Determination of Optimal Penalties for Antitrust Violations in a Dynamic Setting

CentER Discussion Paper No. 2004-96

32 Pages Posted: 12 Nov 2004

See all articles by Evgenia Motchenkova

Evgenia Motchenkova

VU University Amsterdam - Department of Economics; TILEC

Date Written: September 2004

Abstract

We analyze a differential game describing the interactions between a firm that might be violating competition law and the antitrust authority. The objective of the authority is to minimize social costs (loss in consumer surplus) induced by an increase in prices above marginal costs. It turns out that the penalty schemes which are used now in EU and US legislation appear not to be as efficient as desired from the point of view of minimization of consumer loss from price-fixing activities of the firm. In particular, we prove that full compliance behavior is not sustainable as a Nash Equilibrium in Markovian strategies over the whole planning period, and, moreover, that it will never arise as the long-run steadystate equilibrium of the model. We also investigate the question which penalty system enables us to completely deter cartel formation in a dynamic setting. We found that this socially desirable outcome can be achieved in case the penalty is an increasing function of the degree of offense and is negatively related to the probability of law enforcement.

Keywords: Antitrust, policy, law, dynamic games

JEL Classification: L41, K21, C73

Suggested Citation

Motchenkova, Evgenia, Determination of Optimal Penalties for Antitrust Violations in a Dynamic Setting (September 2004). CentER Discussion Paper No. 2004-96. Available at SSRN: https://ssrn.com/abstract=617202 or http://dx.doi.org/10.2139/ssrn.617202

Evgenia Motchenkova (Contact Author)

VU University Amsterdam - Department of Economics ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands

TILEC ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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