Optimal Deterrence and Private International Cartels

The focus of this paper is on penalties imposed on modern private international cartels. I begin by showing that deterrence of recidivism of overt collusion is the overarching objective of the world's leading antitrust regimes, and I sketch the theory of optimal deterrence in the context conduct by hard-core cartels. Beginning in the late 1980s, fine-setting standards became more precise and progressively harsher. U.S. Sentencing Guidelines for cartels came based on a corporate defendant's affected commerce and certain objective culpability factors. Alternatively, large fines could be assessed by a double-damages criterion. Combined with parallel treble damages from private suits that often accompany fines, the substantial increase in total penalties has led some legal writers to criticize U.S. cartel sanctions as having reached supra deterrent levels. Fines imposed on cartels by the European Union and other jurisdictions have also risen in the past decade, thus adding to concerns about supra deterrence in the case of global cartels. On the other hand, there are at least eight legal-economic arguments that support the proposition that contemporary monetary sanctions on global cartels are inadequate to deter recidivism. Previous attempts to analyze optimal cartel sanctions have generally remained at a theoretical level. In the few cases where optimal fines have been discussed empirically, the studies have relied on assumed point estimates of key parameters, the fines considered have been those of only one jurisdiction, private settlements have been ignored, only current monetary values employed, and the scenarios have been generic cartel situations. To attempt to resolve this debate, formulas are presented and parameterized with data that takes into account the specific characteristics of modern private international cartels. This paper considers five important cases: cartels that operate within North America (fined only, civil settlements only, and both), within the EU, and across two or more continents ("global" cartels). Empirical data needed to operationalize the formulas are drawn from a comprehensive sample of 283 international cartels discovered since January 1990. Moreover, actual affected sales, penalties, and damages are adjusted to account for the time value of money. Optimal penalties are derived as a function of damages caused by the cartels. Probability distributions of the relevant variables result in a range of optimal penalties for the five cartel scenarios. Optimal corporate monetary sanctions are compared to both the median and the harshest actual international cartel fines and settlements. This exercise supports the view that with rare exceptions actual corporate cartel penalties up to 2005 have been sub optimally deterrent