Cycles of competition enforcement

Recently I have been involved in some work on assessing the methods that competition authorities use in order to evaluate the impact (and the consumer benefits) of their work. There are many ways this can be done but there is one thing in common in these methods. The estimated consumer benefits of enforcement are calculated to see if it meets the pre-defined target level. The way the target level is set varies across jurisdictions (in the UK the Treasury sets a 5:1 target, i.e. the benefits should be at least 5 times larger than the costs; in the US, for example the FTC’s five year target is 2.5 billion USD in consumer benefits as a result of merger control).

There is one aspect of this evaluation process, which I think would deserve further investigation: the question of deterrence. If the consumer benefits of enforcement is difficult to estimate, then it is safe to say that measuring the effect of deterrence is next to impossible (although the OFT makes assumptions about the scale of deterrence but it does not form part of the estimated sum of consumer benefits). For this reason the estimated sum of consumer benefit excludes benefits from deterrence. The resulting bias seems obvious. If an authority is successful, it would not only mean that the consumer benefit target would be easily met, but would surely increase the level of deterrence. Higher deterrence would consequently lead to a smaller number of cases and thus would gradually lead to smaller estimated consumer benefits. Would this mean that successful enforcement periods – success measured in the level of consumer benefits – are followed by unsuccessful ones in terms of meeting the target level of benefits? And what would governments do? Would the authority receive a smaller budget as a result of not meeting the targeted benchmark? In this latter case, a reduced budget would result in a less active competition authority, which would subsequently decrease the level of deterrence and would eventually increase the number of cases again, making the estimated consumer benefits larger, and the circle would start again.

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