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Working Papers and Abstracts
My doctoral dissertation
Title: Optimal Enforcement of Competition Law
Brief description:
My PhD dissertation deals with the problems of
antitrust enforcement and deterrence of violations of competition law and
falls into the field of industrial organization and competition policy.
Most of the papers included in the thesis are theoretical and use tools of
microeconomic theory, game theory, dynamic games, and dynamic optimization
to approach the problem of optimal antitrust enforcement in general. In
addition, they also deal with practical aspects of this problem. I compare
current US and EU penalty schemes for violations of antitrust law and
develop policy implications on how existing penalty schemes can be modified
in order to increase their deterrence power.
Brief
review in Dutch is available from: http://webapp.uvt.nl/fsw/spitsjohn.nb_lib.frmToonPersbericht?v_id=3919
More information
is provided below.
Introduction:
Despite the
recent theoretical developments in the field of antitrust law enforcement,
much still needs to be done in practice by competition authorities in order
to prevent collusion and price-fixing in the major industries. Although
penalties were recently increased considerably and new instruments of
cartel deterrence, such as leniency programs, were introduced, still
complete deterrence of antitrust law violations has not been achieved. This
thesis contributes to the solution of the problem of optimal competition
law enforcement. We approach this problem from the angle of possible
refinements of current penalty schemes for violations of competition law.
In particular, we determine the optimal combination of instruments such as
the amount of the fine and the rate of law enforcement, and the optimal
structure and design of leniency programs. In the thesis, the main features
of current penalty systems are modeled employing the tools of game theory,
dynamic games, and dynamic optimization. We stress the importance of the
dynamic analysis of competition law enforcement, since it captures better
both the current antitrust rules and the crime process in general.
Application of the above-mentioned tools allows to compare current US and
EU penalty schemes for violations of antitrust law and to develop policy
implications on how existing penalty schemes can be modified in order to
increase their deterrence power.
1. Determination of optimal penalties
for antitrust violations in a dynamic setting
Accepted to European Journal of
Operational Research (2008)
Abstract: We analyze a
differential game describing the interactions between a firm that might be
violating competition law and the antitrust authority. The objective of the
authority is to minimize social costs (loss in consumer surplus) induced by
an increase in prices above marginal costs. It turns out that the penalty
schemes which are used now in EU and US legislation appear not to be as
efficient as desired from the point of view of minimization of consumer
loss from price-fixing activities of the firm. In particular, we prove that
full compliance behavior is not sustainable as a Nash Equilibrium in Markovian strategies over the whole planning period,
and, moreover, that it will never arise as the long-run steady-state
equilibrium of the model. We also investigate the question which penalty
system enables us to completely deter cartel formation in a dynamic
setting. We found that this socially desirable outcome can be achieved in
case the penalty is an increasing function of the degree of offence and is
negatively related to the probability of law enforcement.
JEL-Classification: L41, K21, C73
Keywords: Antitrust Policy, Antitrust Law, Dynamic
games
Full
text available from CentER Discussion
paper series 2004-96 (or http://dx.doi.org/10.1016/j.ejor.2007.05.048)
2. Analysis of the properties of current penalty
schemes for violations of antitrust law
joint work with Peter M. Kort
Accepted to Journal of Optimization Theory and
Applications (2006)
Abstract: The main
feature of the penalty schemes described in current sentencing guidelines
is that the fine is based on the accumulated gains from cartel or
price-fixing activities for the firm. These gains are usually difficult to
estimate, but they can be approximated by a fraction of the turnover. The
regulations thus suggest modeling the penalty as an increasing function of
the accumulated illegal gains from price-fixing to the firm, so that the history
of the violation is taken into account.
We incorporate these features of the
penalty scheme into an optimal control model of a profit-maximizing firm
under antitrust enforcement. In order to determine the effect of taking
into account "the history of the violation", we compare the
outcome of this model with a model where the penalty is fixed. The main
result of the analysis of the later model is that complete deterrence can
be achieved only at the cost of shutting down the firm. The proportional
scheme improves upon the fixed penalty since it can ensure complete
deterrence in the long run, even when penalties are moderate.
Phase-diagram analysis shows that the
higher the probability and severity of punishment, the sooner cartel
formation is blocked. Further, a sensitivity analysis is provided to show
which strategies are most successful in reducing the degree of
price-fixing. It turns out that, when the penalties are already high, the
antitrust policy aiming at a further increase in the severity of punishment
is less efficient than the policy that increases the probability of
punishment.
JEL-Classification: C61, L41, K21
Keywords: Dynamic analysis, Antitrust Policy,
Antitrust Law
Full
text available from CentER Discussion
paper series 2004-97 (or http://www.springerlink.com/content/4430162512326843/fulltext.pdf)
3. Effects of leniency programs on cartel stability
Abstract: In this paper
we study the effect of leniency programs on the stability of cartels under
two different regimes of fines, fixed and proportional. We analyze the
design of self-reporting incentives, having a group of defendants.
Moreover, we consider a dynamic setup, where accumulated (not
instantaneous) benefits and losses from crime are taken into account.
Similar to the Reiganum-Fudenberg-Tirole
Model the tools of optimal stopping and timing games are used for the
analysis of this problem. We obtain that, cartel occurrence would be less
likely, if the rules of the leniency programs were more
strict and the procedure of application for leniency was more
confidential. Moreover, we conclude that, when the procedure of application
for leniency is not confidential, in some cases leniency may increase
duration of cartel agreements. This occurs when penalties and rate of law
enforcement are low. Surprisingly, under a fixed penalty scheme the
introduction of a leniency program cannot improve the effectiveness of
antitrust enforcement when the procedure of application for leniency is not
confidential.
