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Leniency Policies Jaime Plaza Aparicio July 13, 2015 Bachelor Thesis in Economics Department of Economics Chair for Microeconomics and Game Theory Prof. María Sáez Martí Jaime Plaza Aparicio Matriculation-number: 11-732-005 [email protected] Phone: +41786923581 Friesenbergstrasse 16 8055 Zürich Switzerland

Leniency Policies: Game Theory Approach

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Page 1: Leniency Policies: Game Theory Approach

Leniency Policies

Jaime Plaza Aparicio

July 13, 2015

Bachelor Thesis in Economics

Department of Economics

Chair for Microeconomics and Game Theory

Prof. María Sáez Martí

Jaime Plaza Aparicio

Matriculation-number: 11-732-005

[email protected]

Phone: +41786923581

Friesenbergstrasse 16

8055 Zürich

Switzerland

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Abstract

This thesis compares leniency programs according to economic theory with real

leniency programs .The analysis focuses mainly on offering leniency in form of a

reward as well as on offering leniency before or/and during investigations. The

Folk Theorem and a competition model with leniency policy (Spagnolo 2005) are

described as well as three different leniency policy papers based on that model.

This thesis also reviews the intentions that lead to the appearance of leniency

programs as well as the main goals of them. The two main leniency programs

(U.S. and E.U.) and the differences between one program and the other are

explained to show how actual leniency programs work. Conclusions lead to real

leniency programs been designed similar to the ones proposed by economic

theory, except for the leniency in form of a reward.

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Table of Contents

1. Introduction ............................................................................................. 1

2. Leniency Programs ................................................................................. 2

2.1 What is a Leniency Program? ......................................................... 2

2.2 Why implement Leniency Programs? ........................................... 4

2.3 Evolution of Leniency Programs .................................................... 8

2.3.1 U.S. Leniency Program .............................................................. 9

2.3.2 E.U. Leniency Program ............................................................ 13

3. Economic Theory .................................................................................. 19

3.1 Folk Theorem ................................................................................... 20

3.2 Competition Model with Leniency Programs ............................ 22

3.3 Spagnolo (2005) ............................................................................... 24

3.4 Chen & Rey (2013) .......................................................................... 30

3.5 Aubert, Kovacic & Rey (2005) ....................................................... 35

4. Conclusion ............................................................................................. 41

References .................................................................................................. 44

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1. Introduction

Leniency programs have changed dramatically the way cartel problems are

tackled. Cartels and similar anti-competitive practices are condemn by

competition authorities all around the world. The Sherman Antitrust Act in the

U.S. and the Article 81 of the European Commission Treaty prohibit activities

that can distort market competition.

Nowadays, a competition authority without a leniency program is rarely

perceived as something feasible. If properly designed, leniency programs can

change the incentive structure of cartel members and provide the means for a

deviation to be profitable. In addition, if programs are effectively planned, they

can also prevent cartel formation.

It is important to highlight that economists started studying leniency programs

and focused not only on the effectiveness of them, but also on their design.

Hence, this thesis focuses on the history and the design of leniency programs.

Directors of the competition authorities designed the programs in a way in which

they do not always harmonize with economic theory. The differences between

both lines of thought are remarkably high in certain aspects, for instance, in

defining the form leniency adopts.

The aim of the thesis is not to decide whether a leniency program is efficient in

itself or not; this work is only trying to assess the differences between the leniency

programs that prevail in “the two worlds”: the real world and the one described

in the economic theory. Nonetheless, it is worth mentioning that the latter partly

agrees with the programs implemented in the real world, and thus this thesis will

explain this “partial” agreement. Economist defend leniency programs and have

some well-established views on certain aspects related to them that have not been

implemented yet in real world programs.

This work is divided in four sections. Section 2 focuses on the history and the

development of leniency programs, and the historical events and the intentions

that motivated politicians to implement such programs are also explained. This

section 2 also explains the two most representative leniency programs (U.S. and

E.U) and the differences between them.

The economic theory is explained in Section 3, where the folk theorem and a basis

model are presented. Here, three major papers based on that model and the most

important concepts of them are exposed. In addition, each of the papers has some

differences to real leniency programs and the work tries to capture them too.

