Deterring Collusion - Some Experimental Evidence on the Relative Effectiveness of Changes in Detection and Sanction Levels

• NCJ Number: 104601
• Author(s): M K Block; V E Gerety
• Date Published: 1987
• Length: 77 pages
• Grant Number(s): 83-IJ-CX-4055; 85-IJ-CX-0062
• Sponsoring Agency: National Institute of Justice (NIJ); US Dept of Justice NIJ Pub
• Sale Source: National Institute of Justice/; NCJRS Photocopy Services
• Publication Type: Report (Study/Research)
• Language: English
• Country: United States of America

Annotation

This study uses an economic laboratory experiment to test the prediction that collusive price setting declines with an increase in the probability of detection and penalty severity.

Abstract

In the experiments, subjects were given the opportunity to earn profits by participating in an auction. During some experiments, substantial profits could be made by colluding with other auction participants, i.e., by forming and operating a sellers' cartel. Antitrust enforcement was simulated by the random imposition of penalties on colluding sellers. If a cartel was 'detected,' a penalty was assessed against the subjects' profits. Since penalties for collusion had a direct and significant impact on subjects' earnings, there was a strong financial incentive to avoid them. Twenty-four subjects participated in five separate sealed-offer experiments over 6 weeks. The most significant finding is that large financial penalties were more effective in deterring collusive price setting than high detection levels, thus supporting the conclusions of Elzinga and Breit (1973) as well as Block et al. (1985). Since these findings were true for an experiment where punishment was only simulated, they are even more likely to hold true under conditions of real financial consequences. 14 tables, appended study instruments, and 17 references.