JEL-Classification:
K21, L41
Keywords: Antitrust Policy, Antitrust Law,
Self-reporting, Leniency Programs
Full
text available from CentER
Discussion paper series 2004-98
4.
Strictness of leniency programs and cartels of asymmetric firms
joint
work with Rob van der Laan
Abstract: This paper
studies the effects of leniency programs on the behavior of firms
participating in cartel agreements. The main contribution of the paper is
that we consider asymmetric firms. In general they have different size and
operate in several different markets. However, they form a cartel only in
one market. This gives rise to additional costs in case of disclosure of
cartel, which are caused by a reduction of the sales in other markets due
to a negative reputation effect. This modeling framework can also be
applied to the case of international cartels, where firms are subject to
different punishment procedures according to the laws of their countries,
or in situations where after application for leniency firms are subject to
other costs rather than the fine itself and these costs depend on
individual characteristics of the firm.
Moreover, following the rules of existing
Leniency Programs, we analyze the effects of the strictness of the Leniency
Programs, which reflects the possibility of getting complete exemption from
the fine even in case many firms self-report simultaneously. Our main results
are that, first, leniency programs work better for small (less diversified)
companies, while big (more diversified) firms are less likely to start
cartel in the first place given the possibility of self-reporting in the
future. Second, the more cartelized the economy, the less strict the rules
of leniency programs should be, while the rules of leniency programs should
be more strict when the economy is not highly cartalized.
JEL-Classification: K21, L41
Keywords: Antitrust Policy, Antitrust Law, Self-reporting,
Leniency Programs
Full text available from: http://ideas.repec.org/p/dgr/kubcen/200574.html
5.
Cost
Minimizing Sequential Punishment Policies for Repeat Offenders
Working
paper, Free University Amsterdam 2006
Abstract: This paper
concludes that, when offenders are wealth constrained and the government is
resource constrained and can commit to a certain policy throughout the
whole planning horizon, cost minimizing deterrence is decreasing in the
number of offenses. Extending the framework of Emons (2003) to n-periods
setting, we prove that for the agents who may commit an act several times,
optimal sanctions are such that the fine for the first crime equals the
offender's entire wealth, and the fines are zero for all the subsequent
crimes. This result contradicts the widely prevailing escalating penalties
imbedded in many penal codes and sentencing guidelines. In addition,
analogous to Emons (2004), this scheme does not appear to be a time
consistent (subgame perfect) strategy for the
government in an n-periods setting. Moreover, we show that, if the
government cannot commit, equal rather than decreasing sanctions will be
optimal.
Full
text available from: http://ideas.repec.org/s/dgr/vuarem.html
6.
Market
Structure and Hospital-Insurer bargaining in
the Netherlands
joint
work with R.S. Halbersma, M.C. Mikkers,
and I. Seinen
Discussion
paper, Free University Amsterdam and TILEC,
2007
Abstract: In 2005,
competition was introduced in part of the hospital market in the
Netherlands. Using a unique dataset of transaction and list prices between
hospitals and insurers in the years 2005 and 2006, we estimate the
influence of buyer and seller concentration on
the negotiated prices in the first two years after the institutional
change. First, we use a traditional Structure-Conduct-Performance model
(SCP-model) along the lines of Melnick et al.
(1992) to estimate the effects of buyer and
seller concentration
on price-cost margins. Second, we model the interaction between hospitals
and insurers in the context of a generalized bargaining model (Brooks et
al., 1997). In the SCP-model, we obtain that the concentration of hospitals
(insurers) has a significantly positive (negative) impact on the hospital
price-cost margin. In the bargaining model, we also find a significant
negative effect of insurer concentration on the bargaining share of
hospital, but no significant effect of hospital concentration on the
division of the gains from bargaining. In both models we find a significant
impact of idiosyncratic effects on the market outcomes, consistent with the
fact that the Dutch hospital sector is not yet in a long-run equilibrium.
JEL-Classification:
I11, L1, C7
Keywords: Competition, Market Structure, Hospitals,
Insurers, Bargaining
Full
text available from: TILEC
Discussion Paper Series 2007-006
7.
To Protect in order to Serve, adverse effects of leniency programs in view
of industry asymmetry
joint
work with Daniel Leliefeld
Working paper, Free University Amsterdam and TILEC,
2007
Abstract: This paper
studies the application of leniency programs. An analysis of the structure
and design of leniency programs and existing literature raises a new
question: Are leniency programs effective, in the sense that they deter
cartels from formation, in asymmetrical markets? A game theoretical model,
which allows for asymmetry and predatory pricing, is used to provide an
answer. A leniency program does not always lead to a breach of trust. We
find that, in certain industries, leniency programs are unable to break
collusion. They may have the adverse effect in the sense that they
strengthen cartel stability or may even lead to abuse of market power. A
relatively large firm can use coercion to remove the option to a smaller
firm to self-report to the authorities, thus removing the risk of
prosecution posed by the program. In industries characterized by a certain
degree of asymmetry in market shares and high sunk costs this is an even
more likely scenario. In view of this limitation, a number of policy
implications are provided in the paper. Policies aimed at the removal of
the threat of retaliation need to be considered in order to convict and
deter these kinds of cartels.
JEL-Classification:
K21, L41
Keywords:
Antitrust Policy, Antitrust Law, Self-reporting, Leniency Programs
Full
text available from: TILEC Discussion Paper Series 2007-007
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