Legal Principles in Antitrust Enforcement

• Published date: 01 July 2018
• DOI: http://doi.org/10.1111/sjoe.12234
• Date: 01 July 2018
• Author: Quan Wen,Evgenia Motchenkova,Harold Houba

©2017 The Authors. The Scandinavian Journal of Economics published by John Wiley & Sons Ltd on behalf of The

editors of The Scandinavian Journal of Economics.

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License,

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Scand. J. of Economics 120(3), 859–893, 2018

DOI: 10.1111/sjoe.12234

Legal Principles inAntitrust Enforcement*

Harold Houba

Vrije Universiteit Amsterdam, NL-1081 HV Amsterdam, the Netherlands

harold.houba@vu.nl

Evgenia Motchenkova

Vrije Universiteit Amsterdam, NL-1081 HV Amsterdam, the Netherlands

e.i.motchenkova@vu.nl

Quan Wen

University of Washington, Seattle, WA 98195-3330, USA

wenq2@uw.edu

Abstract

We study antitrust enforcement that aims to channel price-fixing incentives of cartels

through setting fine schedules and detection levels. Fines obey legal principles, such

as the punishment should fit the crime, proportionality, bankruptcy considerations, and

minimum fines. Bankruptcy considerations limit maximum fines, ensure abnormal cartel

profits, and impose a challenge for optimal antitrust enforcement. We derive the fine

schedule and detection level that are constrained-optimal under legal principles and

sustainability of cartel prices. This fine schedule lies below the maximum fine, makes

collusion on lower prices more attractive than on higher prices, and, hence, relates to

the body of literature on marginal deterrence.

Keywords: Antitrust enforcement; antitr ust law; cartel; oligopoly; repeated game

JEL classification:C73; D43; K21; L4

I. Introduction

Despite increased antitrust sanctions and other recent developments in

antitrust enforcement, there seems to be a worldwide increase in price-

fixing, market-sharing, and bid-rigging cartel behavior. Antitr ust sanctions

are the most important instrument in the fight against cartel infringements.

However, there are limitations to the effectiveness of monetary antitrust

*We would like to thank Florian Baumann, Joseph Harrington, Jeroen Hinloopen, Yannis

Katsoulacos, Jose Luis Moraga-Gonzalez, Massimo Motta, Michele Polo, Daniel Rubinfeld,

Giancarlo Spagnolo, David Ulph, and the participants of the ALEA (2012), EARIE (2012),

CRESSE (2012), IIOC (2013), and RES (2014) conferences, and a DICE seminar (2014) for

valuable comments.

860 Legal principles in antitrust enforcement

fines that cause price distortions.1In many countries, monetary

fines are capped by legal ceilings that are considered to be too low

by the experts. This restriction limits the effectiveness of fines, and

we develop an alternative constrained-optimal fine under existing legal

principles that could significantly improve the effectiveness of antitrust

enforcement.

Buccirossi and Spagnolo (2007), Harrington (2010), and Katsoulacos

and Ulph (2013) show that legal ceilings on antitrust fines in both the

US and the EU are insufficient to efficiently deter cartels from forming

for realistic levels of detection efforts.2Ceilings make antitrust policies

either completely ineffective or, at best, partially effective, in such a way

that only low prices are deterred, but high prices are still sustainable.

This raises the issue of whether such a negative result is inevitable in

the presence of legal ceilings on antitrust fines. Our study shows that

it is not, and that, even in the presence of insufficient legal ceilings,

it is possible to design a more effective fine schedule as a function

of cartel price overcharge, which is welfare-improving when compared

with the policy prescriptions currently available in the body of literature

on antitrust. This constrained-optimal fine schedule induces the lowest

possible profit-maximizing cartel price, and, hence, reduces the dead-

weight loss to its lowest achievable level. This welfare improvement is

possible because our fine schedule allows for low (or zero) fines for small

violations, and this provides incentives for cartels to switch from high

cartel overcharges to low overcharges, which benefits consumers. Hence,

instead of increasing fines to the legal upper bound for all types of

violations, which generally results in higher cartel overcharges for stable

cartels, antitrust agencies could implement a fine schedule that induces a

socially better outcome with a lower fine level, which we later relate to

marginal deterrence.

