How the design of cartel fines affects prices: Evidence from the lab

Sindri Engilbertsson, Sander Onderstal and Leonard Treuren

No 779661, Working Papers of Department of Management, Strategy and Innovation, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Management, Strategy and Innovation, Leuven

Abstract: Antitrust authorities impose substantial penalties on firms engaging in illegal price-fixing. We examine how basing cartel fines on revenue, profit, or price overcharge influences prices, cartel incidence, and cartel stability. In an infinitely repeated Bertrand oligopoly game, we show that fines based on revenues/profits/overcharge incentivize firms to charge prices above/equal to/below the monopoly price. Cartels are stable for a smaller range of discount factors when fines are based on overcharges rather than other bases. We test these predictions in a laboratory experiment where subjects can form cartels, which allows them to discuss pricing at the risk of being detected and fined. By equalizing expected fines across treatments, we isolate the effect of the fine's base. We find that market prices are lowest under overcharge-based fines and highest under revenue-based fines. While these results align with the theoretical predictions, cartel incidence and cartel stability do not differ significantly across fining regimes. Our results suggest that antitrust authorities could improve enforcement by shifting from revenue-based fines to profit- or overcharge-based fines.

Keywords: STG/23/026#57790427 (search for similar items in EconPapers)
Pages: 58
Date: 2025-02-21
Note: paper number TI 2025-012/VII
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Forthcoming in Tinbergen Institute Discussion Paper

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