Anti-trust and the ‘Beckerian Proposition’: the Effects of Investigation and Fines on Cartels

In order to deter collusion and punish the infringement of competition law, anti-trust authorities run costly investigations and levy fines on detected and convicted wrongdoers. Across countries, the resources committed to anti-trust investigations and the fine level vary. According to Becker (1968) different combinations of magnitude of fine and likelihood of detection are substitutable in their deterrence effect. Since detection depends on costly investigation, it is optimal to minimize detection efforts and impose high fines. Recently the UK Office of Fair Trading faced a budget reduction that may affect detection efforts, while it simultaneously increased colluding firms fines from 10% to 30% of its annual turnover. Experimental support for the Beckerian Proposition is mixed in different contexts, and it is not known from a behavioural perspective how effective this type of policy design would be in a market. We address this issue through a market experiment to study the effects of magnitude and likelihood of fines on cartel activity, prices and collusive stability. We find that, in the absence of a leniency program, complying with the Beckerian Proposition, detection rates and fines are indeed substitutable. In the presence of a leniency program, however, a regime that embodies low rates of detection and high fines reduces the propensity to collude and lowers the overall incidence of cartelized markets significantly more than a high detection and low fine regime. This indicates that antitrust agencies can economize on enforcement costs and achieve a higher degree of deterrence by imposing higher level of fines.