The paper analyzes the effect of private antitrust litigation on firms’ ability to collude and charge supracompetitive market prices. When the cost of litigation is sufficiently low, firms charge high market prices, accommodate lawsuits, and accept the litigation costs as just another cost of doing business. When the cost of litigation is sufficiently high, by contrast, the firms charge lower market prices and deter litigation. We model the class action as a mechanism that allows plaintiffs to lower their litigation costs and show that class actions may or may not be socially desirable. We also show that the firms’ private incentives to block class action lawsuits may be either aligned with the social incentives, socially excessive, or socially insufficient. Various extensions, such as settlement, contingent fee compensation, fee shifting (loser pays all litigation costs), and damage multipliers (e.g., treble damages), are also examined.
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