AAI Working Paper No. 11-08: Cartels As Rational Business Strategy: New Data Demonstrates that Crime Pays

Robert Lande and John Connor This AAI Working Paper by John M. Connor and Robert H. Lande indicates the overall level of the United States anti-cartel sanctions should be approximately five times as high as they are today. The paper was updated on March 12, 2012.

The working paper strives to determine empirically whether United States anti-cartel sanctions are, overall, at an optimal level. The authors employ the standard optimal-deterrence model, which assumes that corporations and individuals are rational actors when contemplating illegal collusion. Crime will be deterred only if expected rewards are less than expected costs divided by the probability the illegal activity will be detected and sanctioned. In other words, a sanction slightly larger than $300 is necessary to deter a cartel that expects to overcharge $100 and believes there is a 1/3 chance its activities will be detected and condemned.

To assess optimality, the authors calculate and use the best available data to estimate the expected profits from cartelization, the allocative inefficiency effects of cartel pricing, the probability cartels will be detected, and the probability detected cartels will be sanctioned. These parameters are then compared to all monetary cartel sanctions imposed by U.S. courts during the past two decades. These include corporate fines, restitution payments, individual fines, and the payouts in private damage actions. The authors also included approximations for the equivalent values (or disvalues) of the imprisonment or house arrest for the individuals involved.

The analysis shows that the combined level of U. S. cartel sanctions has been far below the optimum. The imposed sanctions have only been 9 percent to 21 percent as large as they should have been to deter cartelization optimally. Thus, the overall level of the United States anti-cartel sanctions should be approximately five times as high as they are today. A concluding section discusses the implications of these results.