Antitrust policy and collusion through credible covenants

This paper presents a political economy model of antitrust policy against horizontal price-fixing. The policy is implemented through discretion. In the event of collusion the public agency can enforce competition through fines and behavioral constraints. The paper shows that while fines do not constitute an incentive to investigate in the event of collusion when the policy is implemented through discretion, behavioral constraints are an effective tool in limiting collusion. However firms can strategically induce that no policy is implemented along the equilibrium path by making a credible “covenant” that little degree of collusion will be implemented today and in the future. Moreover, if firms have limited information about agency’s costs, social welfare rises up, while if the agency has limited information about production costs, the efficient cartel type increase its rents.