The deterrent effect of anti-cartel enforcement: A tale of two tails

Iwan Bos, Stephen Davies and Peter Ormosi
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Stephen Davies: Centre for Competition Policy and School of Economics, University of East Anglia
Peter Ormosi: Centre for Competition Policy and Norwich Business School, University of East Anglia

No 2014-06v2, Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) from Centre for Competition Policy, University of East Anglia, Norwich, UK.

Abstract: Very little is known empirically about deterred cartels. Therefore, although the characteristics of detected cartels are well documented, it is unclear that they are a representative sample. If deterred or undetected cartels differ systematically from the detected, many of our conventional empirical wisdoms could be subject to sample selection bias. Similarly, the impact of cartel policy, based only on prosecuted cases, could be systematically under-estimated. This paper addresses this gap in our knowledge, and explores how far a key characteristic - the overcharge - differs between deterred and undeterred cartels. First we examine an existing well-known database on cartels and find that the distribution of overcharge for legal cartels has significantly greater mass in its tails than the distribution for illegal cartels. Taking legal cartels as a proxy for a world without enforcement policy, this suggests that it is the lowest and highest overcharge cartels which are most likely to be deterred, or undetected, by cartel enforcement policy. Second, we summon a theoretical model of cartel formation to show that, under very reasonable assumptions, it is deterrence that explains the reduced occurrence of low and high overcharge cartels when faced with antitrust enforcement.

Keywords: cartel deterrence; cartel overcharge; consumer harm (search for similar items in EconPapers)
JEL-codes: C46 K14 K21 L41 (search for similar items in EconPapers)
Date: 2014-11-05
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