Umbrella pricing and cartel size

Abstract

It is generally assumed that bigger scale and scope of private antitrust enforcement promotes effective competition. This has motivated several North American and European courts to uphold redress claims not only from clients of a detected cartel but also plaintiffs who were exposed to ‘umbrella pricing’, i.e. equilibrium price increases by non-colluding competitors. The paper shows that the presumed deterrence effects of obliging infringing firms to compensate aggrieved customers of non-infringing firms can be dominated by adverse cartel size effects: liability for umbrella damages primarily constrains small partial cartels. It thereby improves the comparative profitability and stability of large ones. More encompassing cartels can form, prices rise, and welfare falls.