Analysis of Current Penalty Schemes for Violations of Antitrust Laws

Kort, P. M. and Motchenkova, E. (2006): Analysis of Current Penalty Schemes for Violations of Antitrust Laws. Published in: Journal of Optimization Theory and Applications , Vol. 128, No. 2 (February 2006): pp. 431-451.

Abstract

The main feature of the penalty schemes described in current sentencing guidelines is that the fine is based on the accumulated gains from cartel activities or price-fixing activities for the firm. The regulations suggest modeling the penalty as an increasing function of the accumulated illegal gains from price fixing to the firm, so that the history of the violation is taken into account. We incorporate these features of the penalty scheme into an optimal control model of a profit-maximizing firm under antitrust enforcement. To determine the effect of taking into account the history of the violation, we compare the outcome of this model with a model where the penalty is fixed. The analysis of the latter model implies that complete deterrence can be achieved only at the cost of shutting down the firm. The proportional scheme improves upon the fixed penalty, since it can ensure complete deterrence in the long run, even when penalties are moderate. Phase-diagram analysis shows that, the higher the probability and severity of punishment, the sooner cartel formation is blocked. Further, a sensitivity analysis is provided to show which strategies are most successful in reducing the degree of price fixing. It turns out that, when the penalties are already high, the antitrust policy aiming at a further increase in the severity of punishment is less efficient than the policy that increases the probability of punishment.

• Item Type: MPRA Paper
• Language: English
• Keywords: Optimal Control; Dynamic Analysis; Antitrust Policy; Antitrust Laws
• Subjects: K - Law and Economics > K2 - Regulation and Business Law > K21 - Antitrust Law; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C61 - Optimization Techniques ; Programming Models ; Dynamic Analysis; K - Law and Economics > K4 - Legal Procedure, the Legal System, and Illegal Behavior > K42 - Illegal Behavior and the Enforcement of Law

References

Report on the Nature and Impact of Hard Core Cartels and Sanctions against Cartels, OECD Report, 2002

European Guidelines on the Method of Setting Fines Imposed, PbEG, 1998

US Sentencing Guidelines for Organizations, Guidelines Manual, Chapter 8: Sentencing of Organizations, 2001

FENT, T., ZALESAK, M., and FEICHTINGER, G., Optimal Offending in View of the Offender’s Criminal Record, Central European Journal of Operations Research, Vol. 7, pp. 111–127, 1999

LEUNG, S.F., How to Make the Fine Fit the Corporate Crime? An Analysis of Static and Dynamic Optimal Punishment Theories, Journal of Public Economics, Vol. 45, pp. 243–256, 1991

FEICHTINGER, G., A Differential Games Solution to a Model of Competition between a Thief and the Police, Journal of Management Science Vol. 29, pp. 686–699, 1983

12th Annual Report, DOJ, 1998; see http://usdoj.gov/atr/public/speeches/1583.html

BECKER, G.S., Crime and Punishment: An Economic Approach, Journal of Political Economy, Vol. 76, pp. 169–217, 1968

EMONS, W., A Note on Optimal Punishment for Repeat Offenders, Mimeo, University of Bern and CEPR, 2001

POLINSKY, A., and SHAVELL, S., The Optimal Tradeoff between the Probability and Magnitude of Fines, American Economic Review, Vol. 69, pp. 880–891, 1979

GAROUPA, N., The Theory of Optimal Law Enforcement, Journal of Economic Surveys, Vol. 11, pp. 267–295, 1997

GAROUPA, N., Optimal Magnitude and Probability of Fines, European Economic Review, Vol. 45, pp. 1765–1771, 2001