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.
Russian competition enforcement is among the most active in the world [Avdasheva, Kryuchkova, 2013]. At the same time the Russian competition agency has recently been criticized for the predominance of quantitative outcomes over qualitative (extremely high number of cases, many of which, after analysis, are irrelevant to competition law protection) and for weak economic analysis [Girgenson, Numerova, 2012]. One recent trend of the Russian competition policy development is an enthusiasm about ex-ante norms of practice in certain industries. During the last few years, industry-specific rules were developed. They include e.g. the Law On the Fundamentals of the Regulation of Trade (2009), a Code of Fair Practices in the Groceries-Suppliers Contracts (2012), the Automakers’ Code of Conduct (2013). Along with sector-specific laws commercial practices (as well as detailed regulations of contract terms) they became a typical part of behavioural remedies in merger cases as well as in decisions on abuse of dominance. The number of cases on abuse of dominance (thousands annually) is decreasing only because of the increasing number of warning letters that have been issued by the competition authorities (between one and two thousand annually). All these specific features of the Russian competition law enforcement are closely interrelated. Under administrative procedural rules in force, a significant share of cases is inspired by the complaints of alleged victims of anti-competitive practices. Such a