Antitrust Enforcement and Marginal Deterrence
VU University Amsterdam - Department of Econometrics; Tinbergen Institute
VU University Amsterdam - Department of Economics; TILEC
Vanderbilt University - College of Arts and Science - Department of Economics
November 22, 2011
Tinbergen Institute Discussion Paper No. 11-166/1
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).
Number of Pages in PDF File: 31
Keywords: antitrust enforcement, antitrust law, cartel, oligopoly, repeated game
JEL Classification: L4, K21, D43, C73
Date posted: November 28, 2011
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