The modern economic theory of law enforcement stems from the

pioneering paper of Becker (1968). Becker’s original analysis and its

adaptation to antitrust law enforcement by Landes (1983) suggest a simple

rule that the efficient expected penalty should be set at the level that

1The limitations on the shape, size, and design of the currently employed monetary antitrust

fines and resulting imperfections and price distortions have been extensively discussed in

Buccirossi and Spagnolo (2007), Harrington (2010), Bageri et al. (2013), Katsoulacos and

Ulph (2013), Dargaud et al. (2016), and Katsoulacos et al. (2015).

2A number of empirical contributions, by, for example, Schinkel (2007) and Veljanovski

(2007), also argue that fines are too low in Europe. In a related empirical study, Connor and

Lande (2008) also show that the size of antitrust penalties in the US is too low, which results

in high cartel overcharges.

©2017 The Authors. The Scandinavian Journal of Economics published by John Wiley & Sons Ltd on behalf of The

editors of The Scandinavian Journal of Economics.

H. Houba, E. Motchenkova, and Q. Wen 861

deters all possible cartels or all possible collusive prices.3Monetary fines

should also be set to the maximum available level in order to save on

inspection costs.4However, such “first-best” antitrust enforcement might

not be feasible due to prevailing legal principles. With lower “second-

best” penalties, some cartels will form and will set positive overcharges.

Furthermore, the current body of literature on antitrust is not explicit

about how to integrate legal principles into economic analysis.5Legal

principles can conflict with the economic principle of efficiency, making

deterrence less effective. In this paper, our aim is to make explicit the

role of legal principles in the economic theory of law enforcement of

concerted illegal actions in antitrust.

In this paper, we characterize the structure of the optimal antitrust

enforcement in the “second-best” context under four legal constraints

on fines. First, the EU and the US legislation explicitly sets restrictive

ceilings to the maximum applicable fine.6Second, an important legal

principle is that punishments should be based on the gravity of the

offense in order to reflect the harm to society and illegal gains. For

antitrust, the legislation attempts to relate the fine to a rough measure

of gravity that is approximated by the volume of affected commerce or

the cartel’s illegal gains in the US and by the relevant cartel turnover

in the EU. Third, an equally important legal principle is the principle

of proportionality; the regulator should not take any action that exceeds

the one that is just necessary to achieve the objective.7In terms of fine

structures, this principle implies that the fine should not exceed the lowest

fine that suffices to prevent criminal activities. Fourth, according to the

current sentencing guidelines in the US and the EU, the lower bound

on antitrust fines is set at zero. The above legal limitations together

with the limitations on the shape of monetary fines imposed by the

antitrust sentencing guidelines might cause various distortions, such as

3In addition, antitrust regulation to deter cartels incorporates the issue of sustainable concerted

illegal activities by several offenders. See, for example, Rey (2003), Spagnolo (2004), and

Harrington (2005).

4Risk aversion and legal errors could reduce the optimal penalty, see, for example, Polinsky

and Shavell (1991, 1992) and Garoupa (1997, 2001).

5Notable exceptions include Buccirossi and Spagnolo (2007) and Cooter and Ulen (2007).

At the more general level, several papers integrate different legal principles, such as fairness

and equity, into the economic analysis (see, e.g., Rabin, 1993).

6See also, for example, Bos and Schinkel (2006) and Bageri et al. (2013). The problem posed

by insufficient legal ceilings on antitrust fines in the EU will be discussed in more details in

Sections II and IV.

7Similar interpretations of this rule can be found in Usher (1998), Tridimas (2006), Sullivan

and Frase (2008), and Sauter (2013). A more detailed discussion of these references is provided

in Online Appendix A.

©2017 The Authors. The Scandinavian Journal of Economics published by John Wiley & Sons Ltd on behalf of The

editors of The Scandinavian Journal of Economics.