Thursday, December 2, 2010
Posted by D. Daniel Sokol
Margaret C. Levenstein & Valerie Suslow (both University of Michigan Ross School of Business) explain Constant Vigilance: Maintaining Cartel Deterrence During the Great Depression.
ABSTRACT: Antitrust authorities around the world have continued to pursue illegal price-fixing throughout the economic crisis, but have also increasingly granted "inability to pay" reductions in fines. While taking ability to pay into account is appropriate, as the overriding policy goal is the promotion of competition, these reductions in fines must be accompanied by other policy changes in order to maintain the expected level of sanction. Granting inability to pay requests for reductions in fines is an ex-post decision on the part of antitrust authorities, and yet it clearly has ex-ante incentive implications for cartel formation. These fine reductions also have the potential to undermine the legitimacy and credibility of the antitrust authorities, and therefore must be implemented with specific, objective, and transparent criteria. To assure the effectiveness of anti-cartel policy, we should design policies that are informed by empirical research. Antitrust authorities should be vigilant in restricting communication that facilitates cooperation among competing firms in highly concentrated industries, especially those with a history of collusion. They should also monitor the behavior of former cartel members, raising standards for mergers and other cooperative agreements for firms with a history of collusion. This paper reviews the implementation of recent cartel "inability-to-pay" reductions in fines and proposes tools for maintaining deterrence without increasing the likelihood of bankruptcy. Our recommendations build on our earlier empirical research on the determinants of cartel stability.