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Section 4 divides leniency programs into three parts and concludes with

explaining the differences between real leniency programs and the economic

theory through these three parts.

2. Leniency Programs

2.1 What is a Leniency Program?

A leniency program is a tool used by competition authorities to reduce sanctions

or fines for a firm involved in a collusive agreement that self-reports and

provides useful information and evidence. Leniency policies are one of the tools

used by competition authorities in combination with active investigations or

fines in order to deter the collusion among firms in various sectors of the market.

The authority offers a degree of leniency in exchange for active participation in

uncovering wrongdoing.

A leniency program is an automatic agreement between the competition

authority and a wrongdoer conditional on the latter meeting a series of

requirements. These requirements are publicly known, and by fulfilling them,

the agreement is guaranteed. The agreement can be seen as an exchange between

two parties. The authority grants leniency in fines, if wrongdoers report the

collusive agreement and meet certain requirements.

One feature of leniency programs is the clear trade-off between its benefits and

costs. The benefit from inducing a “death threat” to the cartel by giving the

members an escape not as harmful as the expected sanctions (fines or prison) and,

at the same time, by stimulating cartels, members can profit from ending the

illegal activity whilst incurring in less damage than they would without a

leniency program. This underlines the importance of the proper design of the

leniency programs, tipping the balance in the proper direction. This means

neither being too strict nor too generous in terms of the leniency awarded.

The idea behind this concept is much older than the first rudimentary leniency

program from the U.S. (1978). This program was the first step to nowadays

corporate leniency programs in U.S. and the rest of the world. The main concept

of inducing mistrust in a group (in this case a cartel) has been very common

throughout human history, especially in such situations as wartime conflicts and

the illegal activities of mafias.

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Since trust is required in cartels or criminal organizations to build a durable and

profitable relationship, wrongdoers must be certain that individual parties will

not deviate in any way from the agreement. If members do not trust one another,

they cannot be confident that the agreement will be sustained in the future.

Spagnolo (2005 & 2006) highlights the famous “Divide et Impera” strategy

employed by Julio Caesar to defeat his enemies by bringing a few of the opposing

groups across to his side, in order to make it impossible for the enemies to unite

and work together, thereby breaking the opponent’s front. His model from the

2005 work can be interpreted both as an optimal leniency program intended to

deter collusion among firms and to reduce criminal misbehavior among criminal

organizations. Treating cartels as criminal organizations is a very good

counterpoint in the analysis of leniency policies. Differences in the national and

international characteristics of the Antitrust Authority (US) and European

Commission (European Union) make the possible punishments entirely

different. Whereas in both cases colluding firms face monetary sanctions, within

US territory they also face prison sentences.

Spagnolo (2006) names three essential features that cartels and organized crime

share. The first entails cooperation between members of the illegal activity

whereby the classic economic problems of cooperation such as free riding or

moral hazards are of greater importance. These activities usually take part in

several periods of time making it an ongoing relationship, whereby future benefits

and costs deemed important and therefore taken into account. As members

cooperate among themselves in an ongoing relationship, they end up obtaining

evidence of one another’s wrongdoing. The last feature is a result of the first two.

Aside from their tasks in the illegal activity, members must monitor each other.

The extensive information typically obtained from this ongoing relationship,

regarding wrongdoing, is crucial for leniency programs. The aim of competition

authorities when focusing on leniency policies is to give members an incentive to

hand in evidence.

When focusing on cartels and other collusive agreements, it should be noted that

not all information is incriminatory. As in González (2007), a difference can be

made between circumstantial and hard evidence. Whereas circumstantial

evidence is open to interpretation, hard evidence proves without any doubt the

wrongdoing. To this latter group belong, e-mails/letters, records, oral statements

or documents alongside other form of correspondence. Circumstantial evidence

is ambiguous and cannot be taken as incriminatory. Aubert, Rey and Kovacic

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(2005) cite the example of the woodpulp case. The European Commission

classified the parallel evolution of prices in the woodpulp industry as

incriminatory, and as an evidence of a collusive agreement, but the European

Court of Justice annulled the decision, asserting that price parallelism is

compatible with competitive behavior. In general, observable data without any

hard evidence makes it difficult to prove collusion.

