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The Profitability of Price Fixing: Evidence from Stock Market Reaction to Federal Indictments

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  • Bosch, Jean-Claude
  • Eckard, E Woodrow, Jr

Abstract

The authors estimate the profitability of price fixing by examining the stock price reaction to federal indictments for 127 firms during 1962-1980. They hypothesize that the reaction is composed of expected legal costs, lost monopoly profits, and/or various negative "market signal" effects. The mean abnormal return over the WSJ indictment announcement date and the day before is a statistically significant --1.08%. This corresponds to a total value loss of $2.18 billion ($1982), of which only about 13% can be attributed to various legal costs (e.g., fines and damages). The $1.89 billion residual might be, in all or part, the present value of monopoly profits lost because of conspiracy dissolution. They test this and other possible explanations, and on balance find support for the lost monopoly profit interpretation. Copyright 1991 by MIT Press.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 73 (1991)
Issue (Month): 2 (May)
Pages: 309-17

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Handle: RePEc:tpr:restat:v:73:y:1991:i:2:p:309-17

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Web page: http://mitpress.mit.edu/journals/

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Cited by:
  1. Joseph E. Harrington, 2005. "Optimal Cartel Pricing In The Presence Of An Antitrust Authority," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(1), pages 145-169, 02.
  2. Tim Reuter, 2012. "Private antitrust enforcement revisited: The role of private incentives to report evidence to the antitrust authority," Working Paper Series of the Department of Economics, University of Konstanz 2012-04, Department of Economics, University of Konstanz.
  3. Hanlon, Michelle & Slemrod, Joel, 2009. "What does tax aggressiveness signal? Evidence from stock price reactions to news about tax shelter involvement," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 126-141, February.
  4. Thorsten Lübbers, 2009. "Is Cartelisation Profitable? A Case Study of the Rhenish Westphalian Coal Syndicate, 1893-1913," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2009_09, Max Planck Institute for Research on Collective Goods.
  5. Yuming Fu & Stephen Ching, 2001. "Examining Competition in Land Market: An Application of Event Study to Land Auctions in Hong Kong," Wisconsin-Madison CULER working papers 01-01, University of Wisconsin Center for Urban Land Economic Research.
  6. Klein, Gordon J. & Günster, Andrea, 2013. "Enforcement of European Competition Policy - Impact on Competition and Efficiency," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79989, Verein für Socialpolitik / German Economic Association.
  7. Houba, H.E.D. & Motchenkova, E. & Wen, Q., 2008. "Maximal Cartel Pricing and Leniency Programs," Discussion Paper 2008-046, Tilburg University, Tilburg Law and Economic Center.
  8. Michael Cichello & Douglas Lamdin, 2006. "Event Studies and the Analysis of Antitrust," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 13(2), pages 229-245.
  9. Ching, Stephen & Fu, Yuming, 2003. "Contestability of the urban land market: an event study of Hong Kong land auctions," Regional Science and Urban Economics, Elsevier, vol. 33(6), pages 695-720, October.
  10. Mats Bergman, 2008. "Quis Custodiet Ipsos Custodes? or Measuring and Evaluating the Effectiveness of Competition Enforcement," De Economist, Springer, vol. 156(4), pages 387-409, December.
  11. Fotis, Panagiotis, 2011. "Firm's damages from antitrust & abuse of dominant position investigations," MPRA Paper 32788, University Library of Munich, Germany, revised 13 Aug 2011.
  12. Margaret C. Levenstein & Valerie Y. Suslow, 2002. "What Determines Cartel Success?," UMASS Amherst Economics Working Papers 2002-01, University of Massachusetts Amherst, Department of Economics.
  13. John Thompson & David Kaserman, 2001. "After The Fall: Stock Price Movements and the Deterrent Effect of Antitrust Enforcement," Review of Industrial Organization, Springer, vol. 19(3), pages 329-334, November.
  14. Barbara Baarsma & Ron Kemp & Rob Noll & Jo Seldeslachts, 2012. "Let’s Not Stick Together: Anticipation of Cartel and Merger Control in The Netherlands," De Economist, Springer, vol. 160(4), pages 357-376, December.

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