Seminar 2: The Deterrence Model

The bulk of competition law enforcement is based upon a public authority investigating, prosecuting and imposing penalties on firms (or individuals) that infringe the antitrust rules. The aim of this seminar is to discuss this approach, which seems to be principally justified by recourse to the notion of deterrence.

I have selected the readings with this thinking in mind: the judgment of the EFTA Court has a concise position on procedural matters, which serves to explain the principal debate in this field. This gives us a starting point on the way competition lawyers think. Then I’ve selected a paper that explores the notion of deterrence, written by economists.  This helps us to think about how easily this notion can be transposed into legal form.  Then I suggested two papers that evaluate the move towards punitive forms of regulation.

The aim is to try and evaluate each paper first, before trying to map out how we can draw together the strands of discourse that come from the readings.

Case E-15/10 Posten Norge v EFTA Surveillance Authority, judgment of 18 April 2012 (paragraphs 80 to 102 only)

Buccirossi (et al) Deterrence in Competition Law (GESY Discussion Paper N.285, October 2009)

Baldwin ‘The New Punitive regulation’ (2004) 67(3) Modern Law Review 351

Parker ‘Economic Rationalities of Governance and Ambiguity in the Criminalization of Cartels’ (2012) 52(5) British Journal of Criminology 974

13 comments on “Seminar 2: The Deterrence Model

  1. The approach by the court in Posten Norge shows very well the European judicial approach to competition cases. While mainly interpreting the law as it is, the court also looks towards economic or other considerations, as so far as they fall within the area covered by the law. This means for example that the court is unlikely to / would be overstepping its authority if it decided to let an applicant (in an annullment action) off, because it deduced or calculated and than balanced a judgement against the applicant with sanctions against the cost that this would have to society.
    The paper re. “Deterrence in Competition Law” however has a clear economic perspective, indentifying the factors that influence deterrence and advocating for just enough deterrence betwen over- and underdeterrence, but readily admitting in the end that deterrence is really hard to measure (it would be more like prediction) and that then it would also have to be decided whether deterrence in a certain case is bad (f.e. if it would discourage actors from otherwise beneficial conduct) or good. It is also held that this is especially compley because for an accurate measurement not only would have to be the actions of normal economic actors have to be anticipated, but it is often not clear whether a CA would prosecute in a certain case, making it even more complex.
    “The New punitive regulation” describes a tendency in the UK to increase punitive measures, even whereas compared to many continental systems, they have had punitive measures for years. One conclusion was that esp. as often directors are not aware of potential punishments, it might be better to rely on internal self-regulation, compliance policies and so on, in the proper form.
    The paper by Parker is very intersting in that it takes a qualitative approach to the effects of the australian anti-cartel law, having conducted interview with cartel participants. While the interviewees by the time of the interview often confirmed that they acted in an illegal manner under the law, they mostly held that they couldn’t have done anything different and that either people higher-up in the company or the way their industry worked made it impossible to do anything else (and still do business and have peace)
    Taken together, it can be held that deterrence is very hard to measure in all cases, which is why in the interpretation of the courts it necessarily plays no or only a negligible role. It has of course a place in the legislative process, but not necessarily in court. Most of all, while economic models are great in theory, the really hard part would be to transpose the already imperfect model by Buccirossi (even though based on mostly ideal conditions) on competition law.
    The two last papers go to demonstrate, that while punitive measures can be very efficient to deterr officers of a company, this is only true up to a point and when they know about it. With reasonable knowledge of potential measures among company officers, they can be very useful to discourage managers from taking on too much risk or willingly running afoul of competition law, as a fine has to be paid by the company, whereas a personal fine or other punishment is more likely to make the managers think twice.

  2. Christopher Johnson says:

    In my opinion, regulators should refrain from imposing sanctions based on purely economic criteria. This is because such an approach prioritises market efficiency over justice in individual cases. My view is best illustrated by two hypothetical examples.

    Example one – two competing firms agree to divide the market on geographical lines. Both firms are aware that such an agreement is anticompetitive and, as such, prohibited. The competition authority calculates that the agreement has caused €1 million of damage to the market.

    Example two – two firms at different levels in a market enter into an exclusive distribution agreement. The firms are aware that, in certain circumstances, such an agreement may be considered to be anticompetitive. However, the firms are both of the belief that their particular agreement does not infringe competition and is not, therefore, prohibited. Despite this, the competition authority finds that the agreement is anticompetitive and that the agreement has caused €1 million of damage to the market.

    If the sanction in each example were calculated on the basis of Becker’s Rule, the firms in example 1 and example 2 would receive the same penalty because the agreements in both cases caused equivalent damage to the market. Such a result, in my opinion, would be unjust for failing to take into account the relative culpability of the parties in each case.

