Corporate Leniency Program Research Articles

Determinants of self-reporting: an experiment on corporate leniency programs

Determinants of self-reporting: an experiment on corporate leniency programs

Corporate Leniency Programs for Antitrust: Past, Present, and Future

AbstractThis special issue marks the 25th anniversary of the introduction of a leniency program for antitrust in the EU and contains five original papers: Each paper examines the effects of design parameters of leniency programs on their performance. Before introducing each contribution separately, we put them in perspective by introducing readers to the existing theoretical, empirical, and experimental literature on corporate leniency programs for antitrust.

Multiproduct firm’s reputation and leniency program in multimarket collusion

The corporate leniency program is believed to be useful for antitrust authorities. Our study challenges this belief in a setting where a large multiproduct firm meets single-product firms in independent and isolated markets. We explore an adversary effect of the corporate leniency program in multimarket collusion in a reputation model. A multiproduct firm forming cartels in multiple markets can build its reputation as a tough firm that punishes any deviation by applying for leniency. We show that the multiproduct firm can manipulate the leniency program to stabilize cartels in markets without material linkages (such as demand linkages). This effect does not exist if only one market exists or the leniency-application outcome is not publicly observable. Our findings theoretically explain why the numerous leniency applications by multiproduct firms should concern antitrust agencies and imply several directions for revising the leniency policy.

Leniency Programs and the Design of Antitrust: Experimental Evidence with Free-Form Communication

We present experimental evidence on the effectiveness of corporate leniency programs. Different from other leniency experiments, ours allows subjects to have free-form communication. We do not find much of an effect of leniency programs. Leniency does not deter cartels. It only delays them. Free-form communication allows subjects to build trust and resolve conflicts. Reporting and defection rates are low, especially when compared to experiments with restricted communication. Indeed, communication is so effective that, with leniency in place, prices are not affected if cartels are fined and cease to exist.

When Can We Expect a Corporate Leniency Program to Result in Fewer Cartels?

Leniency programs have become widespread and are generally quite active as reflected in the number of applications. What is not well-understood is how they affect the number of cartels. This paper develops and explores a theoretical framework to help understand when leniency programs are likely to be effective in reducing the presence of cartels. Plausible conditions are derived whereby a leniency program can result in more cartels. On a more positive note, we identify situations and policies that a competition authority can pursue that will make it more likely that a leniency program will have the intended effect of reducing the number of cartels.

When Can We Expect a Corporate Leniency Program to Result in Fewer Cartels?

Leniency programs have become widespread and are generally quite active as reflected in the number of applications. What is not well understood is how they affect the number of cartels. This paper develops and explores a theoretical framework to help understand when leniency programs are likely to be effective in reducing the presence of cartels. Plausible conditions are derived whereby a leniency program can result in more cartels. On a more positive note, we identify situations and policies that a competition authority can pursue that will make it more likely that a leniency program will have the intended effect of reducing the number of cartels.

HOW DOES A CORPORATE LENIENCY PROGRAM AFFECT CARTEL STABILITY? EMPIRICAL EVIDENCE FROM KOREA

This article examines the impact of Korea's corporate leniency program on cartel stability by applying a semi-parametric hazard model to a unique data set of 619 discovered cartels. We find that, in the short run, the introduction and revision of leniency reduced a cartel dissolution rate and resulted in longer cartel duration. However, in the long run, the introduction of leniency increases the cartel dissolution rate and decreases cartel duration. As a consequence of the leniency program, the Korea Fair Trade Commission's enforcement on cartels has become more effective. These results provide empirical evidence of the effectiveness of full leniency with respect to the first applicant and also have some policy implications for the revision of the leniency program.

Determinants of Self-Reporting Under the European Corporate Leniency Program

We empirically investigate the determinants of self-reporting under the European corporate leniency program. Applying a data set consisting of 442 firm groups that participated in 76 cartels decided by the European Commission between 2000 and 2011, we find that the probability of a firm becoming the chief witness increases with its character as repeat offender, the size of the expected basic fine, the number of countries active in one group as well as the size of the firm’s share in the cartelized market. Our results have important implications for an effective prosecution of anti-cartel law infringers.

