Does enforcement deter cartels? A Tale of Two Tails

Abstract

This paper investigates the deterrent impact of competition enforcement on cartels. It is shown theoretically that if enforcement is effective in deterring and constraining cartels then there will be fewer cartels with low overcharges and fewer with high overcharges. This prediction provides an indirect method for testing whether the enforcement of competition law is proving effective. Using historical data on legal cartels to generate the counterfactual, we find significantly less mass in the tails of the overcharge distribution, compared to the distribution for illegal cartels. This result is robust to controlling for confounding factors, and although further work is desirable, we interpret this as the first tentative confirmation of effective deterrence.

Keywords: anti-cartel enforcement, deterrence, cartel overcharge

JEL Classification: C21, K14, K21, L41