The deterrent effect of anti-cartel enforcement: A tale of two tails

Very little is known empirically about deterred cartels. Therefore, although the characteristics of detected cartels are well documented, it is unclear that they are a representative sample. If deterred or undetected cartels differ systematically from the detected, many of our conventional empirical wisdoms could be subject to sample selection bias. Similarly, the impact of cartel policy, based only on prosecuted cases, could be systematically under-estimated. This paper addresses this gap in our knowledge, and explores how far a key characteristic - the overcharge - differs between deterred and undeterred cartels. First we examine an existing well-known database on cartels and find that the distribution of overcharge for legal cartels has significantly greater mass in its tails than the distribution for illegal cartels. Taking legal cartels as a proxy for a world without enforcement policy, this suggests that it is the lowest and highest overcharge cartels which are most likely to be deterred, or undetected, by cartel enforcement policy. Second, we summon a theoretical model of cartel formation to show that, under very reasonable assumptions, it is deterrence that explains the reduced occurrence of low and high overcharge cartels when faced with antitrust enforcement.