That which is meant by leniency is a full or partial reduction in the fine; however,

there are some regulations that go further and reward agents who report an

illegal activity. The authority rewards agents that provide them with hard

evidence of a collusive agreement. Although the economic analysis defends the

concept that a system of rewards, instead of fine reductions, is more effective, in

reality, such systems are rare. Examples of this include South Korea, which in

2002 implemented a system that grants rewards for individual informants of

collusive agreements, and the US Civil False Claim Act are some examples. The

Act rewards individuals who inform the U.S. government of fraudulent activity.

The frauds reported directly involve the U.S. government as the purchaser of

goods and services or as insurer.1

2.2 Why implement Leniency Programs?

In words of the Director of Criminal Enforcement from the Antitrust Division,

Scott D. Hammond2: “[…] an effective leniency program will lead cartel members

to confess their conduct to authorities even before an investigation is opened”.

Before the implementation of leniency programs, reductions in sanctions or fines

were in use but they were neither publicly nor general knowledge. Agents

colluding or committing a crime could not take leniency into consideration since

there was no leniency program in place, and trying to negotiate more lenient

terms was fraught with uncertainty.

Antitrust authorities had, and continue to have, other techniques to detect cartels

apart from the leniency policies. These techniques are not available in every

jurisdiction, and sanctions also differ among jurisdictions. Different sanctions can

also increase the fear of detection in stricter regions of the world, making

1 Aubert, Kovacic, and Rey (2005) 2 Hammond (2004)

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collaboration in those regions more advantageous. The Antitrust Division3 listed

the cooperation of “insiders”, the assistance of skilled FBI agents in interviews,

the collaboration from immigration authorities to track cartel members, and the

execution of search warrants on the offices of the suspected firms as some of the

tools used in their investigations. Despite this, the new version of the Corporate

Leniency Program (1993) has helped to detect a greater number of international

cartels than the combination of aforementioned methods available to the

Antitrust Division.

Spagnolo (2006) remarks that the characteristic of being “ex ante”, general, and

public is what differentiates leniency programs. This makes them different in

terms of their effectiveness and form from previous leniency agreements. It is

“ex-ante” because the program acts a stage prior to other mechanisms such as

plea bargains, which are similar but come into play at the prosecution stage. The

aim of these programs is to encourage the wrongdoers not yet detected to come

forward. It is “general” in so far as any agent facing such situations can adopt

this program and apply for leniency. It is “public” because agents must know the

existence of both the program and the situations in which they can adopt it.

Spagnolo also highlights codification also as a useful instrument of these new

programs. Codification helps to reduce some of the main problems of these pre-

program situations; namely, discretionality and uncertainty. If firms want to

apply for leniency but do not know the amount of leniency offered by the

authority, or are afraid of possible changes in jurisdiction, calculating the value

of reporting will be difficult.

Spagnolo (2006) also summarizes the goals of well-designed leniency programs.

The first goal is the prevention of cartel formation, deterring the formation of

cartels by inducing mistrust in the cartel structure from the onset, so that the

probability of members losing confidence increases. The second goal is oriented

to cartels that were formed before, or in spite of, the adoption of the program.

The authority achieves its detection of cartels by reaching an agreement with one

of the members and obtains the information from this source. These two concepts

are very important in terms of the analysis. For this framework cartel deterrence,

and only cartel deterrence, means to prevent a cartel from being formed because

the leniency program makes the illegal activity unprofitable. Cartel detection

means that the authority discovers a cartel as a result of one of the members

reporting it through the leniency program.

3 Hammond (2004)

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With the implementation of leniency programs, applying for leniency becomes

more predictable. Transparency, publicity, anonymity or generality are some of

the features that new well-designed programs fulfil that helps their

predictability. To assist its implementation, firms should know the existence and

workings of these programs. Speeches in workshops and conferences increase

the program knowledge between its potential “users”; namely, the corporations

and their directors, officers and employees.

