The Distortive Effects of Antitrust Fines Based on Revenue

Abstract

In most jurisdictions, antitrust fines are based on affected commerce rather than on collusive profits, and in some others, caps on fines are introduced based on total firm sales rather than on affected commerce. We uncover a number of distortions that these policies generate, propose simple models to characterise their comparative static properties and quantify them with simulations based on market data. We conclude by discussing the obvious need to depart from these distortive rules of thumb that appear to have the potential to substantially reduce social welfare. How competition authorities (CAs) should set fines and how they actually do so in practice is a highly debated issue among antitrust practitioners. In Europe, where fines are often set directly by the CAs, appeal courts have often slashed CAs’ decisions precisely on the grounds of how they set the fines. An illuminating example is the UK Competition Appeal Tribunal (CAT) decision in 2011 to cut the fines set by the Office of Fair Trading (OFT) for members of the construction recruitment cartel substantially, on the grounds that the ‘wrong’ measure of affected commerce was used.