Optimal Deterrence and Private International Cartels

and other participants for their constructive comments on this paper. Purdue University is committed to the policy that all persons shall have equal access to its programs and employment without regard to race, color, creed, religion, national origin, sex, age, marital status, disability, public assistance status, veteran status or sexual orientation. The focus of this paper is on international cartels that have been uncovered by one or more of the world's antitrust authorities since January 1990. 1 In this Introduction, I show that deterrence of recidivism is the underlying objective of the world's leading antitrust regimes, and I sketch the theory of optimal deterrence in the context of market collusion. I highlight two paradoxical trends in anticartel enforcement: enhanced use of monetary penalties to punish convicted cartelists and, notwithstanding contrary voices, an increasing awareness that the higher penalties are below socially optimal levels to ensure deterrence. Objective In this paper, a model of optimal deterrence will be developed for the case of companies 2 that form global cartels. Global cartels are overt conspiracies with members from at least two nations that fixed prices in at least two continents. 3 In particular, a formula is presented that takes into account the special characteristics of contemporary cartels that operate across multiple antitrust jurisdictions with varying levels and types of sanctions. Recent empirical data on international cartels are used to estimate parameters needed to operationalize 1 This starting date marks the beginning of the present U.S. antitrust enforcement era. The maximum statutory corporate fine for Sherman Act violations was raised from $1 million to $10 million in 1990. Perhaps more importantly, a new Presidential administration in 1991 made appointments of individuals in the Antitrust Division of the U.S. Department of Justice (DOJ) who implemented an array of policies that raised anticartel enforcement to a significantly higher level of effectiveness (Connor 2001). Three important innovations were implemented by the Antitrust Division of the Department of Justice (DOJ) in 1991-1995: the unleashing of mafia-style investigations of international cartels by the FBI in 1992, a new more effective Corporate Leniency Program in 1993, and starting in 1995 the use of the federal felony-conviction standard for setting fines (" twice the harm ") that resulted in a series of corporate price-fixing fines above the $10-million statutory cap. 2 Optimal deterrence theory is based on the balance between the present value of expected future corporate profits from the …