    If criminal or quasi-criminal sanctions are to be imposed for the breach of regulations, it follows that regulatory bodies, when considering their sanctions policy, should have regard to the copious academic literature on the justifications for criminal punishment. There has been a shift in such literature in recent years from a focus on the effects of criminal conduct, to a focus on the level of culpability of the wrongdoer (see Von Hirsch, Doing Justice: The Choice of Punishments, 1976).

    I was relieved to see at paragraphs 28 and 29 of the “Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Regulation No 1/2003” that the Commission, when deciding on the level of fines for the breach of competition law, has not adopted the purely economic approach, instead allowing circumstances pertaining to an individual’s culpability to be reflected in the fine.

    It is to be hoped that punishment based solely on economic criteria remains simply an academic possibility.

  3. Marita says:

    In his article Baldwin notes that regulators, including the OFT, appear to be following the steps of the government policy to harden their stance and employ a more punitive regulatory policy. To my mind, there might be very prosaic reasons for that move, that might have nothing or very little to do with a belief that a punitive approach will increase deterrence and thus lead to more effective enforcement. All non-departmental public bodies in the UK need to undergo so called Trennial Review at least every three years in which they need to justify their continued existence. During that process, bodies like the OFT need to prove their effectiveness in achieving their statutory aims. Unsurprisingly, it is much easier to evidence their effectiveness through hard figures representing the number of successful investigations and cases brought before courts than through involvement in other softer approaches to enforcement. So, down-to-earth internal administrative reasons might be behind a move towards a more punitive approach, although a coinciding parallel normative shift cannot be ruled out.

    On the other hand, admittedly Baldwin’s article was written at a point when English regulatory scene was undergoing a radical cultural change following the introduction of the Enterprise Act 2002. It would be interesting to see if the author would come to similar conclusions on the regulatory approach now, after a few years have passed. My guess, although not supported by any research, only general observation, would be that nothing has changed in that matter, if anything the regulatory stance might have hardened even further (especially since a belief in self-regulation was shattered by the financial crisis).

    Another observation that I would like to make was also inspired by Baldwin’s article and concerns the density of the regulatory framework. When discussing the effectiveness of penalties in a particular area, especially one as specific as competition policy, it is easy to overlook the fact that in creating their compliance policy firms need to deal with a multitude of regulatory provisions from various fields. Lack of awareness on the part of directors and managers evidenced by Parker becomes perhaps less shocking if one takes into account a dense network of regulations in which they operate where a risk of competition law prosecution is just one of many risks to consider. Thus, the general deterrent effect of individual liability for competition law violations might be watered down by circumstances going way beyond reach of competition policy.

  4. Maria H says:

    To me a few crucial drawbacks to criminalising competition law and punishing individuals stick out, which I would like to highlight in the following:

    There is no doubt that criminalising competition law and sanctioning the culpable individuals responsible for hard-core cartels has its benefits. Most importantly, it is said to be an effective deterrence for people actually behind breaches of competition law. Criminal convictions and prison sentences also attract media attention and sends a strong signal of condemnation to the public.

    However, such criminalisation demands caution. As pointed out in ‘Criminalization of Competition Law Enforcement: Economic and Legal Implications for the EU Member States’ (edited by Katalin J. Cseres, Maarten-Pieter Schinkel, Floris O. W. Vogelaar, 2006), when sanctioning individuals the most important question becomes upon whom to impose such a sanction. It might be difficult to identify the individuals actually responsible. The book also points out that culprits are ‘likely to design mechanisms to escape detection and punishment through more professional hiding techniques as well as indemnification methods’. Most simplistically, for example, an innocent bystander could be blamed.

    A further question in need of answer is: what factors trigger individuals to violate antitrust laws? Parker’s article shows that the incentives are not always straightforward. Following the results of her interviews, small businesses seem to be heavily constricted by ‘pre-existing relationships and politics’, and therefore not purely acting out of their economic self-interest. Parker also points out that similar justifications are used by managers in large firms. In case of criminalisation it is therefore necessary to look further into the sociology behind cartels.

    Criminalisation can also create over-deterrence. Companies can become inefficiently careful which is costly for the business. Baldwin’s article gives the example of non-executive directors who face the same punitive risks as executive directors in the UK, but have less influence and less access to information. Due to the high risks attached to the position, people are less likely to take it up.

