comments. Financial support from the Norwegian Research Council is gratefully acknowledged.
The Effects of Leniency on Cartel Pricing
SSRN Electronic Journal, 2000
We analyze how leniency affects cartel pricing in an infinitely-repeated oligopoly model where the fine rates are linked to illegal gains and detection probabilities depend on the degree of collusion. A novel aspect of this study is that we focus on the worst possible outcome. We investigate the maximal cartel price, the largest price for which the conditions for sustainability hold. We analyze how the maximal cartel price supported by different cartel strategies adjusts in response to the introduction of (ex-ante and ex-post) leniency programs. We disentangle the effects of traditional antitrust enforcement, leniency, and cartel strategies on the maximal cartel price. Exante leniency cannot reduce the maximal cartel price below the price under antitrust without leniency. On the other hand, for ex-post leniency, improvement is possible and granting full immunity to single-reporting firms achieves the largest reduction in the maximal cartel price. To reduce adverse effects under both leniency programs, fine reductions to multiple-reporting firms should be moderate or absent. Finally, ex-post leniency should provide less generous fine reductions to multiple-reporting firms, which is supported by the current practice in the US and the EU.
Combining cartel penalties and private damage actions: The impact on cartel prices
International Journal of Industrial Organization
In many countries antitrust enforcement by Competition Authorities through prosecution and the imposition of penalties is complemented in price-fixing cases by private damage actions, which should affect both cartel deterrence and the prices set by those cartels that do form. We show that the impact of combining penalties and damages on cartel prices is not clearcut, and depends on both the nature of the penalty regime and the way that damages are calculated. We demonstrate this by focusing on two ways of calculating damages that have been advocated in practice and two different forms of the widely used revenue-based penalty regime. When the simple form of revenue-based penalties is in force, the standard method of calculating damages worsens its harmful pricing effects, whereas the proposed alternative method of calculating damages can overturn them. When a more sophisticated form of revenue-based penalties is in operation, imposing damages will improve its beneficial pricing effects under both methods of damage calculation, but the alternative method is more effective. In all cases combining penalties and damages improves deterrence.
How High Do Cartels Raise Prices? Implications for Reform of the Antitrust Sentencing Guidelines
SSRN Electronic Journal, 2005
The current U.S. Sentencing Guidelines for criminal price fixing violations begin with an assumption that cartels raise prices by an average of 10% of the affected commerce, and use this estimate to calculate recommended fines to achieve optimal deterrence. Some have suggested that this figure might be too high, and a recent Supreme Court decision has called into question the constitutionality of the Guidelines. For these reasons the Guidelines might well be reformulated. This article reexamines the Sentencing Commission's assumption using 2 data sources: every available economic study of cartels, and every final verdict in a U.S. cartel case that reported the overcharge percentage. The results from the different data sources and periods, show median and average cartel overcharges that are between 15% and 36%, with most of the median and average results between 20% and 30%. Based upon this finding the authors recommend that the Sentencing Commission raise the current level of cartel penalties.
Violations of Antitrust Provisions: The Optimal Level of Fines for Achieving Deterrence
While the general principle that fines for antitrust violations be set at deterrent levels is well established in prevailing Guidelines on Fines, how these principles are to be interpreted in specific cases is not even considered, or at most only non-operational indications are provided. This article attempts to fill this gap by elaborating some guidance on how deterrence could be achieved for specific categories of violations, by taking into account very simple parameters of demand and supply responses to price signals. In the first place, we argue that a measure of 'ex ante' extra profits provides the conceptually correct starting point and we suggest how this may be calculated. Second, general principles of determination of fines can and should be applied in distinct ways to cartel and to abuse of dominance violations, taking into account the different probability of detecting these violations. Furthermore, the determination of the deterrent level of fines would benefit both enforcement and compliance if appropriate account is taken of the interplay between fines, leniency, and private litigation. A simulation approach is developed in the article to provide competition authorities with ranges of percentages of fines that may become useful in practical applications.
Antitrust enforcement with price-dependent fines and detection probabilities
Economics Bulletin, 2010
We analyze the effectiveness of antitrust enforcement in repeated oligopoly models in which both fines and detection probabilities depend on the cartel price. Such fines reflect actual guidelines. Inspections based on monitoring of market prices imply endogenous detection probabilities. Without monitoring, fines that are either fixed or proportional to illegal gains cannot eradicate the monopoly price, but more-than-proportional fines can. Policy design with inspections based on price-monitoring implies that the profit-maximizing cartel price always lies below the monopoly price independently of the fine structure. These results offer partial support for the current practice of monitoring and more-thanproportional fines. We would like to thank an anonymous referee and the editor for suggestions which were very helpful in improving the present paper.
Antitrust and the “Beckerian Proposition”: the effects of investigation and fines on cartels
Handbook of Behavioral Industrial Organization
In order to deter collusion and punish the infringement of competition law, antitrust authorities run costly investigations and levy fines on detected and convicted wrongdoers. Across countries, the resources committed to antitrust investigations and the fine level vary. According to Becker (1968) different combinations of magnitude of fine and likelihood of detection are substitutable in their deterrence effect. Since detection depends on costly investigation, it is optimal to minimize detection efforts and impose high fines. Recently the UK Office of Fair Trading faced a budget reduction that may affect detection efforts, while it simultaneously increased colluding firms fines from 10% to 30% of its annual turnover. Experimental support for the Beckerian Proposition is mixed in different contexts, and it is not known from a behavioural perspective how effective this type of policy design would be in a market. We address this issue through a market experiment to study the effects of magnitude and likelihood of fines on cartel activity, prices and collusive stability. We find that, in the absence of a leniency program, complying with the Beckerian Proposition, detection rates and fines are indeed substitutable. In the presence of a leniency program, however, a regime that embodies low rates of detection and high fines reduces the propensity to collude and lowers the overall incidence of cartelized markets significantly more than a high detection and low fine regime. This indicates that antitrust agencies can economize on enforcement costs and achieve a higher degree of deterrence by imposing higher level of fines.