The Optimal Prudential Deterrence of Price Fixing Agreements

IGIER Working Paper No. 120

19 Pages Posted: 14 May 1998

See all articles by Michele Polo

Michele Polo

Bocconi University - Department of Economics

Date Written: November 1997

Abstract

We analyze the optimal antitrust enforcement against collusion under asymmetric information with a continuum of types. We focus on prudential deterrence, by imposing that expected fines cannot induce losses even off the equilibrium path. Due to incentive compatibility, efficient cartels enjoy positive rents even when prosecution is costless, created through reduced fines and price cost margins. In equilibrium this distortion is lower for more efficient types, while full collusion can be tolerated for high cost cartels. Moreover, regulation with positive transfers is better than antitrust enforcement, which, however, allows to implement more efficient outcomes than price caps.

JEL Classification: D21, L4

Suggested Citation

Polo, Michele, The Optimal Prudential Deterrence of Price Fixing Agreements (November 1997). IGIER Working Paper No. 120. Available at SSRN: https://ssrn.com/abstract=87248 or http://dx.doi.org/10.2139/ssrn.87248

Michele Polo (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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