    Further, the above mentioned book brings forward another interesting argument: harsh criminal sanctions might not suit the nature of competition law enforcement. Competition rules are given a dynamic interpretation that changes over time with increasing but also shifting economic insights. Such soft norms do not fit criminal punishments which can involve the loss of reputation and imprisonment of an individual. False criminal convictions are very undesirable, more so, arguably, than false fines given to companies.

  5. Jotte says:

    The readings set out to suggest that (i) EU competition law enforcement is of a punitive (criminal nature); (ii) this justifies a full judicial review of the decisions; (iii) there is a choice and a development towards such a punitive sanctioning framework and; (iv) the development towards a punitive framework can be questioned on the basis of its (a) ultimate effectiveness and (b) social legitimacy.
    I will highlight a few things on the social legitimacy aspect of the readings. In this context the most interesting reading for me was the Parker piece that suggests that an enforcement regime that implements ‘blind economic rationality’ may miss out on some relevant societal context that embeds entrepreneurial relationships. That is to say that the model of market behaviour that is required by the competition rules is not necessarily a model that resonates with the day-to-day lives of its subjects (in particular SMe’s). The sociological consequence of that finding questions the social legitimacy (i.e. acceptance) of these models because it lacks embedding in the entrepreneurial relations it targets. Ultimately that finding points towards an insufficient societal basis for the criminalization of anti-competitive conduct. The reason being that criminalization of any kind of behaviour should be supported by a broad societal consensus and condemnation. It is of course doubtful whether empirical evidence, pointing towards the absence of an understanding of the rationale of a strongly punitive cartel policy amongst the people who have themselves been punished by it is a credible basis for this conclusion. The Parker piece however points towards another interesting facet of this debate by raising the question of the dynamic between punitive frameworks and how they affect social relations.
    In her piece, Parker refers to the work of Karl Polanyi. Polanyi’s basic point can be said to be concerned primarily with the way that broad human and societal objectives are commodified as part of an economic model of society and thereby disembedded from their societal roots when approached solely on the basis of self-regulatory market mechanisms. Polanyi described the destructive effects of industrialisation and the orthodox conception of market liberalism on small scale, mostly agricultural, social relations. It is questionable whether his work is actually relevant for the phenomenon that Parker tries to capture. In a sense there is a process of disembedding happening if the competition rationale completely ignores pre-existing social relations and destructs them in the ‘satanic wheels’ of administrative decision making processes. However, it is perhaps more accurate and interesting to look at the work of Durkheim in this respect and, specifically, at what he said about the non-contractual relations in society. In his work the Division of Labour, Durkheim responded to the idea that society can be identified on the basis of its individuals and seeing those individuals as freely contracting economic and social agents. He questioned specifically the notion that it is through the specific relations with each other that individuals are creating society because it is only in a pre-existing society that contractual relationship can be made. Furthermore, the simple convergence of individual interests creates bonds that are too weak and superficial to give stability to social relations, one needs that extra dimension of trust in the human scale to give rise to stable social relations: “for where interest alone reigns, as nothing arises to check the egoism confronting one other, each self finds itself in relation to the other on a war footing” (Durkheim Division of Labour, p 152)
    Looking at the punitive competition enforcement regime, or for that matter any regime that is based on high levels of individual liability, one can starts to see some broader societal effects and legitimacy problems arising. First, the outside relationships of firms with clients, suppliers and competitors may freeze and become rigid, which may have unintended and undesirable societal consequences (freezing the sharing of R&D in the competition example or the over emphasis on the avoidance of liability between doctor and patient or lawyer and client:”I’m a doctor… This man needs someone who can grant me immunity from liability, and fast!”). Second, the internal business dynamics between employer and employee, between employees themselves and their managers, may be affected in a way that non contractual elements that are normally associated with a working life (stability, friendships, cohesion) are basically destroyed. As such the ignorance of the existence or the importance of non-contractual elements, within punitive liability regimes, for the social fabric may give a strong argument against a rigid application of those type of rules and perhaps one that is often overlooked in their design.

  6. Mariajo says:

    The main justification for the way in which antitrust/competition enforcement works is deterrence. We punish people who do harm to the market process, to provide an incentive to all market participants to behave on the market in a way which does not damage it. The EFTA court clearly states that competition rules exist in the “interest of society in general and the functioning of the EEA single market in particular”, they have the function to deter any future breaches (at 88). The court also places competition rules in the area of criminal law, and therefore find Art 6 ECHR applicable in its full stringency. As with any criminal offense, there should therefore be something morally wrong about breaching competition rules.

