The Deterrent Effect of Antitrust Enforcement
18 Pages Posted: 30 Jan 2003
Soon after the passage of the Sherman Act, the Supreme Court determined that horizontal minimum price fixing was so inherently injurious to consumer welfare that it should be illegal per se. Horizontal collusion has since become a major focus of federal antitrust enforcement. Through the use of criminal and civil sanctions the Department of Justice (DOJ) has sought not only to remedy specific instances of price fixing, but also to achieve general deterrence of potential price fixing.
This paper is the first systematic attempt to estimate the impact of antitrust enforcement on horizontal minimum price fixing. We develop a simple theoretical model of the collusive pricing decision and then, using data on the bread industry, assess empirically the deterrent effect of public and private antitrust enforcement on the decision to collude. We show that a cartel's optimal price is likely to be neither the competitive price nor the price that the cartel would see in the absence of antitrust enforcement but rather an intermediate price that depends on the levels of antitrust enforcement efforts and penalties. Our empirical results reveal that increasing antitrust enforcement in the presence of a credible threat of large damage awards has the deterrent effect of reducing markups in the bread industry.
JEL Classification: D4,K00,K14,K2,K21,L2,L4,L41,L5
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