"The good news is that competition authorities are regularly detecting and convicting cartels. The bad news is that competition authorities are regularly detecting and convicting cartels. That cartels continue to form is striking in light of the impressive list of advancements in enforcement in the last three decades.
Corporate (and individual) leniency programs have greatly improved the discovery, prosecution, and conviction of cartels. Beginning with the revision of the U.S. Department of Justice’s program in 1993, corporate leniency programs can now be found in more than 60 countries and unions. The next phase of detection programs is in progress with whistleblower rewards and screening. Whistleblower rewards provide bounties to individuals who report suspected cartels and are not themselves part of the illegal activity. Initiated by South Korea and the United Kingdom, Hungary and Taiwan have recently been added to the list of countries offering whistleblower rewards. Screening is the use of market data to identify markets that might have cartels and warrant closer inspection. It is being used to various degrees by many competition authorities,1 and has uncovered cartels in generic drugs (Mexico), road construction (Switzerland), retail gasoline (Brazil), shrimp (The Netherlands), cement (South Africa), ampoules (Chile), and subway construction (South Korea).
Turning to corporate penalties, government fines have vastly increased in the last 25 years in the United States and the European Union, and are on the rise in other jurisdictions. Customer damages have long been a substantial financial penalty in the United States, and are becoming increasingly common in other countries. Though these penalties are large in some absolute sense, apparently they are insufficient to dissuade some firms from forming a cartel. While increasing the level of fines is an option, they can only be raised so far before they jeopardize the financial stability of a firm.
Finally, there are individual penalties. An impressive 35 countries have criminalized participation in a cartel (or, in some cases, just bidding rings). In addition, the Antitrust Division of the U.S. Department of Justice has been increasingly aggressive in using this stick. Over the last 25 years, the percentage of defendants who have gone to prison has risen from 37 percent (during 1990–99) to 70 percent (2010–13),2 and the average prison sentence has almost tripled from eight months (1990–99) to 22 months (2010–16).3 However, the United States is an outlier in routinely putting cartelists in jail; only a few other jurisdictions have ever used incarceration. There are also individual fines and debarment, which keep convicted cartelists out of managerial positions, but their usage is not yet common.
Even if all of these developments have resulted in substantial progress in the fight against cartels, the evidence is that current enforcement falls well short of being an effective deterrent. Many cartels continue to form and operate, which is true even in the United States where enforcement is very aggressive, corporate penalties are the highest (when government fines are combined with customer damages), and incarceration is routine and substantial. Furthermore, many of these cartels are not the product of rogue employees but rather are the result of calculated decisions by upper-level management. It would seem that collusion remains a viable business strategy in the eyes of many high-level executives.
If this experience tells us anything, it is that a competition authority needs more weapons in its arsenal. Towards that end, this article proposes a corporate penalty that would increase financial penalties (while posing less of a risk for a firm’s financial stability than fines), would be compensatory for consumers (in some instances, more so than customer damages), and, most importantly, would be corrective in the sense of making future collusion less likely (which is not a property of fines or damages).
The penalty is to require one or more cartel members to divest themselves of assets for the purpose of making the market more competitive. For example, it could have members of a cement cartel sell some of their plants to an entrant, or it could have an airline cartel of legacy carriers sell some gates and landing slots to low-cost carriers. Before a structural remedy of divestiture is dismissed as impractical and draconian, divestiture as an antitrust remedy is routinely used for mergers with anticompetitive effects and is accepted as a remedy for monopolization. In the early 1970s, the DOJ seriously considered imposing divestiture on members of a gypsum cartel, and in 2014 a structural remedy was used for a cement cartel in Brazil (though the circumstances were rather special). Both cases are discussed below.
The benefits of a structural remedy are described in Part I, while the associated costs are covered in Part II. A discussion of when and how to use divestitures is provided in Part III, while an examination of the legality of such a remedy is provided in Part IV. To argue the practicality and relevance of structural remedies, Part V provides some cartel cases for which they would seem feasible and possibly appropriate. While the discussion is at times conducted from the perspective of the United States (in that some arguments appeal to U.S. policy and jurisprudence), the arguments for a structural remedy are relevant to all jurisdictions."