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Antitrust Enforcement and Marginal Deterrence

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  • Harold Houba

    (VU University Amsterdam)

  • Evgenia Motchenkova

    (VU University Amsterdam)

  • Quan Wen

    (Vanderbilt University)

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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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-166/1.

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Date of creation: 22 Nov 2011
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Handle: RePEc:dgr:uvatin:20110166

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Web page: http://www.tinbergen.nl

Related research

Keywords: Antitrust enforcement; Antitrust Law; Cartel; Oligopoly; Repeated game;

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  1. Wilde, Louis L., 1992. "Criminal choice, nonmonetary sanctions and marginal deterrence: A normative analysis," International Review of Law and Economics, Elsevier, Elsevier, vol. 12(3), pages 333-344, September.
  2. Garoupa, Nuno, 1997. " The Theory of Optimal Law Enforcement," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 11(3), pages 267-95, September.
  3. Nuno Garoupa, 2000. "Optimal magnitude and probability of fines," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 454, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Stigler, George J, 1970. "The Optimum Enforcement of Laws," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 78(3), pages 526-36, May-June.
  5. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262061414, December.
  6. Motta, Massimo & Polo, Michele, 2003. "Leniency programs and cartel prosecution," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 21(3), pages 347-379, March.
  7. Houba, Harold & Motchenkova, Evgenia & Wen, Quan, 2012. "Competitive prices as optimal cartel prices," Economics Letters, Elsevier, Elsevier, vol. 114(1), pages 39-42.
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Cited by:
  1. C. Detotto & BC. McCannon & M. Vannini, 2013. "A Note on Marginal Deterrence: Evidence," Working Paper CRENoS 201310, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.

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