    Buccirossi et al. approach deterrence from a Beckarian angle, nice and clean as economists generally tend to be, and give a formula to assess deterrence as a function of the level of the loss if the perpetrator is convicted, the probability of being detected and convicted and the perceived probability of being wrongly convicted. The variables of this formula are then affected by the sanction policy and damages, the financial and human resources of the enforcer, the enforcer’s investigative powers, the quality of the law (surprise! Good quality means the more based on economic considerations the better), the independence of the enforcer and separation of powers. As the authors note however, after all these algebraic niceties it is hard to discern whether deterrence actually works within a given enforcement system.

    Baldwin addresses deterrence through the lens of punitive sanctions in regulation. As follow-up to our discussion last week, Baldwin seems to assume readily that competition law is a form of regulation, as he cites it as example of punitive regulation. What I found interesting in Baldwin’s article is the fact that due to the unclear effectiveness of punitive systems, an alternative model, the proactive model is presented. He draws on a concept of “meta-regulation” by Parker, a pretty utopian but beautiful idea of aligning business interests with general social interests, and giving regulation in the hands of businesses themselves (in some sectors this works already though, e.g. advertising in the UK). I was wondering while reading it, whether leniency proceedings could be classified as a proactive form of regulation? Another interesting point was the fact that Baldwin found out that reputational damages are those that businesses are most afraid of. Rather than engaging in a cost/benefit analysis as suggested by econs, where the sanction imposed by law seems to be the figure to be calculated into the equation, the most important sanction seems to be the reaction of the market and other businesses.

    Lastly there is Parker, giving a gloomy perspective on the effectiveness of the deterrence model (or actually uncovering it as a myth?). I already raised that point last year, because we read Parker in a deterrence session, but I am still wondering whether the crucial point is that a deterrence system might simply not work in an environment where morality (this whole story of companies not having a soul) is absent .

  7. Fabrizio says:

    I want to write only two brief comments on the article “The New Punitive Regulation”.

    First, “Duties, not only risks”. A “command” by a legitimate authority is not a risk. Falling off the stairs is a risk. Punitive regulation informs the addressee of what he should (or may) and should not do. Considering a duty – which is the correlative of someone else’s right, by the way – a risk reduces the normative dimension of the law to a threat with the motivating power provided only by the sanction. If this is the case, then the law is tantamount to the words of a bunch of bandits. It is typical of neoclassical economics to overlook completely this point. This leads to a bad understanding of the motivational mechanisms used by the legal system. And also the predictions are bad, of course. If the assumption is the basis for understanding the effectiveness of legislation, the situation is even worse. Hopefully behavioral insights (based on the importance of the social dimension in the choice of individuals) will take the place of this misunderstanding of normativity.

    Second, the “it is not likely to work” argument is incomplete. Note that this has nothing to do with the fact that the argument can be poorly founded and result in a slippery slope fallacy. If legislation is likely to be ineffective, for example because its addressee are not aware of its content, this is not a sufficient reason for repealing it. You can try to fix it by making the regulation more salient. Or if firms do not have compliance plans, and you believe they are necessary for compliance, you can always make the compliance plan compulsory as well. You need to argue that an efficacious legislation is never going to work (Hirschmann called this argument the “futility thesis”) or that it is too costly ((Hirschmann divided this argument in the “perversity thesis” and “jeopardy thesis”). Making the argument completely explicit has drawbacks for the opaque critique. On the one hand, if a certain level of intrusion is going to be ineffective no matter what, one may consider a more intrusive tool of regulation. On the other hand, the fact that something is too costly is ultimately a value judgment and other people may simply disagree with you.

  8. Leticia says:

    While I can see the inconveniences of criminalising competition law (mainly from Bucirossi’s and Baldwin’s articles), personally I believe the main thrust of Parker’s paper is misguided.

    Firstly, what Parker calls a ‘blind economic approach’ might not be that blind after all. Subsuming empirics into economic models or statistics offers the benefits of generalisation at the expense of occasional over-simplification. I do not think this is particular of the decision to criminalise competition law, instead it seems common to every decision to regulate an economic activity: when doing calculus on welfare gains, we tend to generalise axioms of behaviour over consumers, taxpayers, business actors, etc. These axioms might not always reflect the actual behaviour of all of them but are nonetheless representative of what most of them do within certain parameters. The article of Parker seems to me more economically blind inasmuch as it focuses on the business side of the story without taking into account the harms that anti-competitive behaviour have on other sectors of society.

    I also disagree with the statement that ‘the enforcement and criminalisation of anti-cartel law (…) represents one aspect of a larger neo-liberal or economically-rational approach to governance’. It has been mostly socialist government who’ve advocated for the criminalisation of anti-cartel law under the belief that the harm caused by anti-competitive structures over societal interests were much higher than what the actual imposition of fines could reflect. Parker acknowledges this later on when admitting that a sector of legal scholars equate cartel conduct with theft or fraud, and Baldwin describes how punitive regulation was a strong point of the Labour manifesto. So there is some socialist moral there! On the other hand, the criminalisation of competition law for reasons of deterrence does not necessarily speak about how the state intends to redistribute wealth among the different sectors of society. And if there’s any straightforward redistribution, this is from the companies to the consumers.

