Review of Industrial Organization 14: 257–272, 1999.
© 1999 Kluwer Academic Publishers. Printed in the Netherlands.
On Antitrust Enforcement and the Deterrence of
Department of Economics, The University of Winnipeg, Winnipeg, Manitoba, Canada R3B 2E9
Abstract. This paper examines an antitrust enforcement policy of using signiﬁcant price changes in
an industry as a sorting mechanism for the allocation of resources devoted to policing collusion. That
is, in either responding to complaints or initiating investigations on their own, I examine the issue
of whether an antitrust enforcement policy of inferring possible collusion from signiﬁcant prices
changes is effective in deterring collusion given that antitrust ofﬁcials have no direct knowledge of
the costs of individual ﬁrms. Using the imperfect information repeated game of Green and Porter
(1984), I show that this investigation strategy if coupled with uniform costs being borne by ﬁrms,
can reduce the expected proﬁts from the collusive agreement: however, unless the punishment is
large enough, it will be ineffective in reducing the frequency of collusion. More importantly, it can
have the undesirable effect of reducing the output agreed to by ﬁrms, if ﬁrms choose quantities, or
raise collusive prices if ﬁrms are choosing price. Moreover, if the enforcement policy is anticipated
by ﬁrms, the punishment mechanism adopted to support collusion will be altered to offset the policy.
Key words: Antitrust enforcement, ﬁnite price wars, collusion.
In enforcing competition policy, antitrust ofﬁcials must often respond to requests
from citizens or politicians to investigate industry pricing behaviour that is viewed
as suspicious. For example, the petroleum industry was the subject of a Canadian
government inquiry regarding pricing conduct in the Petroleum Inquiry of 1981.
The inquiry was triggered by a request by the Consumer’s Association of Canada
in 1973 to “investigate (whether) gasoline and fuel oil price increases made a
month earlier by a number of oil companies were the result of a conspiracy and
to determine generally whether prices were maintained at an unduly high level
because of the extent of vertical integration within the petroleum industry.”
A version of this paper has been presented at the Canadian Economics Association meetings
in Calgary, Alberta. Comments by Tom Ross, Wilson Brown and seminar participants are greatly
For an overview see Maule and Cyrenne (1986).
Maule and Cyrenne (1986, p. 37). More recently, the gasoline industry has been investigated
once again for its pricing behaviour. A six citizen complaint in 1996 involving a Canadian Member