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The Impact of a Corporate Leniency Program on Antitrust Enforcement and Cartelization

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The Impact of a Corporate Leniency Program onAntitrust Enforcement and Cartelization Myong-Hun ChangDepartment of EconomicsCleveland State UniversityCleveland, OH 44115216-687-4523, -9206 (Fax)[email protected]/changmJoseph E. Harrington, Jr.Department of EconomicsJohns Hopkins UniversityBaltimore, MD 21218410-516-7615, -7600 (Fax)[email protected]/People/HarringtonFebruary 20, 2009AbstractTo explore the e¢ cacy of programs designed to …ght cartels, a Markov pro ces sis constructed which models the stochastic formation and demise of cartels. Car-tels are born when given the opportunity and market conditions are right, whilecartels d ie because of internal collapse or they are caught and convicted by theantitrust authority. The likelihood that a cartel, once identi…ed, is convicteddepends inversely on the caseload of the antitrust authority. The antitrust au-thority also optimally chooses an e nforcem ent policy in terms of how many casesit prosecutes. With this model, the impact of a corporate leniency program onthe steady-state cartel rate is investigated. Holding the enforcement policy ofthe antitrust authority …xed, a leniency program lowers the frequency of cartels.However, the additional caseload provided by the leniency program induces theantitrust authority to be less aggressive prosecuting cases outside of the program.As a result, it is possible that the cartel rate is higher when there is a leniencyprogram. We thank Yossi Spiegel and participants of the 15th WZB Conference on Markets and Politicsand the 2nd Conference of the Research Network on Innovation and Competition Poli cy (Berlin) fortheir valuable comments. The second author gratefully acknowledge s the support of the NationalScience Foundation (SES-0516943).11 IntroductionThe 1993 revision of the Corporate Leniency Program of the U.S. Department ofJustice’s Antitrust Division gives a member of a cartel the opportunity to avoidgovernment penalties if it is the …rst to fully cooperate and provide evidence. Thisprogram is arguably the most signi…cant policy development in the …ght againstcartels since the Clayton Act instituted private treble damages in 1914. As noted byAntitrust Division o¢ cials, the leniency program is the primary generator of cartelcases, and the information provided by those admitted to the program has beeninstrumental in securing the convictions of other cartel members. Deputy AssistantAttorney General Scott Hammond stated in 2005:The Antitrust Division’s Corporate Leniency Program has been the Di-vision’s most e¤ective investigative tool. Cooperation from leniency ap-plicants has cracked more cartels than all other tools at our disposalcombined.1The widespread usage of the leniency program in the U.S. soon led to the adop-tion of similar programs in other countries. In 1996, the European Commission (EC)instituted a leniency program and a decade later 24 out of 27 EU members had one.Today, leniency programs span the globe from Canada to the United Kingdom toJapan to South Africa to Brazil. Since 1995, more than 20% of discovered interna-tional cartels have been awarded amnesty by at least one antitrust authority (Connor,2008). The EC provided partial or fu ll leniency in 45 of 50 cartel cases decided d uring1998-2007, and leniency lowered average …nes per cartel by almost 40% from 199 mil-lion to 123 million euros (Veljanovski, 2007). In sum, leniency programs have beenwidely introduced and utilized throughout the world.In light of the widesp read adoption and usage of leniency programs, a considerablebody of scholarly work has developed to understand these programs and assess howthey can be better designed; a review of much of this research is provided in Spagnolo(2008). Research is especially valuable since heavy usage of a leniency program neednot imply that the program has succeeded in the ultimate goal of reducing the numberof cartels. This issu e is particularly challenging because the number of cartels is notdirectly observable. In fact, leniency programs could be utilized, yet be promotingcollusion because their terms are too generous.Starting with the pioneering paper of Motta and Polo (2003), there has been asequence of theoretical analyses including Spagnolo (2003), Aubert, Kovacic, and Rey(2006), and Harrington (2008). While models and results vary, the overall conclusionis that leniency programs make collusion more di¢ cult.2There is also a growing bod yof experimental work which similarly provides evidence of the e¢ c acy of leniency1Scott D. Hammond, “Cracking Cartels With Le niency Programs,” OECD Competition Com-mittee, Paris, France, October 18, 2005.2Ther e are a variety of e¤e cts at work when a leniency program is put in place and som e se rveto make collusion easier; see Ellis and Wilson (2001) and Chen and Harrington (2007). Generally,these e ¤ects net out so that fewer ca rtels form when there is a leniency program.2programs includin g most recently Hinloopen and Soetevent (2008) and Bigoni et al(2008). Both studies report that a leniency program reduces cartel formation thoughBigoni et al (2008) also …nd that prices are higher, conditional on a cartel forming.The general conclusion from previous theoretical and experimental research is thatleniency programs are e¤ective in shutting down cartels and deterring cartel forma-tion. However, those …ndings were derived under a key but problematic assumptionthat enforcement through non-leniency means is una¤ected by the introduction of aleniency program. More speci…cally, it is assumed that the probability that a c artelis discovered, prosecuted, and convicted - in the absen ce of a …rm coming forwardunder the leniency program - is unchanged with the adoption of a leniency program.Not only is that assumption almost ce rtain to be violated, but conclusions about thee¢ cacy of a leniency program could signi…cantly change once this probability is madeendogenous. Let us argue both points.With the introduction of a leniency program, the prosecution of cases not involv-ing leniency is likely to change and, as a result, this will a¤ect the probability thata cartel is caught and c onvicted. As an antitrust authority has limited resources, ifresources are used to handle leniency cases then fewer resources are available to e¤ec-tively prosecute non-leniency cases. This doesn’t necessarily imply that non-leniencyenforcement is weaker, however.


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