Does Crime Pay? Cartel Penalties and Profits

Abstract

This article seeks to answer a fundamental antitrust question: does crime pay? Do the current overall levels of U.S. cartel sanctions adequately discourage firms from engaging in illegal collusion? Seven years ago our research showed that the unfortunate answer was clearly that, yes, criminal collusion usually is profitable! The expected costs (in terms of criminal fines and prison time, civil damages, etc.) was significantly less than expected gains to the price fixers. Sadly, the most recent data re-affirm this conclusion.

The great majority of companies participating in illegal cartels make a profit even after they pay all the penalties. The current level of sanctions is only 9 to 21 percent of optimality, so it follows that current overall sanction levels should be quintupled. To move modestly in this direction, we propose five specific recommendations. Only the first and possibly the last would require new legislation.

First, legislation should add prejudgment interest to both private treble damage actions and criminal fines. Second, the U.S. Sentencing Commission should double its current presumption that cartels raise prices by an average of 10 percent. (Hundreds of independent estimates show that median cartel overcharges since 1990 have averaged 23 percent, and the mean overcharge has been more than 35 percent for domestic cartels, and 56 percent for international cartels.) Third, the budget of the Antitrust Division should be increased significantly. Fourth, as Judge Douglas Ginsburg and others have recommended, the DOJ should insist, in its plea bargaining negotiations, that corporate defendants agree not to hire or re-hire anyone who has been convicted of price fixing for a specified (and long) period. Finally, the United States should implement a whistleblower reward or bounty system for individuals who turn in cartels.

Together, these proposals would more nearly deter price fixing optimally. They would save victimized consumers and businesses from paying billions of dollars per year in cartel overcharges.

Keywords: cartels, collusion, price fixing, optimal deterrence, antitrust, antitrust penalties, antitrust sanctions, antitrust remedies

JEL Classification: K21