Antitrust Penalties and the Implications of Empirical Evidence on Cartel Overcharges

Abstract

This article 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 data set 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.

Legal Principles in Antitrust Enforcement

“…25 It appeared for the …rst time in a judgement of the Court in Fédéchar. 26 Since the Treaty of Amsterdam of 1997 the principle is incorporated 24 In practice upper bounds on …nes are implemented in order to prevent bankruptcy or in order to reduce social costs of legal errors. This is the case in the EU and in many OECD countries as well (see e.g.…”

“…Tridimas (2006) for a more precise de…nition. 26 The general implementation of the principle of proportionality by the Court can be described as "The principle of proportionality requires that action undertaken must be proportionate to its objectives." 27 It is based on the concern to protect individuals against the State and on the assumption that regulatory intervention must be suitable to achieve its aims.…”

“…Ceilings on antitrust …nes have been analyzed by Bos and Schinkel (2006), Buccirossi and Spagnolo (2007), Wils (2007), Harrington (2010), or Katsoulacos and Ulph (2013). They argue that the ceilings on antitrust …nes in both the US and the EU are insu¢ cient to deter cartels for realistic levels of detection e¤orts.…”

Measuring the Effectiveness of Anti-Cartel Interventions: A Conceptual Framework

“…So, for example, our numerical simulations are based on the assumption that, while the penalty is based on revenue, both the penalty rate and the probability of detection are independent of the cartel price. As shown in Katsoulacos and Ulph (2013), if either of these are an increasing function of the cartel price then the cartel price will be lower than that used in the simulations. That could produce not just a positive indirect price effect but also a stronger deterrent effect.…”

“…The results largely replicate those in the literature -e.g. Katsoulacos & Ulph (2013) or Houba, Motchenkova and Wen (2010) -in showing that, when the penalty is imposed on profits then, if the probability of detection increases with the price set by the cartel, the cartel price will be below the monopoly price. 12 It is interesting to note however that when we set the values of our key intervention parameters to those implicitly assumed by Davies and Ormosi (2014), our calculations of the fraction of potential harm removed by a competition authority are consistent with theirs, showing that a CA can remove between 55 and 85% of all potential harm depending on the effort devoted to detection and prosecution.…”