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The Role of Legal Principles in the Economic Analysis of Competition Policy

In: THE ANALYSIS OF COMPETITION POLICY AND SECTORAL REGULATION

Author

Listed:
  • Harold Houba
  • Evgenia Motchenkova
  • Quan Wen

Abstract

We study the impact of legal principles on the design and the effectiveness of antitrust fines. Modern antitrust enforcement obeys four basic legal principles: punishments should fit the crime, proportionality, bankruptcy considerations, and minimum fines. We integrate these principles into a Bertrand oligopoly model, where bankruptcy considerations ensure abnormal cartel profits. We discuss the optimal legally-constrained fine schedule that achieves maximal social welfare under these legal principles. This fine schedule induces collusion on a lower price by making it more attractive than collusion on higher prices. This fine structure depends on the characteristics of competition, legal restrictions, and market conditions and can be related to price-cap regulation implemented in several sectors, such as electricity and telecom. We analyze the welfare implications of limited liability restrictions and minimum fines. We conclude that regulations aiming at either reducing legal ceilings or raising minimum fines reduce social welfare and should better be avoided.

Suggested Citation

  • Harold Houba & Evgenia Motchenkova & Quan Wen, 2014. "The Role of Legal Principles in the Economic Analysis of Competition Policy," World Scientific Book Chapters, in: Martin Peitz & Yossi Spiegel (ed.), THE ANALYSIS OF COMPETITION POLICY AND SECTORAL REGULATION, chapter 14, pages 389-421, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814616362_0014
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    Cited by:

    1. Marcel Boyer & Rachidi Kotchoni, 2015. "How Much Do Cartel Overcharge?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(2), pages 119-153, September.
    2. Katsoulacos, Yannis & Motchenkova, Evgenia & Ulph, David, 2015. "Penalizing cartels: The case for basing penalties on price overcharge," International Journal of Industrial Organization, Elsevier, vol. 42(C), pages 70-80.

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