Abstract
Cartels, or secret agreements between competitors, are universally recognized as the most harmful of all types of anticompetitive conduct. Facing the challenges associated with globalization of the market economy, competition authorities in all parts of the world are increasing their efforts to design and implement modern instruments, effective enforcement procedures and adequate sanctions in order not only to detect and punish, but also to deter cartels.In this paper, we analyze the deterrent properties of the competition policy within the legal framework of the European Union. Applying the classical deterrence theory based on the model of criminal activity, we identify two key factors that affect the degree of deterrence of anticompetitive behavior: adequate sanctions and the probability of detection. We further discuss the level of fines, leniency programs and direct settlement procedures, both the latter as instruments to enhance the probability of cartel detection.By employing the methods of meta-analysis and meta-synthesis of economic and legal literature, cartel case studies, and descriptive statistical analysis, our attempt is to show that during the past decades the European competition authorities have focused on efforts to increase the effectiveness of cartel prosecution and to achieve better deterrence by numerous alterations in the European competition law, such as extensions of the fine spectrum or leniency programs or introduction of a direct settlement procedure, and that these efforts have proven to be rather successful for preventing the formation of anticompetitive agreements.
Highlights
Cartels, or illegal agreements between competitors, are designed to limit or eliminate competition between them, with the objective of increasing prices and profits of the participating companies, and have long been a problem for market economies
In order to reveal the factors that have an impact on the deterrence of cartel behavior, we focus on a standard model of criminal activity
We firstly examine the sources of potential benefits for cartel members and focus on the three main factors in an antitrust regime with optimal deterrence: on leniency programs and the direct settlement procedure both as instruments to promote the probability of cartel detection, and on the level of fines
Summary
Illegal agreements between competitors, are designed to limit or eliminate competition between them, with the objective of increasing prices and profits of the participating companies, and have long been a problem for market economies. Applying the standard model of criminal activity to cartel behavior, the economic theory of crime indicates that individuals and companies will be motivated to participate in cartel activity if the expected gain in terms of higher profits is greater than the expected costs associated with the probability of detection and subsequent punishment (Damgaard et al, 2011). Taking the middle point of this overcharge range – 10 percent – gives a conservative estimate of the consumer harm of EUR 7.6 billion due to these cartels Even this figure is probably too low: the economic literature on the subject suggests that the average overcharge in prices can be as high as 20–25 percent (Report on Competition Policy, 2009). Allain et al (2011) estimate that the fine necessary for optimal deterrence is around 28% to 67% of annual sales depending on assumptions as to profit
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