Analysis of the Properties of Current Penalty Schemes for Violations of Antitrust Law

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 or price-fixing activities for the firm. These gains are usually difficult to estimate, but they can be approximated by a fraction of the turnover. The regulations thus 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. In order 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 main result of the analysis of the later model is 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.