Post-strongCartelstrong Pricing during Litigation.pdfVIP

Post-Cartel Pricing during Litigation∗ Joseph E. Harrington, Jr. Department of Economics Johns Hopkins University Baltimore, MD 21218 410-516-7615, -7600 (Fax) joe.harrington@ www.econ.jhu .edu/People/Harrington August 2002, Revised June 2003 JEL Classification: L1, L4 Key Words: Collusion, Antitrust Damages Abstract Standard methods in the U.S. for calculating antitrust damages in price-fixing cases are shown to create a strategic incentive for firms to price above the non- collusive price after the cartel has dissolved. This results in an overestimate of the but for price and an underestimate of the level of damages. The extent of this upward bias in the but for price is greater, the longer the cartel was in place and the more concentrated is the industry. ∗I appreciate the assistance of Chris Cavanagh, Massimo Motta, Valerie Suslow, and Peter Wood- ward, the constructive comments of two anonymous referees and the editor, and the research as- sistance of Joe Chen and Sung-Hwan Kim. This research is supported by the National Science Foundation under grant SES-0209486. 1 1 Introduction Consider a cartel that has been caught colluding. According to standard U.S. an- titrust practice, the damages associated with firms colluding in period tare calculated to be h c bf i c P (t) −P (t) D(P (t)) (1) wher