    Finally, I do not get all the problematic related to the variety of motives that can lead a business actor to enter into anti-competitive behaviour. I don’t think the enforcement of cartel law has anything to do with Polanyi’s embededdness theories, but rather with the general problem of criminalisation and the spectrum of reasons under which an individual can commit a crime. Maybe the law does not always offers the best tools to adjust the punitive consequences to a particular case, but in general I think figures like aggravating and mitigating circumstances are useful for these situations. And if Parker intends to make a point on the lack of effectiveness of criminal sanctions for competition law, then I don’t think that the interviews to business actors give any valid argument. The interviewees are people who faced sanctions before the conduct was criminalised. Hence the way they pondered their interests when entering into anti-competitive behaviour, even the knowledge they had on the consequent penalties, say nothing about the incentives they would have had to do otherwise if their cartel arrangement had been criminalised at the time.

  9. Elias says:

    Below some comments on punitive regulation and in particular the issue of criminalization of competition law:

    Frist, Robert Baldwin’s article underlines the recent turn towards a more punitive approach of regulation and identifies the Enron and Worldcom scandals as one reason for this new trend. Interestingly, the financial crisis has even reinforced the public demand for and the trend towards punitive regulation. This is for instance reflected by the legal measures adopted by the European Union in the aftermath of the crisis. Thus, the European Union recently (April 2014) adopted the Directive 2014/57/EU on criminal sanctions for market abuse (market abuse directive) in the financial sector. This directive constitutes the first legal act, which is based on the new provision of Art. 83 (2) TFEU. This provision introduced by the Treaty of Lisbon confers to the EU the new competence to harmonize criminal legislation and regulation of the Member States in sectors which are already harmonized by EU law. The new directive on market abuse in the financial sector establishes minimum rules for criminal sanctions for insider dealing, for unlawful disclosure of inside information and for market manipulation (Art. 1 of the Directive). The introduction of criminal sanctions reflects on the one hand the growing social disapproval of market manipulation in the aftermath of the financial crisis and of the Libor scandal (recital 6 and 7 of the Directive). On the other hand, it is motivated by the perception of under-deterrence since administrative sanctions had been proven unsufficient in the past to ensure compliance with market rules in the financial sector (recital 5). The increasing reliance on criminal sanctions as a regulatory tool in the banking sector raises, however, also critical reactions since it risks chilling ‘good’ risk taking within an economic sector which main activity is the management of financial risks.

    Second, the judgment of the EFTA court in the case E-15/10 Posten Norge v EFTA Surveillance Authority, underlines that beyond the problem of over-deterrence, the criminalization of competition law enforcement also raises important concerns with regard to the fundamental rights to a fair trial and procedural rights of defendants in competition law proceeding. Due to the high fines imposed by the European Commission as well as its extensive investigatory rights, the current EU competition law system is often characterized as criminal law regime. In this regard, the fact that the European Commission is at the same time prosecutor and adjudicator in competition proceedings is often seen as problematic with regard to the procedural rights of the defendants. This issue has been indirectly addressed in the Menarini judgment of the ECtHR. In this judgment the ECtHR held that Art. 6 of the European Convention for the protection of Human Rights and Fundamental Rights (ECHR) which guarantees the fundamental right to a fair trial in cases of criminal proceedings applies to (EU) competition law proceedings (paras. 40-44). Thus, the ECtHR indirectly characterized the current enforcement regime of EU competition law as criminal law regime. The ECtHR further held that the fact that a competition authority is at the same time prosecutor and adjudicator (by imposing fines) is not contrary to Art. 6 ECHR, as long as its decisions are appealable before a court which exercises full jurisdiction and could review all aspects of the CA’s decision (para. 57-61). While the ECJ (General Court and the Court) exercise full judicial review with regard to fines imposed by the Commission, it remains rather unclear to what extend the ECJ (General Court and Court) also exercises a full legal review of the Commission’s assessment of substantive issues (e.g. finding of a cartel and/abuse of dominance). In the past the Court held repeatedly that the Commission has an extensive margin of discretion with regard to the assessment of economic matters and that it will not substitute its own assessment. In the aftermath of the ECtHR’s Menarini judgment, the Court and the General Court sent, however, some unclear signs. In Case C-272/09 P, KME the Court confirmed the Commission’s margin of discretion (para. 94) with regard to the evaluation of economic facts and underlined that the legal review of the ECJ complies with the principle of effective judicial protection enshrined in Art. 47 of the Charter of Fundamental Rights of the EU (para. 106). In Case T-336/07 Telefónica the General Court was less clear on the extent of the judicial review by the EU courts and underlined that the defendant firm must in case of doubt (para. 72) benefit from the presumption of innocence (para. 73). This restatement of the legal principle of “in dubio pro reo” in criminal proceedings could be interpreted as a recognition of the criminal nature of EU competition law enforcement. In the light of these fundamental rights issues, the introduction of criminal sanctions in some Member States and the debate on the adoption of this approach on the EU level (Wils (2005): Is Criminalization of EU Competition Lawthe Answer?) exacerbates the problem of the guarantee of a fair trial and of the procedural rights in favour of the defendant undertakings. Moreover, the necessity of guaranteeing the procedural rights of the defendants could also undermine the alleged increase of the deterrence effect by the criminalization of competition law. Thus, it could make the competition law enforcement more difficult and more costly in terms of personal and time resources which are necessary to meet higher procedural standards. In addition, the introduction of criminal sanctions for certain forms of competition law breaches in some Member States (on the base of REG 1/2003) and its absence in other Member States also entails the problem of uneven EU competition law enforcement and forum shopping.

