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Friday, June 10, 2011

Thomas Cheng on Criminalising Cartels

Posted by Thomas Cheng

Professor Maurice Stucke's chapter on the application of behavioral economics to cartel enforcement makes an important contribution to the existing literature on cartels. What is clear after reading the chapter is how little we know about the mechanics of cartel formation and maintenance. Invoking relevant behavioral economic concepts, Stucke insightfully points out that cartels are not necessarily formed in a smoke-filled room on one discrete occasion. Instead, cartel members may drift into a cartel through gradually intensifying cooperation, which may have started off as a completely innocuous information exchange.

What is equally clear is that one of the main reasons for our paltry understanding of cartel mechanics is the rational behavior assumption of neo-classical economic theory, which has reduced cartel members to little more than a calculator of expected costs and benefits. This assumption has led us antitrust scholars and enforcers to neglect the very important sociological and cultural dimensions of cartels. After all, cartels are ultimately group interaction. It should be small surprise that factors that usually affect group dynamics, such as social norms and trust, play an important role in the formation and maintenance of cartels. As urged by Professor Stucke, it is critically important that we go beyond the neo-classical understanding of cartels and improve our understanding of cartel mechanics by incorporating insights from behavioral economics, social and cultural psychology.

This task is doubly important because there are clear limitations to the enforcement strategy prescribed by the neo-classical theory. If it is true that current cartel enforcement has failed to achieve optimal deterrence, fines would need to be raised so that the expected costs of cartel participation outweigh the expected gains. While this may be sound in theory, it is clear that fines cannot rise indefinitely. The level of fines imposed by antitrust authorities is constrained by societal norms about proportionality. Over the last few years, there have been increasing complaints that the fines imposed by the European Commission have become excessive. This view is strongly held by many corporations and private practitioners. One may argue that it is to some extent shared by the European courts as well, as evidenced by the repeated reduction of fines by the General Court on appeal of Commission decisions.

Members of society have an innate sense of proportionality between the severity of crime and punishment. This sense of proportionality does not seem to be linear in nature. Beyond a certain point, despite the level of harm created by the conduct, members of society seem to deem certain level of fine to be excessive. If there is a curve that represents this sense of proportionality, it clear flattens out at the top. There seems to be no exact way to determine this, but at some point, our gut feeling tells us “this fine is too much”. Even if this gut feeling of most members of society is inconsistent with neoclassical economic learning, antitrust enforcers cannot ignore it, lest the antitrust enterprise will lose its legitimacy in the eyes of the public.

One new line of inquiry that Stucke’s book chapter opened is the relationship between culture and cartel enforcement. At various points, Stucke emphasizes the importance of social or group norms to the formation and maintenance of cartels. Social norms and the trust shared by industry members may facilitate the formation and maintenance of cartel. Social norms differ across cultures. Cultural psychologists such as Geert Hofstede have documented the differences across cultures in their business behavior, including the extent of individualism and collectivism that permeates a particular culture. Group norms are obviously different in a collectivist culture as opposed to an individualistic culture. It would thus be interesting to examine the extent to which cartel formation and maintenance differs across cultures. This difference of course should not be overstated. There have been numerous instances of successful international cartels spanning across cultures. Yet the point remains that there may be differences in the formation and maintenance of more localized cartels that are confined within national borders. A deeper understanding of the relationship between cultural norms and the mechanics of cartel will allow different jurisdictions to tailor their cartel enforcement policies according to local circumstances and hopefully improve their effectiveness.

 

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