Tuesday, June 22, 2010
Posted by D. Daniel Sokol
Harold Houba, VU University Amsterdam - Department of Econometrics, Tinbergen Institute, Evgenia Motchenkova, VU University Amsterdam - Department of Economics, TILEC, and Quan Wen, Vanderbilt University - College of Arts and Science - Department of Economics discuss Antitrust Enforcement Under Endogenous Fines and Price-Dependent Detection Probabilities.
ABSTRACT: We analyze the effectiveness of antitrust regulation in a repeated oligopoly model in which both fines and detection probabilities depend on the cartel price. Such fines are closer to actual guidelines than the commonly assumed fixed fines. Under a constant detection probability, we confirm the long-run neutrality result with respect to fixed fines reported in Harrington (2005) and extend his result to the case where fines are directly proportional to illegal gains. In addition, we report that the profit-maximizing cartel price lies below the monopoly price when policy design features non-constant price-dependent detection probability. This offers partial support for current practice.