    Third, the criminalization of competition rules is also problematic in terms of legal certainty due to the indeterminacy and vagueness of (EU) competition provisions and in particular of Art. 102 TFEU. This problem has been repeatedly addressed by defendants before the ECJ (for instance Case 85/76 Hoffmann-La Roche v Commission, para. 4). The problem of indeterminacy and vagueness is also exacerbated by the lack of clarity of the conceptual approach and underlying goals of EU competition law which are also pointed out by Christine Parkers. The enforcement of EU competition law by the European Commission and by the ECJ currently oscillates between a more “economic-based” approach and the traditional “ordoliberal” approach. Therefore, enterprises face legal uncertainty and do not exactly know under which circumstances a certain conduct breaches or complies with competition law. Therefore, the imposition of criminal sanctions seems to be very problematic and contrary to the legal principle of “nulla poena sine lege”.

  10. Maria says:

    The readings explore the concept of deterrence as one of the objectives of the enforcement of competition law and the problems and difficulties it poses: the rights assisting the parties facing a financial sanction of quasi-criminal dimensions in a competition law procedure, an economic analysis of the factors that go to determine the existence of healthy deterrence as opposed to over-deterrence or under-deterrence, the problems faced when gauging their effectiveness, the generalization of punitive regulation and competition law as an example of this trend, the tension between purely economic reasons and others, often affecting the behavior of economic players that do not deal with punitive regulatory risks the way they would be rationally expected to, the conflicting interests of regulators and regulatees as a limit to the effectiveness of alternative approaches such as meta-regulation, or the legitimacy itself of the criminalization of anti-competitive behavior.
    Of all the issues raised by these papers, I would like to comment on the broader issue of the legitimacy of a punitive approach to enforcing competition law as presented in Parker’s paper.
    The main objectives of public enforcement are to detect infringements, to put an end to anti-competitive behavior, and mainly, to achieve an optimal level of deterrence, through fines and other mechanisms. As shown in the last two papers, there is a trend towards the criminalization of anticompetitive behaviors. The question this trend pose is its compatibility with the concept of ultima ratio that governs and guides criminal policy, or should govern it, and whether there are substantive justifications for the criminalization of anti-competitive actions apart from the merely economic. Parker’s views seem to argue that criminalizing cartels takes only into account purely economic variables, leaving aside non-economic relations and factors. However, as Leticia has pointed out, what the author calls a “blind economic approach” may not be so blind. To a certain extent, it can also be argued that sanctions, financial or criminal, can act as a way to compel undertakings to consider and internalize the risks and costs in their activity that they would otherwise ignore as not directly related to maximization of their own economic profit. They are asked to internalize the social costs of their actions, which are not only concerned with the negative effects on economic efficiency and consumer welfare, but may also be a way of protecting extra-economic values, such as the protection of environment, of health, etc., concepts that may as well be integrated in a wider conception of consumer welfare, since consumers are not only interested in more and cheaper products, but also in safe and healthy ones, among other considerations.
    In short, I don’t share the view that there is a necessary relation between criminalizing anti-competitive practices and overriding extra-economic considerations or the degree of individual culpability to determine the quantum of the fine. These, I think, are separate considerations.

