Legal uncertainty, competition law enforcement procedures and optimal penalties

David Tregear Ulph, Yannis Katsoulacos

    Research output: Working paperDiscussion paper

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    Abstract

    In this paper we make three contributions to the literature on optimal Competition Law enforcement procedures. The first (which is of general interest beyond competition policy) is to clarify the concept of “legal uncertainty”, relating it to ideas in the literature on Law and Economics, but formalising the concept through various information structures which specify the probability that each firm attaches – at the time it takes an action – to the possibility of its being deemed anti-competitive were it to be investigated by a Competition Authority. We show that the existence of Type I and Type II decision errors by competition authorities is neither necessary nor sufficient for the existence of legal uncertainty, and that information structures with legal uncertainty can generate higher welfare than information structures with legal certainty – a result echoing a similar finding obtained in a completely different context and under different assumptions in earlier Law and Economics literature (Kaplow and Shavell, 1992). Our second contribution is to revisit and significantly generalise the analysis in our previous paper, Katsoulacos and Ulph (2009), involving a welfare comparison of Per Se and Effects- Based legal standards. In that analysis we considered just a single information structure under an Effects-Based standard and also penalties were exogenously fixed. Here we allow for (a) different information structures under an Effects-Based standard and (b) endogenous penalties. We obtain two main results: (i) considering all information structures a Per Se standard is never better than an Effects-Based standard; (ii) optimal penalties may be higher when there is legal uncertainty than when there is no legal uncertainty.
    Original languageEnglish
    PublisherUniversity of St Andrews
    Pages1-35
    Number of pages35
    Publication statusPublished - 1 Jul 2014

    Publication series

    NameSchool of Economics & Finance Discussion Paper
    PublisherUniversity of St Andrews
    No.1410
    ISSN (Print)0962-4031
    ISSN (Electronic)2055-303X

    Keywords

    • competition law enforcement
    • penalties
    • legal uncertainty
    • competition policy

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