Scott D. Hammond, former Director of Criminal Enforcement of the Antitrust

Division of the US, explains in one of his speeches the three fundamental

cornerstones for the success of a leniency program: threat of severe sanctions,

perceiving a high risk of detection, and high transparency and predictability of

the program.

If the program is well-designed, it should succeed in real world. Although

competition authorities consider the leniency program their most powerful and

successful deterrence weapon, and that with its implementation the number of

convicted cartels and fines has increased, there is a need to be cautious when

taking into considering the programs. The increase in leniency applications,

cartel detection and fines, after they have been introduced is clear and

undeniable, but to characterize the program as a complete cartel detector is

perhaps an overly sweeping claim.

Since the number of active cartels reigning in the market is unknown, the increase

in cartel conviction cannot be solely attributed to the leniency programs. The rise

could come from the existence of a greater number of cartels in the market or, as

the authorities suggest, from leniency programs, but a clear statement cannot be

formulated. When adopting a program with full deterrence and detection of

cartels, the authority ought not to receive any leniency application. This is clearly

not the case, since the leniency applications rates have increased with the

implementation and updates of the programs.

Even assuming this success comes directly from leniency programs, another

issue arises. The design of the leniency program may have played a role, which

meaning that a different design could have performed even better than the one

implemented. It can also be argued that leniency programs have changed nothing

in cartel deterrence and detection (same probability of detection), but simply that

the number of active cartels have increased, and that it is this that has resulted in

a notable increase in cartel convictions.

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The introduction of leniency programs has increased the number of convicted

cartels4 and has also radically changed the way in which the authorities discover

cartels. The deterrence effects are difficult to quantify and qualify, but the

analysis is easier for determining the effects of detection.

Detection effects can be seen in the applications for leniency received by the

competition authorities, as for example with HENKEL, a company that produces

chemical products such as detergents or shower gels. HENKEL has applied for

leniency three times in Spain, but also in Italy, in France, in Germany and at the

European Commission. The program has proved very profitable for HENKEL’s

interest, and it subsequently assisted several competing authorities with the

discovery of cartels. In Spain alone HENKEL has saved over 15 million Euros.

There are undoubtedly other companies, which, like HENKEL would be willing

to apply for it or that have already applied. With the application comes the

investigation in the offices of the reported firms; the emails, videos and other

exchange of information between the wrongdoers; the knowledge of the practices

used by them to fix the price or exchange information and these not only help the

authority with regards to the reported cartel, but the authority also learns about

those involved firms in the cartel and their bad practices. Multinational

companies that collude in one particular market may also have other collusive

agreements in other markets, which proved to be the case with Henkel and its

cartel’s colleagues. If HENKEL and the other companies take turns in reporting

and their agreement remains unbroken in spite of the reports, the competition

authority will lose with regards to the leniency program and should change the

incentive structure of it.

A leniency program, when it is well designed so that firms do not systematically

benefit from reporting, can prove greatly beneficial to the authority through the

information and knowledge that it acquires about the running of cartels. This

only happen in the worst case-scenario, whereas the program could actually

deter and detect cartels at a very high rate.

Despite the success and evolution of leniency programs, competition authorities

did not dare to set leniency as a reward. High fine reductions or fine cancellations

are the form leniency takes in the policies of the authorities. If the authority is

willing to refrain from levying the full fine against a wrongdoer, why should it

not go further by setting a reward? Through its leniency policies the authority

4 Spartling (1998), Delrahim (2004)

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reveals that discovering an entire collusive agreement compensates the

condonation of the sanction to a confessed wrongdoer. If the authority is willing

to pay that price for cartel detection, why do not increase this effect by setting a

reward instead of a reduction/cancellation?

Aubert, Kovacic, Rey (2005) name certain possible implantation issues for

rewards. A limited budget can impede the possible reward but the reward can

be paid through the fines imposed on the other cartel members. There may be

public condemnation of rewarding wrongdoers, especially at a time when a

country is in recession. A third issue is the additional collusion incentives that

rewards produce. If with a fine reduction firms can adopt collusive strategies to

exploit the leniency authority, a reward can increase incentives to collude and

loot the competition authority.

