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A normative approach to the criminalisation of cartel activity

Published online by Cambridge University Press:  02 January 2018

Bruce Wardhaugh
Bruce Wardhaugh*
Affiliation:
Newcastle Law School
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Abstract

Although cartel behaviour is almost universally (and rightly) condemned, it is not clear why cartel participants deserve the full wrath of the criminal law and its associated punishment. To fill this void, I develop a normative (or principled) justification for the criminalisation of conduct characteristic of ‘hard core’ cartels. The paper opens with a brief consideration of the rhetoric commonly used to denounce cartel activity, eg that it ‘steals from’ or ‘robs’ consumers. To put the discussion in context, a brief definition of ‘hard core’ cartel behaviour is provided and the harms associated with this activity are identified. These are: welfare losses in the form of appropriation (from consumer to producer) of consumer surplus, the creation of deadweight loss to the economy, the creation of productive inefficiency (hindering innovation of both products and processes), and the creation of so-called X-inefficiency. As not all activities which cause harm ought to be criminalised, a theory as to why certain harms in a liberal society can be criminalised is developed. It is based on JS Mill's harm to others principle (as refined by Feinberg) and on a choice of social institutions using Rawls's ‘veil of ignorance.’ The theory is centred on the value of individual choice in securing one's own well-being, with the market as an indispensable instrument for this. But as applied to the harm associated with cartel conduct, this theory shows that none of the earlier mentioned problems associated with this activity provide sufficient justification for criminalisation. However, as the harm from hard core cartel activity strikes at an important institution which permits an individual's ability to secure their own well-being in a liberal society, criminalisation of hard core cartel behaviour can have its normative justification on this basis.

Type
Research Article
Information
Legal Studies , Volume 32 , Issue 3 , September 2012 , pp. 369 - 395
Copyright
Copyright © Society of Legal Scholars 2012

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References

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5. Sherman Act, 15 USCA § 1–7; Clayton Act, 15 USCA § 12–22, 19 USCA § 52–53.

6. Competition Act 2002, ss 4–8.

7. Enterprise Act 2002, ss 188–190.

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11. As cartelists have the economic effect of acting as ‘divisions’ of a monopoly, the same criticisms (and analyses) are levelled at monopolies.

12. The terms ‘consumer surplus’ and ‘producer surplus’ are defined and discussed in s 3(a), below.

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21. Ibid, p 277.

22. Ibid, pp 269–270.

23. Ibid, pp 260 and 267.

24. Ibid, pp 292–293.

25. Ibid, p 295.

26. Feinberg Harm to Others, above n 16, pp 31–34.

27. See Concise Oxford English Dictionary (Oxford: Oxford University Press, 10th edn, 2001) s v.

28. Feinberg Harm to Others, above n 16, pp 32–33.

29. Ibid, pp 33–34.

30. Ibid, pp 34–35.

31. Ibid, pp 32–33.

32. See Concise Oxford English Dictionary, above n 27, s v.

33. However, if it is through kidnapping or theft that these interests are hindered, it is the kidnapping or theft which should be criminalised.

34. Feinberg Harm to Others, above n 16, pp 55–64 and in particular p 60.

35. Ibid, p 57.

36. Ibid.

37. Ibid, pp 61–64.

38. Ibid, p 62.

39. Ibid, pp 63–64.

40. Ibid, p 63.

41. Risk of harm may also provide another extension. See Feinberg Harm to Others, above n 16, p 11.

42. Rawls, above n 17, p xi.

43. See his remarks at eg ibid, p 130.

44. Ibid, pp 157, 221–227. See also I Kant Groundwork of the Metaphysics of Morals (1785) Book I, ch 2 (the first and third formulations of the Categorical Imperative).

45. Ibid, pp 124–125.

46. Ibid, pp 131–134.

47. Ibid, pp 118–120, 131–132.

48. Ibid, pp 109–110.

49. Ibid, p 11, see also pp 118–123.

50. Ibid, p 118.

51. Ibid, p 266.

52. Ibid.

53. Ibid, p 53.

54. Ibid, p 160, see also pp 131–132.

55. Ibid, p 130.

56. Ibid, pp 130–131.

57. Ibid, p 131.

58. See Dresher, M Games of Strategy: Theory and Applications (Engelwood Cliffs, NJ: Prentice-Hall, 1961)Google Scholar pp 21–35. This is a rule of choice when those choosing have no information about the probabilities of future events. It tells one to rank all possible outcomes, and select the least worst of them, ie ‘maximise the minimum’.

59. Rawls, above n 17, pp 148–153 (particularly p 149) and p 160.

60. His argument occupies Part Two (pp 171–343) of A Theory of Justice.

61. Ibid, p 207.

62. Ibid, p 208.

63. Ibid, p 207.

64. Rawls's discussion is contained in ibid, pp 207–210. As Rawls notes, his analysis is based on Fuller, L The Morality of Law (New Haven: Yale University Press, 1964)Google Scholar and Anatomy of Law (New York: The New American Library, 1969).

65. Ibid, pp 210–211.

66. This is the social version of the prisoners' dilemma.

67. Rawls, above n 17, p 211.

68. Ibid, Rawls's footnote omitted.

69. On Kant's views of the necessity of punishment, see I Kant The Metaphysics of Morals (1797) ‘On the right to punish and grant clemency’ (The doctrine of right, part five).

70. Ibid, p 243.

71. Ibid, pp 240–241.

72. Ibid, p 239.

73. Ibid, p 240. By ‘monopolistic restrictions’, Rawls appears to mean ‘abuse of a dominant position’. See eg his remarks on competition in ibid, pp 241 and 244.

