Optimal Antitrust Fines: Theory and Practice
32 Pages Posted: 17 Feb 2006
This article discusses the use of fines imposed on companies or other corporate entities to enforce antitrust or competition law prohibitions such as Articles 81 and 82 of the EC Treaty or Sections 1 and 2 of the Sherman Act. The article addresses more specifically the questions in what ways these fines contribute to competition law enforcement, on the basis of which factors the amount of antitrust fines should be fixed in theory, and whether it is feasible in practice to calculate or measure such optimal fines. It is argued that the imposition of fines can contribute in three ways to the prevention of antitrust violations: through deterrent effects, through moral effects, and by raising the cost of setting up and running cartels. For violations committed by a single offender, a necessary condition for deterrence to work is that the expected fine, discounted for the probability of detection and punishment, exceeds the gain which the offender expected to obtain from the violation. Because of overconfidence bias, prospective offenders are likely to overestimate the gain and underestimate the probability of detection and punishment. Administrative costs could be saved by adopting an enforcement strategy of very high fines and low probability of punishment, but the possibility to impose high fines is limited by inability to pay, by the social and economic costs of high fines, and by requirements of proportional justice. Cooperation with the competition authority's investigation should be rewarded through reduced fines. For collective violations, it is a sufficient but not a necessary condition for deterrence to work that the expected fine, discounted for the probability of detection and punishment, exceeds the expected gain, either for all the cartel members taken together or for each of them separately. The cost of setting up and running cartels can be raised by modulating the amount of the fine for each cartel member depending on the active role played in the functioning of the cartel, as as well through a leniency policy. To avoid a deterioration of the market structure as a result of the imposition of fines, where high fines are imposed and where there is a significant difference in the ability to pay of the various cartel members, the amount of the fines imposed on the different companies should be differentiated so as to reflect their respective ability to pay. In practice, it does not appear feasible to measure econometrically the theoretically optimal fine for a given antitrust violation. The theory on optimal fines remains however useful as general guidance for the practice of fixing the amount of antitrust fines.
JEL Classification: K21, K42, L40
Suggested Citation: Suggested Citation