Abstract
Few scholars have seriously considered the possibility that the very existence of an antitrust law might make markets less competitive. In this chapter, we provide a selective review of this thought-provoking literature. The focus of our analysis is on contributions within the limits of the neo-classical theory of firms and markets, pointing out that antitrust legislation can hinder price/output competition. Following this literature, the introduction of antitrust penalties or leniency programmes can have the perverse effect of stabilizing cartels and increasing their size, as these policies may raise the costs of deviating and/or renegotiating a collusive agreement.
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Notes
- 1.
- 2.
The absolute irreconcilability between free capitalism and antitrust legislation in the libertarian tradition is well summarized by Walter Block: “The premise underlying laissez-faire capitalism is that the only actions which should be illegal are those which involve an initiation of aggression against another person or his property. Antitrust law is clearly in violation of this principle, because it prohibits business practices no one even alleges constitute such depredations.” (Block 1994, p. 35).
- 3.
The collusive profit does not necessarily derive from monopoly pricing; it depends on the price level firms in the cartel decide to enforce.
- 4.
The function ψ(p) defines the deviating price which maximizes the firm’s profit given that all the other firms’ price is p.
- 5.
In the original model, Harrington (2004) assumes that the penalty also consists of a compensative part X t, proportional to the social welfare losses produced by collusion, which increase with the current collusive price and the duration of the cartel.
- 6.
The result that the antitrust penalty reduces competition only when the original price is lower than the monopolistic price, is mirrored by a similar condition in Bartolini and Zazzaro (2008), where in order to have the perverse effect the market structure without antitrust should not be a monopolistic cartel. We postpone further discussion on this point after the introduction of Bartolini and Zazzaro’s model.
- 7.
See Ray (2007) for an introduction to this literature.
- 8.
GCS is a weaker version of superadditivity, as it only requires the firms’ payoff vector in the grand coalition (the monopolistic cartel) to be larger than the payoff vector of firms in any other coalition structure. Formally, given N players, for every state \(x = (\pi, \mathcal{P})\), there is \(x^{{\prime}} = (\pi ^{{\prime}},\,\{N\})\) such that \(\pi ^{{\prime}} \geq \pi \), where {N} is the grand coalition, \(\mathcal{P}\) is any coalition structure, and π is the firms’ payoff vector (Ray 2007, p. 192).
- 9.
Under stricter conditions, this result can be extended to the case of asymmetric firms (Bartolini and Zazzaro 2008).
- 10.
For a definition of coalition games, see Ray (2007).
- 11.
- 12.
This is not a restriction as Ray and Vohra (1997) show that the equal division of the coalition worth arises in any equilibrium of a coalition formation game with symmetric players.
- 13.
Since players are symmetric, we can omit coalition structures that are just a permutation of players in the same coalition structure.
- 14.
Actually the singleton coalition structure, \({\mathcal{P}}^{{_\ast}}\), is always an EBA by definition; firms should not select this equilibrium, however, if there is another which gives all of them a higher payoff.
- 15.
Obviously, if we apply a different concept of stability the coalition structure prevailing in equilibrium can be different. For example, using the sequential formation model proposed by Bloch (1996), the equilibrium of the game is coalition structure \({\mathcal{P}}_{2}\), that still consists of a partial cartel, leaving unaltered the possibility of the antitrust penalty generating anticompetitive effects.
- 16.
In the US, unlike Europe, price fixing is a criminal offense.
- 17.
This perverse effect is also discussed by Buccirossi and Spagnolo (2006), who apply a similar framework to a model of illegal trade.
- 18.
In Spagnolo’s model only duopolistic Bertrand competition is considered.
- 19.
In antitrust laws, however, it is common to introduce some elements of proportionality in penalty schemes.
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Acknowledgements
We would like to thank participants of the conference “The Economics of Imperfect Markets,” held in Rome (May 2008), for useful comments on an earlier draft of this work. Usual disclaimer applies.
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Bartolini, D., Zazzaro, A. (2010). The Anticompetitive Effects of the Antitrust Policy. In: Calcagnini, G., Saltari, E. (eds) The Economics of Imperfect Markets. Contributions to Economics. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-2131-4_11
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