74. Ibid, p 240.

75. See above n 53, text.

76. See above n 68, text.

77. See above n 14, text.

78. See above n 18, and Cook, PJ and Ludwig, J ‘The social costs of gun ownership’ (2006) 90 J Pub Econ 379 Google Scholar who estimate that in the USA the average marginal social cost of handgun ownership per handgun-owning household is in the range of $600–1800.

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80. Admittedly, some transactions may not be voluntary: the purchase of essential medicines (for which there may be no substitute) comes immediately to mind. As we briefly suggest in the conclusion of this paper, it may be the case that some forms of extracting consumer surplus in these circumstances could merit criminalisation due to, inter alia, the involuntary nature of the transaction. However, a discussion of the issues involved in the balancing of intellectual property rights (and the need to reward risk-taking in the development of new medications) and the allocation of medical resources in a liberal society are well beyond the scope of this present paper.

81. See eg Bishop, S and Walker, M The Economics of EC Competition Law: Concepts, Application and Measurement (London: Sweet and Maxwell, 3rd edn, 2010)Google Scholar pp 166–167.

82. Posner, above n 13, at 821.

83. See eg Fisher, FM ‘The social costs of monopoly and regulation: Posner reconsidered’ (1985) 93 J Pol Econ 410 Google Scholar; Motta, M Competition Policy: Theory and Practice (Cambridge: Cambridge University Press, 2004)CrossRefGoogle Scholar pp 44–45; and Viscusi, WK, Harrington, JE and Vernon, JM The Economics of Regulation and Antitrust (Boston: MIT Press, 3rd edn, 2005)Google Scholar pp 88–89.

84. Karier, T ‘Unions and monopoly profits’ (1985) 67 Rev Econ and Stats 34 Google Scholar at 41; and Salinger, MA ‘Tobin's q, unionization and the concentration-profits relationship’ (1984) 15 Rand J Econ 15 Google Scholar.

85. Viscusi et al, above n 83, pp 88–90.

86. Note, however, the dividing line between a ‘lobbying cost’ and a bribe may not be entirely clear. It is unlikely that precise distinctions among (legitimate) corporate hospitality, (illegal) ‘facilitation payments’ and outright bribes can be drawn. (See eg Raphael, M Blackstone's Guide to the Bribery Act 2010 (Oxford: Oxford University Press, 2010)Google Scholar pp 71–76.) Nevertheless, bribery is correctly viewed as wrong (hence criminalised) precisely because it involves ‘playing outside’ the ostensive institutional (and market) rules and thus casting the institution or market (and their fairness) into disrepute. This is identical to our analysis of the wrong done by the cartelist, see s 4, below. Likewise, the harm done by most so-called ‘white collar crime’ (eg insider trading, securities disclosure offences) is identical.

87. The leading article is Tullock, G ‘The welfare costs of tariffs, monopolies, and theft’ (1967) 5 Westn Econ J 224 Google Scholar.

88. Leibenstein, above n 14, at 398–403.

89. See ‘ICC tribunal bans Pakistan Test captain Salman Butt for 10 years’Observer (London) 6 February 2011, available at http://www.guardian.co.uk/sport/2011/feb/06/pakistan-cricket-bettting-scandal-test-match.

90. See ‘Japanese sumo wrestling tournament cancelled over bout-fixing allegations’Guardian (London) 6 February 2011, available at http://www.guardian.co.uk/world/2011/feb/06/sumo-match-fixing-corruption-japan.

91. See Cooke J's sentencing remarks in the cricket match fixing case referred to, above n 89: ‘It is the insidious effect of your actions on professional cricket and the followers of it which make the offences so serious. The image and integrity of what was once a game, but is now a business is damaged in the eyes of all… Now, whenever people look back on a surprising event in a game or a surprising result or whenever in the future there are surprising events or results, followers of the game who have paid good money to watch it live or to watch it on TV… will be led to wonder whether there has been a fix and whether what they have been watching is a genuine contest between bat and ball. What ought to be honest sporting competition may not be such at all.’R v Majeed, Butt, Asif and Amir Southwark Crown Court, 3 November 2011 at [1].

92. See our argument, above n 44, text.

93. Sen, AK ‘Isolation, assurance and the social rate of discount’ (1967) 81 Q J Econ 112 Google Scholar at 112–114.

94. Ibid, at 122; and Rawls, above n 17, pp 237–238.

95. See Sen, above n 93, at 114–115.

96. See Rawls, above n 17, pp 235–239.

97. Samuelson, PA ‘The pure theory of public expenditure’ (1954) 36 Rev Econ and Stats 387 Google Scholar.

98. Coase, RH ‘The lighthouse in economics’ (1974) 17 J Law and Econ 357 Google Scholar.

99. See Rawls, above n 17, p 236.

100. See Elzinga, KG and Brett, W The Antitrust Penalties: A Study in Law and Economics (New Haven, CT and London: Yale University Press, 1976)Google Scholar pp 3–16 who note this.

101. Although ‘pay for delay’ has elements of both cartel and abuse of dominance (involving a horizontal market sharing arrangement and exploitation of a dominant position obtained by a patent), the abuse of dominance is logically prior to the cartel activity: without the monopoly/patent, the agreement could not occur.

102. On this point, see eg ‘Antitrust: Commission opens proceedings against Johnson & Johnson and Novartis’ 21 October 2011 IP/11/1228, available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/1228&format=HTML&aged=0&language=EN&guiLanguage=en.

103. The argument here (to which this caveat is directed) would be along the lines espoused by Devlin, P The Enforcement of Morals (Oxford: Oxford University Press, 1965)Google Scholar who follows the reasoning of Stephen, JF Liberty, Equality, Fraternity (London: Smith Elder, 1874)Google Scholar.

104. Brisimi and Ioannidou, above n 9, make a similar point at 173 and 175–176.