# 11-166/1 (2011-11-22)

Harold Houba, VU University Amsterdam; Evgenia Motchenkova, VU University Amsterdam; Quan Wen, Vanderbilt University
Antitrust enforcement, Antitrust Law, Cartel, Oligopoly, Repeated game
JEL codes:
L4, K21, D43, C73

We study antitrust enforcement in which the fine must obey four legal principles: punishments should fit the crime, proportionality, bankruptcy considerations, and minimum fines. We integrate these legal principles into an infinitely-repeated oligopoly model. Bankruptcy considerations ensure abnormal cartel profits. We derive the optimal fine schedule that achieves maximal social welfare under these legal principles. This optimal fine schedule induces collusion on a lower price making it more attractive than on higher prices. Also, raising minimum fines reduces social welfare and should never be implemented. Our analysis and results relate to the marginal deterrence literature by Shavell (1992) and Wilde (1992).