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Competition Policy Enforcement in Mexico: Fines vs. Private Actions

14 marzo, 2010

The Economist has recently published the article “Busting the Cartels” regarding the fines imposed last month by the Mexican Competition Commission (MCC) on six pharmaceuticals companies for incurring in collusive practices. The Economist argues that, notwithstanding the positive impact that the 2006 reforms to the federal competition law had on the enforcement of competition policy in Mexico, the MCC still lacks of policy instruments that would make competition enforcement in Mexico more efficient. It is hard to disagree with this view. But, what is the set of policy instruments that the MCC lacks? A non-exhaustive list includes themes as increasing the efficiency of “dawn raids”; the implementation of measures that preserve the competitive “status quo” meanwhile the decision of the competition authority is disputed in courts; increasing the maximum level of fines for antitrust violations and the enhancement of the private system of damage compensation for antitrust violations.

No doubt that the most controversial of the above topics is the one associated with the level of maximum fines. The discussion (and political negotiation) of this matter in the Congress is expected to be hard, given the role played by fines in the cost-benefit analysis carried out by firms before engaging in anticompetitive conduct. It is a bit surprising, however, that the discussion regarding the design of the “proper incentives” to reduce competition violations in Mexico has centered on fines and criminal prosecutions, omitting the important role that private actions can play as a means to discipline market conduct. The underlying idea is simple. In a basic framework, the expected cost associated with engaging in anticompetitive conduct is given by:

                   Expected Costs (Anticompetitive Conduct) = Fine x Probability (detection) x

                                                                                                                Probability (payment)

So far, the discussion in Mexico has been centered in the area of increasing the component “Fine”. That’s good, but the equation also points out that there are other factors having impact on the “right structure” of incentives, as improving the investigative capacity of the MCC —which affects the probability of detection— and/or increasing the efficiency of the legal system for the recovery of the fines imposed —which affects the probability of payment. Now, in the presence of an effective private system of damage compensation for antitrust violations the above equation turns into:

                   Expected Costs (Anticompetitive Conduct) = Fine x Probability (detection) x

                                                                                                                Probability (payment) +

                                                   Damage x Probability (private suit) x Probability (losing)

Therefore, a workable private system of damage compensation in antitrust can have a huge impact on the anticompetitive conduct of firms and, in some sense, may be a much more efficient way of enforcing competition law in a decentralized way. The importance of this system in the effectiveness of competition enforcement in Mexico has unfortunately been minimized.

To conclude, increasing the current level of fines in Mexico as a means of improving the enforcement of competition law is important, but the development of a robust private system of damage compensation for antitrust violations is, to say the less, fundamental.

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