‘Private v public sanctions: the case of cartels’
July 10, 2015 Leave a comment
On Friday 10th July, we rounded off our Summer Seminar Series in style with the dream pairing of Franco Mariuzzo (CCP and ECO) and Peter Ormosi (CCP and NBS) presenting ‘Private v public sanctions: the case of cartels‘, a joint project with Antonios Karatzas (Warwick). An abstract for their presentation can be found below.
Economics literature on the relationship between private and public sanctions has led to a consensus that private (market-based) sanctions can act as an important deterrent to corporate misbehaviour inasmuch as they internalise the social costs of these offences. On the other hand public sanctions are needed where the harm caused by the offence is not internalised (for example because the damaged party remains oblivious to the offence); in these cases the amount of the sanction should equal the un-internalised social cost. We provide further empirical evidence to this literature by looking at cartels, using a novel methodology that enables us to directly control for the magnitude of the private sanction in our model. This allows us to empirically study the substitutability between fines and reputation for firms that have been found guilty of cartel illegal conduct.
We measure reputation with a composite of the frequency of media exposure and the intensity of the media content. Media exposure is captured by a count of sources that document a firm’s illegal behaviour in the cartel and intensity is measured by a sentiment analysis of the text of the published news. We employ an event study technique over a sample of about 300 public companies that belong to about 100 cartels detected by the Competition Commission during the period 1990-2012. Our results confirm that public and private sanctions are not perfect substitutes, and that the intensity of the media content has a larger punishment effect than exposure; we call this “quality for quantity” effect. In addition we find that the effect of reputation is larger for firms that belong to cartels with non-atomistic customers.
This is the final seminar of the Summer but we will return in September for another excellent series of interdisciplinary presentations on competition policy and regulation. We will be announcing the programme for the Autumn Seminar Series in due course and you can keep up-to-date by visiting our designated seminar pages on the CCP website.