Handbook of Behavioral Industrial Organization
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Handbook of Behavioral Industrial Organization

Edited by Victor J. Tremblay, Elizabeth Schroeder and Carol Horton Tremblay

The Handbook of Behavioral Industrial Organization integrates behavioral economics into industrial organization. Chapters cover concepts such as relative thinking, salience, shrouded attributes, cognitive dissonance, motivated reasoning, confirmation bias, overconfidence, status quo bias, social cooperation and identity. Additional chapters consider industry issues, such as sports and gambling industries, neuroeconomic studies of brands and advertising, and behavioral antitrust law. The Handbook features a wide array of methods (literature surveys, experimental and econometric research, and theoretical modelling), facilitating accessibility to a wide audience.
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Chapter 14: Antitrust and the “Beckerian Proposition”: the effects of investigation and fines on cartels

Subhasish M. Chowdhury and Frederick Wandschneider

Abstract

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.

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