Violations of Antitrust Provisions: The Optimal Level of Fines for Achieving Deterrence (original) (raw)
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Analysis of Current Penalty Schemes for Violations of Antitrust Laws
Journal of Optimization Theory and Applications, 2006
The main feature of the penalty schemes described in current sentencing guidelines is that the fine is based on the accumulated gains from cartel activities or price-fixing activities for the firm. The regulations suggest modeling the penalty as an increasing function of the accumulated illegal gains from price fixing to the firm, so that the history of the violation is taken into account. We incorporate these features of the penalty scheme into an optimal control model of a profit-maximizing firm under antitrust enforcement. To determine the effect of taking into account the history of the violation, we compare the outcome of this model with a model where the penalty is fixed. The analysis of the latter model implies that complete deterrence can be achieved only at the cost of shutting down the firm. The proportional scheme improves upon the fixed penalty, since it can ensure complete deterrence in the long run, even when penalties are moderate. Phase-diagram analysis shows that, the higher the probability and severity of punishment, the sooner cartel formation is blocked. Further, a sensitivity analysis is provided to show which strategies are most successful in reducing the degree of price fixing. It turns out that, when the penalties are already high, the antitrust policy aiming at a further increase in the severity of punishment is less efficient than the policy that increases the probability of punishment.
Determination of optimal penalties for antitrust violations in a dynamic setting
European Journal of Operational Research, 2008
We analyze a di¤erential game describing the interactions between a …rm that might be violating competition law and the antitrust authority. The objective of the authority is to minimize social costs (loss in consumer surplus) induced by an increase in prices above marginal costs. It turns out that the penalty schemes which are used now in EU and US legislation appear not to be as e¢ cient as desired from the point of view of minimization of consumer loss from price-…xing activities of the …rm. In particular, we prove that full compliance behavior is not sustainable as a Nash Equilibrium in Markovian strategies over the whole planning period, and, moreover, that it will never arise as the long-run steadystate equilibrium of the model. We also investigate the question which penalty system enables us to completely deter cartel formation in a dynamic setting. We found that this socially desirable outcome can be achieved in case the penalty is an increasing function of the degree of o¤ence and is negatively related to the probability of law enforcement.
Antitrust Penalties and the Implications of Empirical Evidence on Cartel Overcharges
The Economic Journal, 2013
This paper makes two contributions to the literature linking penalties charged by Competition Authorities to observed cartel price overcharges. (i) It extends the theory of optimal penalties by introducing new considerations regarding the timing of penalty decisions. Drawing on a new European dataset to calculate these additional factors, the optimal penalty is shown to be approximately 75% of that implied by the conventional formula. (ii) It shows that because penalties are typically imposed on revenue, a tougher regime may increase cartel overcharges. This calls into question some recent empirical findings on this issue, and the potential benefits of raising penalties.
This report should be cited as following: Lianos, I., Jenny, F., Wagner von Papp, F., Motchenkova E., David, E. et al (2014) An Optimal and Just Financial Penalties System for Infringements of Competition Law: a Comparative Analysis (CLES Research paper series 3/2014, UCL Faculty of Laws: London).
The report examines optimal financial penalties from an economic and a comparative perspective. While emphasis is put on deterrence, we also examine some limits to the optimal enforcement theory employed by economists to design effective sanctions, in particular the principle of proportionality and the need for the penalty to be related to the harm caused and the wrong committed, the legal system integrating corrective justice concerns. The report delves into the tension between over-enforcement and under-enforcement and that between a more effects-based approach for setting financial penalties (sanctions) that would rely on economic methodologies and a case-by-case analysis to provide an accurate estimate of the harm caused by the anticompetitive conduct and a more "forms-based" approach that would rely on the use of proxies of percentages of the volume of commerce or the affected sales. The latter reduce the administrative costs of the authorities in designing appropriate sanctions but are less accurate than effects-based approaches. The report examines intermediary approaches put forward by the literature and their possible application to various competition law infringements (e.g. cartels, abuse of a dominant position). The final part of the report proceeds to a detailed comparative analysis of the financial penalties (sanctions) regimes for infringements of competition Law in the European Union, United States, Germany, United Kingdom, France and Chile, taking an empirical and a doctrinal perspective. Specific recommendations for the reform of the financial penalties system for competition law infringements in Chile are also provided.
Antitrust Enforcement and Marginal Deterrence
SSRN Electronic Journal, 2000
We study antitrust enforcement in which the …ne must obey four legal principles: punishments should …t the crime, proportionality, bankruptcy considerations, and minimum …nes. We integrate these legal principles into an in…nitely-repeated oligopoly model. Bankruptcy considerations ensure abnormal cartel pro…ts. We derive the optimal …ne schedule that achieves maximal social welfare under these legal principles. This optimal …ne schedule induces collusion on a lower price making it more attractive than on higher prices. Also, raising minimum …nes reduces social welfare and should never be implemented. Our analysis and results relate to the marginal deterrence literature by Shavell (1992) and Wilde (1992).
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.
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
The Distortive Effects of Antitrust Fines Based on Revenue
The Economic Journal, 2013
In most jurisdictions, antitrust fines are based on affected commerce rather than on collusive profits, and in some others, caps on fines are introduced based on total firm sales rather than on affected commerce. We uncover a number of distortions that these policies generate, propose simple models to characterize their comparative static properties, and quantify them with simulations based on market data. We conclude by discussing the obvious need to depart from these distortive rules-of-thumb that appear to have the potential to substantially reduce social welfare.
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.