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

 |  January 13, 2014

Posted by Social Science Research Network

The Role of Legal Principles in the Economic Analysis of Competition Policy – Harold Houba (VU University Amsterdam, Tinbergen Institute ; VU University Amsterdam, Department of Econometrics), Evgenia Motchenkova (VU University Amsterdam Department of Economics ; TILEC), and Quan Wen (University of Washington)

ABSTRACT: We study the impact of legal principles on the design and the effectiveness of antitrust Â…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 proÂ…fits. We discuss the optimal legally-constrained Â…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 Â…fines. We conclude that regulations aiming at either reducing legal ceilings or raising minimum Â…fines reduce social welfare and should better be avoided.