Data resulting from a laboratory economic experiment in the area of market and competition policy, in which we study the effects of several policy instruments. The experiment was conducted at the Centre for Behavioural and Experimental Social Science (CBESS) at the University of East Anglia (UEA). Subjects were 180 UEA students without prior experience in market experiments. 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.The ESRC Centre for Competition Policy (CCP) at the University of East Anglia (UEA) undertakes interdisciplinary research into competition policy and regulation that has real-world policy relevance without compromising academic rigour. It prides itself on the interdisciplinary nature of the research and the members are drawn from a range of disciplines, including economics, law, business and political science. The Centre was established in September 2004, building on the pre-existing Centre for Competition and Regulation (CCR), with a grant from the ESRC (Economic and Social Research Council). It currently boasts a total of 26 faculty members (including the Director and a Political Science Mentor), 4 full- and part-time researchers and 23 PhD students.
Laboratory economic experiment. Subjects were invited using ORSEE recruitment system, excluding subjects with prior knowledge of market experiments. A total of 180 students from various backgrounds and nationalities, without prior experience in market experiments, took part. We employed a fixed matching in which every subject was matched with the same other two subjects for at least 20 periods. To avoid end-game effects we implemented a random stopping rule: at the beginning of period 21 and of each following period, there was a 20% chance that the experiment stopped. Due to dependencies of observations between subjects, each group of three constitutes an independent observation. 36 subjects participated in each treatment; hence we have 12 independent observations from each treatment. The experiment was programmed and conducted using the z-Tree software. Further details in attached documentation and paper.
