This blog post – which can be found here – pulls together the results from three recently completed papers on cartel deterrence (namely: (1) “The Deterrent Effect of Anti-Cartel Enforcement: A Tale of Two Tails”, with Bos, Davies, Harrington and Ormosi, 2017; (2) “Quantifying the deterrent effect of Anti-Cartel Enforcement”, Davies, Ormosi & Mariuzzo, 2017; and (3) “Cartel enforcement and deterrence over the life of a Competition Authority”, with Armoogum, Davies & Mariuzzo, (2017)).
Given that deterrence can never be directly observed – because it refers to events that never occur – the papers are instead based on two statistical regularities that the authors uncovered from close scrutiny of large databases already in the public domain. The first regularity comes from a historical comparison of the overcharges set by 500 legal and illegal cartels. This comparison reveals a significantly lower incidence of illegal cartels in the two tails of the distribution of overcharges – i.e. when it is illegal to cartelise, relatively fewer cartels charge either very low or very high prices. This can be explained theoretically in terms of deterrence. On the one hand, the threat of detection and penalty will likely outweigh any potential benefit for those ‘weak’ cartels which can at best only moderately raise prices. On the other hand, those cartels operating in conditions favourable to the setting of high prices may be deterred from setting very high overcharges for fear that it would increase the risk of detection. To estimate the proportion of total potential cartel harm which is deterred, as opposed to undeterred and detected, or undeterred and undetected, a simulation model is deployed.
A second database contained an international comparison of the number of cartels detected by over 30 Competition Authorities over a number of years. The author explains that as an agency builds expertise and experience, and its enforcement activities feedback to the business community, cartel formation is deterred. This results in an inverted U shape time-pattern in the number of detected cartels. Thus, over the first decades of its existence a competition agency typically increases its detection rates, sometimes very rapidly. As successful enforcement begins to feedback to the business community and starts to deter the formation of cartels, we observe a gradual tailing off – and sometimes even a decline – in the number of cartels detected.
The papers arrive at broadly three conclusions, which the author recognises are both preliminary and somewhat speculative:
- The deterrence effect of competition law and enforcement agencies seems to be considerable, and is likely to be quantitatively far more important than detection in the fight against cartels. On the most conservative estimates, more than half of all potential cartel harm never occurs because it is deterred. This is very much a lower bound of the authors’ simulations, and the proportion could be as high as 90%.
- It is unlikely that those cartels which are detected, and therefore observed, are representative of those which are deterred. Deterrence appears to be greater for potential cartels which would otherwise set either relatively low overcharges or very high prices in the absence of the cartel offence.
- It is dangerous to judge the success of a competition agency purely on the basis of the number of cartels it detects – a strong competition agency might detect only few cartels, because its strength deters more cartels from forming in the first place.