Determinants of self-reporting under the European corporate leniency program

We empirically investigate determinants of self-reporting under the European corporate leniency program. Applying a data set consisting of 442 firm groups that participated in 76 cartels decided by the European Commission between 2000 and 2011, we find that the probability of a firm becoming the chief witness increases with its character as repeat offender, the size of the expected basic fine, the number of countries active in one group as well as the size of the firm's share in the cartelized market. Our results suggest, inter alia, that the reform of the European corporate leniency program in 2002 had a positive effect on the incentives to self-report.

Corporate Leniency Programs when Firms have Private Information: The Push of Prosecution and the Pull of Pre‐emption

A corporate leniency program provides relief from government penalties to the first member of a cartel to cooperate with the authorities. This study explores the incentives to apply for leniency when each cartel member has private information as to the likelihood that the competition authority will be able to convict them without a cooperating firm. A firm may apply for leniency because it fears being convicted (‘prosecution effect’) or because it fears another firm will apply (‘pre‐emption effect’). Policies by the competition authority to magnify concerns about pre‐emption—and thereby induce greater use of the leniency program—are also explored.

The Effects of Ringleader Discrimination on Cartel Stability and Deterrence – Experimental Insights

Cartel ringleaders make significant contributions to enabling illegal collusive agreements to function. According to US legislation, ringleaders are excluded from corporate leniency programs. Since 2002, under EU regulations, ringleaders may qualify for a reduction of fines. To date, both antitrust laws treat cartel ringleaders differently. We analyze the impact of this difference in a cartel experiment. Given a low probability of detection through an authority, we find that excluding ringleaders from leniency facilitates cartel formation, stabilizes collusion and leads to significantly higher market prices. The opposite holds for a high probability of detection. Here, the results are in line with the situation when every player can apply for leniency.

Cartel Ringleaders and the Corporate Leniency Program

Cartel ringleaders can apply for amnesty in some jurisdictions (e.g., the E.U.), whereas in others they are excluded (e.g., the U.S.). This paper provides a survey of identified ringleaders in recent European cartel cases and explores theoretically the effect of ringleader exclusion on collusive prices. Our survey shows that cartels often had more than one ringleader, the role of ringleaders was very diverse and ringleaders were typically the largest cartel members. Our theoretical analysis reveals that ringleader exclusion leads to higher prices when the joint profit maximum cannot be sustained under a non-discriminatory leniency policy, antitrust fines depend on individual cartel gains in a nonlinear fashion and the size distribution of members is sufficiently heterogeneous. These findings support the imposition of antitrust penalties proportional to firm size when ringleaders are excluded from the corporate leniency program.

Cartel Ringleaders and the Corporate Leniency Program

Cartel ringleaders can apply for amnesty in some jurisdictions (e.g., the E.U.), whereas in othersthey are excluded (e.g., the U.S.). This paper provides a survey of identified ringleaders inrecent European cartel cases and explores theoretically the effect of ringleader exclusion oncollusive prices. Our survey shows that (i) cartels often had more than one ringleader, (ii) therole of ringleaders was very diverse and (iii) ringleaders were typically the largest cartelmembers. Our theoretical analysis reveals that ringleader exclusion leads to higher prices when(iv) the joint profit maximum cannot be sustained under a nondiscriminatory leniency policy, (v)antitrust fines depend on individual cartel gains in a nonlinear fashion and (vi) the sizedistribution of members is sufficiently heterogeneous. These findings support the imposition ofantitrust penalties proportional to firm size when ringleaders are excluded from the corporateleniency program.

Evidence Dependence of Fine Reductions in Corporate Leniency Programs

We analyze whether corporate leniency programs should grant full immunity to the first self-reporting firm regardless of the amount of evidence provided. We distinguish between two firms, one of them providing high and one only low evidence. We show that awarding full amnesty also to the low evidence provider is suboptimal. Distinguishing fines between the two firms leads to the same percentage of self-reporting and to a lower cartel frequency. For the high evidence provider, full amnesty can but does not have to be optimal.