  11. Theodosia says:

    The reading material focuses on the question how deterrence in the field of competition law can be achieved. In the UK for example competition law enforcers and regulators aim at enhancing deterrence by applying specific features of criminal law in the field of competition law. Economists on the other hand take the view that deterrence can be enhanced if a variety of factors is taken into account. On the basis of the economic theory of law enforcement, as they maintain, several factors are likely to affect its degree of deterrence: 1)sanctions and damages; 2) financial and human resources; 3) powers during the investigation; 4) quality of the law; 5) independence and 6) separation of power. Considering the divergence between the two different policy choices I think it would be interesting to consider which are the main pros and cons of each policy option and how their main weaknesses may be mitigated.
    As presented in the material under review there is some evidence that the UK competition law enforcement is being transformed into a separate field of criminal law. I consider that the major advantage of this policy choice is that it is a policy scheme whose application does not entail considerable public resources. It is also an enforcement scheme which can be easily applied. However is it an effective scheme? Can it achieve deterrence? I consider that the answer in not clear. And the reason the answer is not clear is not related with the difficulties policy makers face when they are asked to measure deterrence. I take the view that such a policy scheme may be ineffective because it is a policy scheme based on fear. The potential success of this scheme is based on the assumption that people will respond to fear in a similar way. People care about their reputation and no director, employee, corporate officer wants to be imprisoned. However do all people calculate the potential risk in a similar manner? Do all people are risk averse? My answer is no. A lot of directors or employers driven by their desire and ambition to earn as much as possible and as soon as possible may disregard the potential danger. Taking into account the length of the procedures, they may think that when the cartel is revealed, they will not be held liable because they might be in a different position. In addition, such a policy scheme might undermine labor relations (when people work under threaten they have the tendency to assign their responsibilities to others) and might lead to unjust results. For example how can it be safeguarded that people actively participating in the cartel will be held liable and not lower level employees who under the fear of being fired sign documents the content of which do not approve?
    On the other hand, as already stated economists maintain that not only sanctions and damages enhance deterrence. Other factors, such as the quality of the law, independence and separation of powers should be included in a policy scheme aiming at deterrence. Indeed, if the law is clear and it is applied by high quality experienced stuff the probability that competition law enforcers will commit both type I and type II errors may be substantially decreased. In addition, to the extent CAs give the signal to potential cartelists that they are equipped with high quality stuff and have the methodological tools to apply law effectively, the deterrence effect of competition law may be increased. However the results of such a policy option may become more obvious in the long term and may entail increase in public expenses.
    In conclusion each policy option has its own strong and weak points. Notwithstanding the pros and cons of each policy option I consider that what is crucial for policy makers when designing competition enforcement schemes is to measure not only the deterrence effect of each policy option but also the potential social costs associated with it. Policy makers should focus not only on how to measure the deterrence effect of each policy option but also on how to mitigate the potential unjust results and the potential negative externalities created by each policy option.

  12. Marcos says:

    What strikes me the most in the readings for this seminar is the contradiction between the measures taken to ensure compliance with competition law (criminalising anti-competitive conducts) and the evaluation of the consequences of these measures for individuals.

    The optimal level of deterrence depends mainly on 6 factors: the quality of the sanctions imposed, the financial and human resources of the supervising agencies, the powers conceded to it in order to carry out investigations, the quality of the text of the law (avoiding ambiguities and prolixity), the independence of investigating authorities and the separation of power. While the quality of the sanction is one of the elements that lead to deterrence effect, its influence on the conducts of economic actors is limited. It is only by taking into consideration the interplay between all these factors that it is possible to assess the capacity of the competition system to avoid breaches of competition law.

    However, as seen in Baldwin’s article, the punitive approach seems to be one of the major answers of politics to significant breaches of competition law. This might give the impression to the general public that something is being done to counter the disrespect of competition policies, while, in fact, the possibility of suffering personal sanctions plays a minor role in complying with standards of competition. Other reasons would have greater impact on the activity of businessmen, such as the maintenance of the reputation of the undertaking, and they are not affected (or they are indirectly affected) by the criminalization of anti-competitive conducts whatsoever.

    Finally, not only the punitive approach doesn’t seem to play a central role on the prevention of anti-competitive conducts, but also it does not take account of the whole reality of such conducts. Competition law, as it happens to any other branch of law, is a simple standard of conduct to its subjects: it gives merely one reason for action (a serious one, though). It is up to the individual to decide (by considering all the factors, personal, social, economic, legal and others) whether he complies with or acts in breach of this standard (and, eventually, suffers the consequences of this choice). Personally, I do not agree with a certain approach that tries to put all those factors in an equation, which would give a (quantifiable) reason for respecting or not the law.