2.3 Evolution of Leniency Programs

The aim of the previous sections is to explain what changes for the wrongdoers

with the introduction of the programs, the characteristic of ideal programs and

the trade-offs and mistrust induced by them. This section focus on how real

leniency programs are designed, their evolution the years that have passed since

the first programs were adopted and the differences between the main leniency

programs.

Figure 2 shows the year of adoption of a leniency program in each country and

the percentage of countries from the total with leniency program in that year. In

less than two decades most of the countries have adopted a leniency program.

These programs can greatly differ between countries and can be more or less

generous or restrictive. Since the revision of the Corporate Leniency Policy in 1993

more competition authorities in national and international regulations have

adopted a leniency program for firms.

Since, in this section, the approach is going to focus on how real programs are

designed there must be clarity about the users of the program. When wrongdoer

or agents was mentioned, it primarily referred to firms.5 Despite the existence of

individual leniency policies, the majority of leniency programs are oriented

towards corporations. This work focuses principally on leniency treatments to

5 For further analysis whenever wrongdoer or a similar term is mentioned is meant firms. Whereas the

term individuals, and only it, will be used for persons.

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firms; nevertheless, in some jurisdictions the leniency to corporations implies the

leniency treatment extends to individuals.

Leniency programs have changed with many useful revisions, but the pioneer is

the U.S. The U.S. program has been the model for the rest of the programs. The

main two competition authorities with regards to leniency regulation are the

Antitrust Authority of the U.S. and the European Commission of the European

Union (E.U). The following sections will focus on both leniency programs and

their differences and similarities.

2.3.1 U.S. Leniency program

The first version of the Corporate Leniency Policy dates from 1978 and was

introduced by the U.S. Department of Justice (DoJ). Within the DoJ the Antitrust

Division is the responsible for the policy. Wrongdoers reporting illegal activity

before an investigation had been launched were eligible to obtain leniency.

Amnesty6 was not granted automatically and the Division had great deal of

prosecutorial discretion in the process. The program was not very appealing and

this resulted in a very poor number of applications (only one application per

6 For this section, as in S. Hammond (2004), the terms amnesty, leniency and immunity will refer only to

a full elimination of the fine and not to partial reductions.

Figure 1: Borrell, García, Jiménez (2013)

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year) and it was unable to discover an international cartel. Both theorists and

directors of competition agreed the program had some errors in its design. As

Spagnolo (2006) highlights, the program was neither transparent nor

“automatic”.

Given that the program was unable to bring firms to apply for leniency, the

Division revised the Corporate Leniency Policy in 1993. The aim was to make it

easier and make applying for leniency and cooperating more attractive to firms.

Three aspects, as stated by several members of the Division7, changed in the

revision that exist and have made the program what it is today.

i) Automatic amnesty if there is no investigation already launched.

ii) Amnesty could still be awarded even if firms cooperate during an

investigation.

iii) Every individual director, officer and employee from the firm that obtains

leniency is protected from criminal prosecution.

The application rate quickly jumped to one application per month and reached

rates near 20 applications per year8. With this new face the Corporate Leniency

Policy became the most effective tool in detecting international cartel cases.

Branches from the same cartel came to the Antitrust Division within the same

weeks, and even within the same day9, but only the first to come was granted

leniency.

Spagnolo (2006) comments on the huge impact of the revision in the program.

Together with the increase in the application rate, the magnitude of the penalties

imposed increased dramatically. Supported by OECD reports that state that the

increase in the use of leniency programs is powered by the substantial increase

in penalties, Spagnolo asserts the two forces operate together. Spagnolo also

defends the notion that the higher quality and quantity of evidence in hands of

the Division was crucial for impose higher sanctions. Finally, higher sanctions

make the risk of getting convicted greater and therefore the program proves more

appealing.

7 Spratling (1998), Hammond (2000), Delrahim (2004). 8 Hammond (2004) 9 It did not happen in the U.S. but HENKEL and other company applied the same day for leniency;

namely, the day the leniency program was first adopted in Spain.

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This new version of the program, still currently in use, is divided into four parts10.