Monitoring Managers Through Corporate Compliance Programs

Compliance programs entail monitoring of employees’ behavior with the claimed objective of fighting corporate crime. (Competition) Authorities promote such intra-firm monitoring. In a three-tier hierarchy model, authority-shareholder-manager, we study the impact of monitoring on contracting within the firm and the authority’s optimal sanctions and leniency policy. We find that compliance programs are beneficial in the fight against corporate crime if and only if the managerial sanction is low. Moreover, when the shareholder blows the whistle, the authority optimally grants partial corporate leniency, while not granting individual leniency to the involved employees. Conversely, when the employee blows the whistle, the authority grants individual leniency if and only if the expected managerial sanction is either particularly high or particularly low. Finally, we find that the authority does not apply a discount on the corporate sanction for the mere fact of having adopted a compliance program. Our results thus contradict the Corporate Leniency Program, Individual Leniency Program and US Sentencing Guidelines on several dimensions.

An empirical study of the European corporate leniency program

Leniency programs are widely used as instruments of competition policy. They are supposed to serve two purposes: in the short-run to facilitate the detection of cartels and thereby to reduce cost of legal enforcement, and in the long-run to deter firms from antitrust abuse. In our empirical study of the 1996 EU Leniency Program, we find evidence indicating that the program provides incentives to reveal information on criminal activities in the sense that agencies are better informed about the cartel conduct than they would be absent the program. Investigation and prosecution becomes faster under the leniency program by about 1.5 years. Finally, we consider sufficient conditions for the destabilizing effect of leniency that regard the number and duration of detected cartels. Our data do not support the view that these conditions are satisfied for this program.

From Overt to Tacit Collusion: Experimental Evidence on the Adverse Effects of Corporate Leniency Programs

Recent laboratory experiments support the popular view that the introduction of corporate leniency programs has significantly decreased cartel activity. The design of these repeated game experiments however is such that engaging in illegal price discussions is the only way for subjects to avoid the one-shot competitive equilibrium. Subjects in the experiment of this paper have multiple feasible Nash equilibrium strategies to avoid the competitive equilibrium. These strategies differ in the difficulty of the coordination problem they have to solve. The experimental results show that if the efforts of the antitrust authority and the leniency program are directed exclusively to the most straightforward collusive scheme, subjects manage to switch to a more intricate form of coordination. This shift from overt collusion to tacit collusion questions the acclaimed success of corporate leniency programs.

Laboratory evidence on the effectiveness of corporate leniency programs

The number of cartels detected in the United States and in Europe has increased considerably since the introduction of corporate leniency programs in antitrust legislation. It cannot, however, be ruled out that this apparent success results in part from increased cartel activity. We explore the effects of corporate leniency programs on pricing and cartel activity by use of an experiment. We find that in the lab (i) fewer cartels are established when a leniency program is in place, and (ii) cartels that do exist are less successful in charging prices above the static Nash equilibrium price and have lower survival rates.

Cartel Organization and Antitrust Enforcement

This paper incorporates the economic theory of organizations into the framework of public law enforcement, and characterizes the dual-coalition structure of cartel organization that allows us to highlight the strategic interactions between cartel participants under different antitrust policies. We show that delegation of authorities over collusive decisions from top executives to subordinates can mitigate the temptation of renege on collusive relationships and thus contributes to facilitating collusion. This result parallels the insights in Baker, Gibbons and Murphy (2002, 2006) which find that the optimal allocation of decision rights is to minimize the maximum temptation to renege on relational contracts. Moreover, the efficiency gains of delegation in facilitating collusion can be mitigated when the corporate leniency program is introduced, in particular whenever it is unlikely to detect cartels absent leniency and the corporate liability is muc more significant than individual liability.

Trust and Recidivism; The Partial Success of Corporate Leniency Program in the Laboratory

An experiment is conducted were subjects interact repeatedly to examine the effect of a particular leniency program on cartel formation, cartel stability and cartel recidivism. The program leads to lower prices for three reasons. First, non-cooperators are more persistent in their behavior which effectively blocks cartel formation in their respective groups. Second, members of groups that do form a cartel defect more often thus reducing the average cartel lifetime. Third, the difference between the agreed-upon price and the undercutting price is larger. The leniency program does not however affect the probability that a dismantled cartel is re-established.