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“Penalizing cartels: the case for basing penalties on price overcharge” by Y. Katsoulacos, E. Motchenkova and D. Ulph

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In this paper we set out the welfare economics based case for imposing cartel penalties on the cartel overcharge rather than on the more conventional bases of revenue or profits (illegal gains). To do this we undertake a systematic comparison of a penalty based on the cartel overcharge with three other penalty regimes: fixed penalties; penalties based on revenue, and penalties based on profits. Our analysis is the first to compare these regimes in terms of their impact on both (i) the prices charged by those cartels that do form; and (ii) the number of stable cartels that form (deterrence). We show that the class of penalties based on profits is identical to the class of fixed penalties in all welfare-relevant respects. For the other three types of penalty we show that, for those cartels that do form, penalties based on the overcharge produce lower prices than those based on profit) while penalties based on revenue produce the highest prices. Further, in conjunction with the above result, our analysis of cartel stability (and thus deterrence), shows that penalties based on the overcharge out-perform those based on profits, which in turn out-perform those based on revenue in terms of their impact on each of the following welfare criteria: (a) average overcharge; (b) average consumer surplus; (c) average total welfare.

 

 

AUTHOR
Yannis Katsoulacos
Yannis Katsoulacos is Chairman of the Department of Economic Science of the Athens University of Economics and Business (AUEB) (2011- ) and Professor of Economics at the same Department (1994- ). He has been University Vice Rector for Academic Affairs (2007-2011) and Director of the Department's Program of Post-graduate Studies (2000-2004). He currently directs the Executive MSc in Applied Economics and Finance (2003- ). He got his MSc and his PhD in Economics from the London School of Economics and he has been teaching Theory of Industrial Organization, Economics of Competition and Regulation Policy, and Economics of Technological Change and Innovation at under-graduate and post-graduate level. His main research interests are in areas of Competition Policy and Regulation and the Economics of Technical Change and Innovation. He served as a teaching assistant at LSE during his PhD studies (1978-1981), and then taught at the Universities of Southampton, Bristol and. Liverpool. He was appointed Associate Professor at AUEB in 1989. He has been Visiting Professor of the University of Pittsburgh (1992-1993) at the Center of Economic Research and Graduate Education, Charles University (Prague), Visiting Research Fellow (Spring 1994) at the Center de Recherche en Economie et Statistique, CREST-ENSAE (Paris), Director of the Institute of Economic Policy Studies (Athens, 1993-1995), and Director of the Joint Doctorate Programme in Economics of AUEB and the University of Athens (2001 -2003). He has also been: • a Research Fellow of the Center of Economic Policy Research (CEPR, London, 1992 - 2001), • a Member of the Executive Board of the European Association for Research in Industrial Economics (1993-1998), • a Member of the Management Committee of the European Commission Research Programme "Targeted Socio-Economic Research" representing Greece (1994-1998), • a Commissioner of the Hellenic Competition Policy Commission (1995 - 2005), and Advisor to the Minister in amending Competition Policy Law in 1995 and 2000, and • a Member of the Council of Economic Advisors of the Ministry of the National Economy of Greece (2002 - 2004). He has been the author or co-author of over 80 articles, over 30 of which in international refereed journals (including the European Economic Review, Economic Journal, Journal of Industrial Economics, Scandinavian Journal of Economics, Journal of Regional Science and Urban Economics, Journal of Comparative Economics, Journal of Competition Law and Economics etc). He has also written and edited a large number of books. His work has been cited in over 1500 scientific articles, many of which have appeared in some of the top international academic journals (American Economic Review, Review of Economic Studies, Economic Journal, European Economic Review, Journal of Industrial Economics, International Journal of Industrial Organization, etc). He has acted as advisor or consultant to the European Commission (CEU), the OECD the World Bank, and major corporations at various times since 1986. He has coordinated or has been principal investigator in over 40 research projects funded by the CEU since 1989. In the period 2004 - 2008 he acted as consultant to the World Bank in projects appraising the Competition Policy and Regulatory regime in Southern Balkan countries and implementing a series of reforms for establishing effective competition and regulation policies. He is Senior Academic Consultant for CRA (2011 – ).
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