An inspector calls: On the optimality of warning firms about ongoing inspections in antitrust policy

Abstract

This paper investigates the effects of disclosing information about the likelihood of an inspection on the sustainability of cartels. To this end, I develop a model in which the Antitrust Authority can credibly disclose this type of information before firms make strategic decisions. In this way, the Antitrust Authority can distort the optimal behavior of the cartel firms related to production and cartel activities between inspection periods and non-inspection periods. I show how this can destabilize some cartel agreements, but it can also create productive inefficiencies not considered in standard models of collusion, to the extent that it induces cartel firms to devote costly resources to cartel activities.