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Abstract

Through its antitrust enforcement system, society allocates resources to deter anticompetitive behavior. Antitrust enforcement is costly because prosecutors and judges mischaracterize some competitive or efficiency-enhancing behavior as horizontal collusion. In this early application of the Polinsky-Shavell argument about the tradeoff between the probability and magnitude of fines, this essay argues that, given prosecutorial and judicial error, society will not optimally allocate its antitrust enforcement resources by threatening price fixers with exorbitant economic penalties that have only a minimal probability of being enforced.

Professor Schwartz argues persuasively that the cost of antitrust enforcement makes deterrence of all antitrust violations through antitrust enforcement undesirable. This reply agrees that society should enforce the antitrust laws only to the point where the harm2 averted by increasing enforcement efforts just equals the cost of increasing those efforts.3 Consequently, an efficient enforcement policy will not deter all antitrust violations because the cost of deterring some of the violations will be greater than the harm averted.

This argument sets forth standard economic theory except for one minor point: Some economists and lawyers, influenced by Professor Becker's pathbreaking work,4 argue that society should reduce the number of prosecutions rather than reduce deterrence in order to decrease the costs of our current expensive antitrust enforcement system.5 Because deterrence depends on the expected value of punishment,6 various combinations of the detection level and the magnitude of the sanction can establish the same level of deterrence.7 Although Schwartz does not discuss the "problem of adjusting the sanction to incorporate varying attitudes toward risk,"8 the solution to the enforcement-cost problem appears to be straightforward: Hang a price fixer now and then. Lumber for gallows is relatively inexpensive, and few offenders would actually be hanged; thus, the cost of enforcing the antitrust laws would be trivial. Although our modest example is fanciful,9 its implication is real. Threatening price fixers with extreme economic punishments should deter price fixing and require minimal enforcement expenditures. Several economic arguments suggest, however, that continously trading higher fines or damage multiples for lower enforcement expenditures might not be optimal. 10 To the extent that these arguments are valid, Schwartz's point about the costs of enforcement remains relevant to antitrust enforcement.

THE COSTS OF ANTITRUST ENFORCEMENT

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J. Gregory Sidak is an Expert Economist in the fields of Antitrust, Telecommunications Regulation, Commercial and Investment Arbitration, and Intellectual Property Law. Prof. Sidak is the Ronald Coase Professor of Law & Economics at Tilburg University and the Chief Economic Expert at Criterion Economics in Washington, DC. The focus of his research has been regulation of network industries, antitrust policy, the Internet and electronic commerce, intellectual property, and constitutional law issues concerning economic regulation.

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