‘The Incidence of Fines on Cartel Dynamic Pricing’

Friday 27th November sees the long-awaited return of our delightful former colleague Anna Rita Bennato (Oxford Brookes University) who will be presenting ‘The Incidence of Fines on Cartel Dynamic Pricing‘, which she has co-researched with Franco Mariuzzo (ECO and CCP). An abstract for her seminar can be found below.

Abstract

With Regulation 1/2003 the European Commission D-G for Competition has introduced administrative fines on corporation turnover to punish any breach of Article 101 and 102 of the Treaty. To confine obvious adverse effects of a too harsh punishment fines have been limited to a thirty per cent cap of the undertaking’s worldwide turnover (Guidelines 2006/C 210/02). However, the assessment of the gravity is made on a case-by-case basis for all types of infringement. As a general rule, fines are calculated as a proportion of the value of sales.

In this paper we study the distortion in pricing that stems from the application of fines on turnover in an environment where cartels choose their optimal pricing under uncertainty and business cycles. Our model shows how in a dynamic setting fines may resemble the effect of an ad-valorem taxation. The effect of fines on prices varies depending on the position on the cycle (expected demand growing or falling).

We test our model using 328 weekly data on the Joint Executive Committee (JEC) and the econometric methodology suggested by Borenstein and Shepard (1996). While JEC was a legal cartel, in a counterfactual exercise we simulate the effect of the cartel being detected and fined on turnover.

 

Anna’s presentation takes place from 13:00-14:00 in the Thomas Paine Study Centre, Room 1.03. 

‘Endogenous antitrust enforcement and strategic cartel pricing: Experimental evidence’

The next presentation in our Autumn seminar series takes place on Friday 6th November, with the return of Carsten Crede (CCP and ECO) who will be presenting ‘Endogenous antitrust enforcement and strategic cartel pricing: Experimental evidence‘, a joint project with Liang Lu (CCP and ECO). An abstract for his presentation can be found below.

Abstract

We experimentally examine the effects of endogenous antitrust enforcement, i.e. an enforcement that increases in the cartel overcharge, on cartel prices and stability. With a novel experimental design, we capture the non-profitability-related strategic effects of cartel pricing as a reaction to the endogenous punishment. By allowing self-selection of the cartel into expected low punishment, endogenous enforcement is effective when both fine and detection probability are sufficiently high. However, it may render deterrence less effective if fines are not sufficiently high, suggesting that the substitutability with respect to deterrence between fines and detection probabilities is limited. Nevertheless, both enforcement elements have welfare implications due to strategic effects: whereas high fines directly reduce cartel formation and undermine stability, high detection probabilities decrease the longevity of existing cartels and with it their economic harm.

The seminar will take place from 13:00-14:00 in the Thomas Paine Study Centre, Room 2.03. To find out about the other seminars in this series, visit the seminar pages on our website.

‘Do Competition Authorities’ Cartel Investigations exhibit a Life-Cycle?’

The Spring Seminar Series continues on Friday 27th February with our master empiricist Prishnee Armoogum (CCP & ECO) asking ‘Do Competition Authorities’ Cartel Investigations exhibit a Life-Cycle?‘. Prishnee is a PhD researcher and Associate Tutor in the School of Economics at the University of East Anglia. Her thesis topic explores the experiences of competition enforcement across different competition authorities around the world, with a particular interest in small economies. Prishnee is also a member of the Competition Commission of Mauritius. An abstract for her paper can be found below.

Abstract

Although there are numerous recent papers which have studied the relationship between deterrence and cartel formation, there is not much literature on the empirical assessment of the Competition authority’s behaviour in the presence of deterrence. The purpose of this paper is to investigate the presence of deterrence on cartels during the life cycle of a competition authority (CA). The intuition of proposed theory developed in this work is used to study the lifecycle of the CA and the impact of competition law and policy deterrence on its cartel activities. A yearly panel data set of 32 countries (33 competition institutions) for period 2006-2012 is used empirically to test the model. Choosing the most preferred model, we find that the number of cartel investigations do not have a life cycle. However, the results show that tools used to deter cartels, i.e. cartel fines, years of imprisonment and number of leniency applications, do have an influence on the number of cartel investigations. The number of phase II merger investigations is also found to be negatively related to the number of cartel investigations.

The seminar takes place from 13:00-14:00 in the Thomas Paine Study Centre, Room 1.03.

Anti-trust and the Beckerian Principle: the Effects of Investigation and Fines on Cartels

This Spring seminar series concludes in style on Friday 12th July as our very own Frederick Wandschneider (CCP and ECO) presents his latest research on ‘Anti-trust and the Beckerian Principle: the Effects of Investigation and Fines on Cartels‘ which he has undertaken alongside Subhasish Modak Chowdhury. An abstract for his seminar can be found below.

Abstract

In order to deter collusion and punish wrongdoers, antitrust authorities employ different combinations of ‘magnitude of fine’ and ‘likelihood of detection’. According to Becker (1968) these tools are substitutable. Since detection depends on costly investigation, it is optimal to minimize detection efforts and impose high fines. Recently the UK Office of Fair Trading followed this proposition and increased the maximum fine that it can impose on a colluding firm from 10% to 30% of its relevant turnover. It is not known, however, from a behavioral perspective how effective this type of policy design would be in a market. We address this issue through a market experiment to study the effects of magnitude and likelihood of fines on cartel activity, prices and collusive stability. We find support for the Beckerian principle only when leniency is not present. In the presence of a leniency program, however, a regime encompassing low detection rates and high fines is even more desirable as this reduces the propensity to collude and lowers the overall incidence of cartelized markets. It also achieves higher consumer welfare and triggers price defections.

CCP academic profiles: Frederick Wandschneider; Subhasish Modak Chowdhury

The CCP seminar series will return in Autumn 2013 with a new line-up of presenters from a variety of disciplines. The Autumn programme will be available to download from our CCP seminar page in the coming weeks and you can also revisit previous seminar series by following the relevant links.