Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Monday, January 16, 2012

Antitrust Enforcement and Marginal Deterrence

Posted by D. Daniel Sokol

Harold E. D. 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 have written on Antitrust Enforcement and Marginal Deterrence.

ABSTRACT: We study antitrust enforcement in which the fine must obey four legal principles: punishments should fit the crime, proportionality, bankruptcy considerations, and minimum fines. We integrate these legal principles into an infinitely-repeated oligopoly model. Bankruptcy considerations ensure abnormal cartel profits. We derive the optimal fine schedule that achieves maximal social welfare under these legal principles. This optimal fine schedule induces collusion on a lower price making it more attractive than on higher prices. Also, raising minimum fines reduces social welfare and should never be implemented. Our analysis and results relate to the marginal deterrence literature by Shavell (1992) and Wilde (1992).

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