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

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Thursday, January 10, 2013

Cartels As Rational Business Strategy: Crime Pays

Posted by D. Daniel Sokol

Robert H. Lande, University of Baltimore - School of Law and John M. Connor, Purdue University argue Cartels As Rational Business Strategy: Crime Pays.

ABSTRACT: This article is the first to analyze whether cartel sanctions are optimal. The conventional wisdom is that the current level of sanctions is adequate or excessive. The article demonstrates, however, that the combined level of current United States cartel sanctions is only 9% to 21% as large as it should be to protect potential victims of cartelization optimally. Consequently, the average level of United States anti-cartel sanctions should be approximately quintupled.

The United States imposes a diverse arsenal of sanctions against collusion: criminal fines and restitution payments for the firms involved and prison, house arrest and fines for the corporate officials involved. Both direct and indirect victims can sue for mandatory treble damages and attorney's fees. This multiplicity of sanctions has helped give rise to the strongly held - but until now never seriously examined - conventional wisdom in the antitrust field that these sanctions are not just adequate to deter collusion, but that they are excessive.

We analyze this issue using the standard optimal deterrence approach. This model is predicated upon the belief that corporations and individuals contemplating illegal collusion will be deterred only if expected rewards are less than expected costs, adjusted by the probability the illegal activity will be detected and sanctioned. To undertake this analysis we first calculate the expected rewards from cartelization using a new and unique database containing 75 cartel cases. We survey the literature to ascertain the probability cartels are detected and the probability detected cartels are sanctioned. We calculate the size of the sanctions involved for each case in our sample. These include corporate fines, individual fines, payouts in private damage actions, and the equivalent value (or disvalue) of imprisonment or house arrest for the individuals convicted.

Our analysis shows that, overall, United States' cartel sanctions are only 9% to 21% as large as they should be to protect potential victims of cartelization optimally. This means that, despite the existing sanctions, collusion remains a rational business strategy. Cartelization is a crime that on average pays. In fact, it pays very well. Accordingly, our concluding section suggests specific ways cartel sanctions should be increased to become more nearly optimal. This should save consumers many billions of dollars each year.

http://lawprofessors.typepad.com/antitrustprof_blog/2013/01/cartels-as-rational-business-strategy-crime-pays.html

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