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The Optimal Prudential Deterrence of Price Fixing Agreements

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  • Michele Polo

Abstract

We analyse the optimal antitrust enforcement against collusion under asymmetric information with a continuum of types. We focus on prudential deterrence, by imposing that expected fines cannot induce losses even off the equilibrium path. Due to incentive compatibility, efficient cartels enjoy positive rents even when prosecution is costless, created through reduced fines and price cost margins. In equilibrium this distortion is lower for more efficient types, while full collusion can be tolerated for high cost cartels. Moreover, regulation with positive transfers is better than antitrust enforcement, which however allows to implement more efficient outcomes than price caps.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 120.

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Handle: RePEc:igi:igierp:120

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  1. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
  2. Besanko, David & Spulber, Daniel F, 1989. "Antitrust Enforcement under Asymmetric Information," Economic Journal, Royal Economic Society, vol. 99(396), pages 408-25, June.
  3. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, January.
  4. Mookherjee, Dilip & Png, I P L, 1994. "Marginal Deterrence in Enforcement of Law," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 1039-66, October.
  5. Baron, David P., 1989. "Design of regulatory mechanisms and institutions," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 24, pages 1347-1447 Elsevier.
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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. Joseph E. Harrington, Jr., 2004. "Cartel Pricing Dynamics in the Presence of an Antitrust Authority," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 651-673, Winter.
  3. Flavia Roldán, 2008. "Collusive networks in market sharing agreements in the presence of an antitrust authority," Economics Working Papers we085024, Universidad Carlos III, Departamento de Economía.
  4. Roldan, Flavia, 2011. "Covert networks and antitrust policy," IESE Research Papers D/932, IESE Business School.

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