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Subhasish M. Chowdhury and Frederick Wandschneider

To deter and punish illegal collusions antitrust authorities run costly investigations and levy fines on detected and convicted wrongdoers. According to Becker (1968) the magnitude of fines and the detection rates are substitutable in their deterrence effect. We investigate this proposition through a market experiment and study the effects of different fine and detection rate combinations (with constant expected fines) on cartel activity, prices and cartel stability. Our results show that in the absence of a leniency program, complying with the Beckerian Proposition, detection rates and fines are indeed substitutable in deterring cartels. With a leniency program, however, due to behavioral bias a regime that embodies low detection rate and high fine lowers the overall incidence of cartelization. The market price in this regime is also significantly lower than in a high detection rate–low fine regime. Finally, irrespective of the presence of a leniency program, the different detection rate–fine combinations do not affect the cartel stability. These findings indicate that antitrust agencies can rely on behavioral biases to economize on enforcement costs and achieve a higher degree of deterrence by reducing investigative efforts and increasing the fine level.