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Analysis of the Properties of Current Penalty Schemes for Violations of Antitrust Law

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Author Info

  • Motchenkova, E.
  • Kort, P.M.

    (Tilburg University, Center for Economic Research)

Abstract

The main feature of the penalty schemes described in current sentencing guidelines is that the fine is based on the accumulated gains from cartel or price-fixing activities for the firm.These gains are usually difficult to estimate, but they can be approximated by a fraction of the turnover.The regulations thus suggest modeling the penalty as an increasing function of the accumulated illegal gains from price-fixing to the firm, so that the history of the violation is taken into account.We incorporate these features of the penalty scheme into an optimal control model of a profit-maximizing firm under antitrust enforcement.In order to determine the effect of taking into account "the history of the violation", we compare the outcome of this model with a model where the penalty is fixed.The main result of the analysis of the later model is that complete deterrence can be achieved only at the cost of shutting down the firm. The proportional scheme improves upon the fixed penalty since it can ensure complete deterrence in the long run, even when penalties are moderate. Phase-diagram analysis shows that the higher the probability and severity of punishment, the sooner cartel formation is blocked.Further, a sensitivity analysis is provided to show which strategies are most successful in reducing the degree of price-fixing.It turns out that, when the penalties are already high, the antitrust policy aiming at a further increase in the severity of punishment is less efficient than the policy that increases the probability of punishment.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2004-97.

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Date of creation: 2004
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Handle: RePEc:dgr:kubcen:200497

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Web page: http://center.uvt.nl

Related research

Keywords: antitrust; law; policy;

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References

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  1. Leung, S.F., 1991. "How to Make the Fine Fit the Corporate Crime? An Analysis of Static and Dynamic Optimal Punishment Theories," RCER Working Papers 261, University of Rochester - Center for Economic Research (RCER).
  2. Polinsky, Mitchell & Shavell, Steven, 1979. "The Optimal Tradeoff between the Probability and Magnitude of Fines," American Economic Review, American Economic Association, vol. 69(5), pages 880-91, December.
  3. Nuno Garoupa, 2000. "Optimal magnitude and probability of fines," Economics Working Papers 454, Department of Economics and Business, Universitat Pompeu Fabra.
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Cited by:
  1. Evgenia Motchenkova & Rob Laan, 2011. "Strictness of leniency programs and asymmetric punishment effect," International Review of Economics, Springer, vol. 58(4), pages 401-431, December.
  2. Leliefeld, Daniel & Motchenkova, Evgenia, 2007. "To protect in order to serve, adverse effects of leniency programs in view of industry asymmetry," Serie Research Memoranda 0002, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  3. Motchenkova, E., 2004. "Effects of Leniency Programs on Cartel Stability," Discussion Paper 2004-98, Tilburg University, Center for Economic Research.

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