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.
Current Antitrust Fines May Increase Distortions in the Economy By: Vasiliki Bageri, Athens University of Economic and Bussiness Yannis Katsoulacos, Athens University of Economic and Bussiness Giancarlo Spagnolo, Stockholm School of Economics-SITE, DEF-Tor Vergata & CEPR Introduction Competition policy has become a prominent policy in all developed economies and many developing ones, from Brazil to India. Indeed, the available evidence suggests that in countries where law enforcement institutions are sufficiently effective, a well designed and enforced competition policy can significantly improve total and labor productivity growth. The emphasis of the italic already suggests the focus of the present piece. It is already well known that the private enforcement of competition policy can give rise to large distortions: since competition law is enforced by Judges and not by economists, it is easy for firms to use strategically the possibility to sue under the provision of competition law to protect their market from competitors rather than to protect competition. A well-known example is the Digital Equipment Corp. vs. Intel Corp case. In this case there is strong evidence that Digital exploited antitrust law to prevent Intel from developing competing technology in the microprocessor market. That is why not only was Digital taking Intel in a patent-infringement suit but it was doing it in a way to gain maximum publicity so as to