    The criminalisation of anti-competitive conducts might give a greater weight to legal reasons for action, but it seems to fail to display a more consistent moral ground to justify its existence (is competition a value embedded in society per se?). And that is even more troubling when you realise that this is a measure of criminal law, which normally would follow the “ultima ratio” logic. Rather than making anti-competitive conducts a matter of criminal law, it would be important to focus on the quality of law (above all, its clarity) to ensure that the actions of individuals are properly informed by the standards fixed by the legislation.

  13. stavros says:

    In this comment I would like to discuss Parker’s main argument according to which criminalization of hard-core cartels is fundamentally flawed, since (a) it is grounded purely on economic variables and, thus, ignores other fundamental values, and (b) is inadequately legitimized taking into account the relevant social and political context.

    First, Parker argues that the cartel criminalization is justified mainly on efficiency grounds, the latter being blind towards other values. Nonetheless, the distinction between the concept of efficiency, as a non-moral notion separate, from other moral values does not hold. For instance, a close examination of the Pareto principles or the Kaldor-Hicks efficiency, as specific conceptualizations of the said concept, dispels the illusion that efficiency is morally neutral. Moreover, the principle of efficiency implies that legal rules and institutions should be assessed taking exclusively into consideration their impact on the well-being (e.g. defined as utility or preference satisfaction) of individuals. Hence, although, Parker recognizes that efficiency seeks to eschew other rationales or conceptualizations of the issue at stake (p. 979) and is not a neutral scientific standard for evaluating social states, she avoids examining further whether efficiency arguments hold as moral arguments or if there are other moral values justifying cartel criminalization. Such an inquiry would involve assessing the underlying rationales of cartel criminalization, in order to determine whether one of them “makes sense” by offering a comprehensive justification of the rule.

    On the contrary, Parker poses a legitimacy issue contending that there is no social or political consensus in relation to the cartelist behavior (multiplicity of rationales), and therefore it should not be considered as a criminal offense. Nevertheless, it could be argued that the legitimacy question cannot be tackled purely on empirical grounds, even though empirical evidence may (or may not) support normative arguments. Specifically, Parker’s empirical inquiry focuses on the conformity (or non-conformity) to the law and it remains descriptive. The “out of necessity” argument, the conceptualization of the cartel as micro politics of redistribution, or the contextual interpretation of the market players’ behavior cannot advance a principled argument against a cartel criminalization rule.

    In light of the above, a better question to ask would be whether (a) it is efficient to criminalize cartel conduct, and if yes, (b) whether such a rule is in compliance with the value of fairness. Apart from the many efficiency-based arguments, cartel criminalization could also be justified on the grounds of fairness. In particular, under a categorical imperative ordering to “act only on that maxim through which you can at the same time will that it should become a universal law” cartel conduct and fair trade cannot be reconciled. In other words, cartel behavior negates the very idea of competition (logical contradiction).

    Furthermore, the rationale behind criminal punishment could be utilitarian (i.e. punishment deters potential criminal and rehabilitates the actual ones), functional (i.e. criminal law as a form of social control), deontic (i.e. crime is a negation of the moral order which should be negated; or a sanction punishes a moral wrong, so it is good in itself) or freedom-based (i.e. punishing presupposes that we are free and morally accountable). Apart from that, not every criminal offense is a moral wrong and vice versa.

    So, in case we adopt a cartel criminalization rule, the context (i.e. the specific characteristics of the market or the market players) still could taken into account as aggravating or extenuating circumstances. Small or medium businesses could be excused of the criminal sanction, for they have no effect on trade. Additionally, cartel criminalization could be accompanied with a leniency program offering immunity exclusively on infringements related to cartel actions such as price-fixing, restriction of output, market partitioning etc. Such an option would enable the most “innocent” player to be protected (e.g. by providing that the firm which took steps to coerce others to join a cartel or remain in it, is not eligible for such immunity), while the authorities would acquire more easily the necessary information, so as to remove the competitive distortions from the market. Such a rule could also enhance compliance with commitments decisions.

    Last considerations of a cartel criminalization rule would be the potential chilling effect, its fairness (i.e. avoid punish non-liable persons invoked to engage in cartel conduct by their employer), and its effective application. The latter condition means that a legal norm should identify and punish anticompetitive behavior without incurring excessive administrative or social costs (i.e. an excessive fines could lead a firm in bankruptcy, increase unemployment etc.).

    Trivial info: the “trust” was originally a device by which several corporations engaged in the same general line of business might cooperative for their mutual advantage aiming at eliminating destructive competition, by controlling output and regulating price, while preserving their separate individual existence..

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