Price-fixing Overcharges: Legal and Economic Evidence

• Published date: 06 April 2007
• Date: 06 April 2007
• Pages: 59-153
• DOI: https://doi.org/10.1016/S0193-5895(06)22004-9
• Author: John M. Connor

PRICE-FIXING OVERCHARGES:

LEGAL AND ECONOMIC

EVIDENCE

John M. Connor

ABSTRACT

This paper surveys published economic studies and judicial decisions

that contain 1,040 quantitative estimates of overcharges of hard-core

cartels. The primary finding is that the median long-run overcharge for all

types of cartels over all time periods is 25.0%:18.8% for domestic cartels

and 31.0% for international cartels. Cartel overcharges are positively

skewed, pushing the mean overcharge for all successful cartels to 43.4%.

Convicted cartels are on average as equally effective at raising prices as

unpunished cartels, but bid-rigging conduct does display somewhat lower

mark-ups than price-fixing cartels. These findings suggest that optimal

deterrence requires that monetary penalties ought to be increased.

INTRODUCTION

Since at least 1888, hundreds of economists, historians, commissioners, and

jurists have labored mightily to assess the ‘‘effectiveness’’ of cartels. Various

criteria have been applied to evaluate cartel performance, including

Research in Law and Economics, Volume 22, 59–153

Copyright r2007 by Elsevier Ltd.

All rights of reproduction in any form reserved

ISSN: 0193-5895/doi:10.1016/S0193-5895(06)22004-9

59

longevity, stability, efficiency, and social welfare effects, but by far the

greatest attention has been lavished on market price effects.

1

The increase in

transaction prices by a sellers’ cartel is commonly called an overcharge by

economists or damages by legal writers. The overcharge rate is calculated by

comparing actual cartel-enhanced prices to some competitive benchmark

price

2

(Connor, 2004a).

A price-fixing overcharge is a transfer of income or wealth from buyers

to the members of the cartel that occurs as a result of a collusive agreement.

3

Ceteris paribus, when a cartel achieves high levels of effectiveness (i.e.,

longevity, stability, and high overcharges), it tends to generate large cus-

tomer losses in the form of loss of consumer surplus.

4

Although there

are other negative effects of price fixing, legal scholarship tends to equate

antitrust injury with the overcharge. Effective cartels are also viewed as

destructive to the competitive process in the sense that they weaken the

natural effects of demand and supply in price formation and cause dead-

weight social losses.

5

The deadweight losses result from the costs incurred by

customers when they are forced to substitute inferior substitutes, if any, the

costs incurred by the members of the cartel in managing the collusive en-

terprise, and rent-seeking behavior by the cartel such as efforts directed at

forestalling entry. In this paper, I focus on cartel overcharges as the prin-

cipal type of harm or damages created by price fixing.

The last dedicated survey of the cartel literature did not cover overcharges

(Bullock, 1901, 1905). Today textbooks of economics conventionally devote

considerable space to the market price effects of cartels (see, for example,

Carlton & Perloff, 2004, pp. 128–131, 140–145, 148–150). While empirical

studies of cartels routinely survey selected works as a prelude to the study

being presented, to my knowledge no one has published a work aimed

principally at comprehensively surveying and analyzing cartel overcharges.

This paper is aimed principally at filling this gap in the legal-economic

literature.

The size of cartel overcharges is an issue at the empirical heart of a

number of legal and economic controversies. First, knowing the size and

distribution of cartel overcharges is necessary to justify the underpinnings

of U.S. and foreign sanctions for illegal cartel conduct. Many commentators

on government fining practices have noted the absence of appropriate em-

pirical data for the rational design of such policies. Second, there is evidence

in the economic literature widely varying opinions among experts on the

critical legal-economic issue of the size of sanctions needed for optimal

deterrence of cartel formation.

JOHN M. CONNOR60

Overcharges and Cartel Fines

The Sentencing Reform Act of 1984 created the U.S. Sentencing Commission

(USSC), a judicial-branch unit charged by Congress with devising guidelines

for sentencing for the federal judiciary (USSG Advisory Group, 2003). The

first set of guidelines was promulgated in 1987, and after three years of study

and public comment was made law in 1989.The guidelines included sanctions

for organizations guilty of horizontal price fixing and bid rigging (Cohen &

Scheffman, 1989, p. 332). Although the Sherman Act of 1890 is a criminal

statute that encompasses other types of restrictive business practices, by long

tradition only horizontal price fixing and market-sharing agreements have

triggered criminal indictments by the Department of Justice (DOJ).

6

The issue of how high cartels typically raise prices was crucial when the

USSC established the fine levels for cartels. The USSC’s cartel fine levels

followed from its famous conclusion: ‘‘It is estimated that the average gain

from price fixing is 10 percent of the selling price.’’

7

The Commission added:

‘‘The purpose for specifying a percent of the volume of commerce is to avoid

the time and expense that would be required for the court to determine

actual gain or loss.’’

8

As the Sixth Circuit noted, the Sentencing Commission

‘‘opted for greater administrative convenience’’ instead of ‘‘undertaking a

specific inquiry into the actual loss in each case.’’

9

The USSC appears to have adopted the 10% presumption because its

use was advocated by the (then) head of the Antitrust Division, Douglas

Ginsburg.

10

The origin of Ginsburg’s 10% figure is not publicly known.

11

However, a prominent analysis of the issue by Cohen and Scheffman (1989)

published shortly after the Antitrust Sentencing Guidelines were promul-

gated, states that the economic evaluation of only three price-fixing con-

spiracies was particularly important in shaping Ginsburg’s views. If this

analysis is correct, a critical assumption in setting cartel fines in the United

States is supported by a surprisingly small amount of evidence.

The USSC’s 10% presumption was attacked as unreliable and overstated

almost as soon as it was issued. For example, Cohen and Scheffman (1989)

concluded that ‘‘ythere is little credible statistical evidence that would

justify the Commission’s assumptions which underlie the Antitrust Guide-

lines’’ (p. 333). ‘‘At least in price fixing cases involving a substantial volume

of commerce, ten percent is almost certainly too high’’ (p. 343). Moreover,

the specific data that the Commission uses was characterized as exaggerated:

‘‘later research has cast considerable doubt on ythese estimates, conclud-

ing that the markups, if they existed, were quite small’’ (p. 345).

Price-Fixing Overcharges 61