Optimal Sequential Investigation Rules in Competition Law
Abstract: The application of US antitrust and European competition law currently shifts from quite strict per-se rules towards the rule of reason. Between these extremes, some authors argue that there is some optimal amount of differentiation in the rules of competition law based on the ‘error cost approach’. In this paper we develop a more sophisticated sequential model of decision-making in applying competition law. We allow for multiple steps of trichotomous decisions: permit a certain behaviour, prohibit it, or go one step deeper into the investigation. We both model the decision process for single case decisions as it is actually carried out by competition authorities and derive consequences for the optimal design of legal rules determining such decision processes. The derivation of those optimal sequential investigation rules follows the error cost approach, i.e. the minimization of the sum of welfare losses through decision errors and (all direct and indirect) regulation costs through the application of competition law.
