Wednesday, October 24, 2018

Legal Principles in Antitrust Enforcement

Harold Houba, VU University Amsterdam, Department of Econometrics; VU University Amsterdam, Tinbergen Institute, Evgenia Motchenkova, VU University Amsterdam - Department of Economics; TILEC, and Quan Wen, University of Washingtonexamine Legal Principles in Antitrust Enforcement.

ABSTRACT: We study antitrust enforcement that aims to channel price‐fixing incentives of cartels through setting fine schedules and detection levels. Fines obey legal principles, such as the punishment should fit the crime, proportionality, bankruptcy considerations, and minimum fines. Bankruptcy considerations limit maximum fines, ensure abnormal cartel profits, and impose a challenge for optimal antitrust enforcement. We derive the fine schedule and detection level that are constrained‐optimal under legal principles and sustainability of cartel prices. This fine schedule lies below the maximum fine, makes collusion on lower prices more attractive than on higher prices, and, hence, relates to the body of literature on marginal deterrence.

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