Leniency before an investigation has begun, alternative requirements for

leniency, leniency for corporate directors & employees, and leniency procedure.

A firm involved in an illegal activity11, looking to be awarded with full immunity,

that is not known by the Division ought to meet several requirements. The firm

must i) be the first from an unknown cartel to report illegal activity; ii) take quick

and effective action to end its participation in the illegal activity; iii) completely

report to the Division and cooperate with it throughout the investigation; iv)

confess as a truly corporate act; v) where possible make restitution to injured

parties; and vi) have participated in the illegal activity without coercing other

parties to take part in it, which means, among other things, being neither the

leader or originator of the illegal activity.

A firm reporting the illegal activity after the beginning of the investigation has a

further opportunity to achieve immunity. The Division grants immunity to a firm

that reports even if the investigation has already started, but it must not have

incriminatory evidence at that point of the investigation. This firm must i) be the

first to report and qualify for leniency from the members of the illegal activity

reported; ii) report at a time when the Division has no evidence against the

company that serves for the conviction of it; iii) take quick and effective action to

end its participation in the illegal activity; iv) completely report to the Division

and cooperate with it helping advance the investigation; v) confess as a truly

corporate act; and vi) where possible, make restitution to injured parties. Other

than that the Division must determine that awarding leniency to that firm, in

consideration of the illegal activity, will not be unfair to others. Being the leader

or having coerce others to participate as well as reporting after an investigation

has started can jeopardize the granting of leniency by the Division.

If a firm qualifies for leniency and meets all requirements its directors, officers

and employees, having admitted their involvement in the illegal activity, will

receive leniency, which means that they cannot be charged criminally. Qualifying

for leniency can save the corporation millions of dollars and also eliminates the

threat of prosecution that would have persisted by continuing with the illegal

activity.

10 Corporate Leniency Policy (1993) 11 For sake of clarity, when in previous sections the term “cartel” was mentioned, it does not meant only

cartels but every other form of collusive illegal activity disturbing competition that is condemned by the

Antitrust Division.

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Qualifying for leniency also entailed certain costs for the firms. Besides

interrupting the typically profitable illegal activity, firms could be the target of

federal and state-treble damage claims based on their involvement in the cartel.

As mentioned by Spagnolo (2006), applicant firms could find themselves not only

liable for three the damages suffered by customers but also thrice that suffered

by the costumers of their conspirator.

With a new legislation approved in 2004, Criminal Penalty Enhancement and

Reform Act, that tries to solve this cost, the Division wanted to give firms a

greater incentive to report. The new legislation reduces potential damages in

private lawsuits to single damages based on their own role in the cartel for the

receiver of leniency, whilst other participants remain fully liable for treble

damages12. As stated by Spagnolo (2006) this new legislation increases the

potential liability for colluding firms that do not apply for leniency. In words of

the Deputy Assistant Attorney General of the Antitrust Division M. Delrahim13:

“the other cartel participants remain fully liable for treble damages based on

harm caused by the entire conspiracy.”

Within the leniency program there are some mechanisms that make reporting

even more attractive to firms involved and which could result in more cartels

being convicted. The Amnesty Plus Program encourages firms involved in ongoing

investigations to seek out amnesty in other markets in which they compete. By

qualifying for leniency (the Amnesty) in other uninvestigated market, and,

precisely, by collaborating with the Division in the discovery of this new cartel

firms will get a reduction (the Plus) on the fine imposed for the participation in

the first cartel.

The Penalty Plus Program works in the opposite direction to the Amnesty Plus

Program. If a firm, which is been investigated and participates in cartels in other

markets does not profit from the opportunity given by the Amnesty Plus and

denies any other illegal activity, it will suffer harsh consequences if the Division

discovers its implication in any other cartel. That which is meant by the Plus is

that if the lie is discovered, the firm will not be condemned with the “regular”

fine or jail sentence of each cartel, but the Division will pursue a harder level of

sanction.

12 Delrahim (2004) 13 Delrahim (2004)

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Through its directors, the Division has espoused the success of the program. Its

work has changed a lot with the revision of the program in 1993 and such

statements are very useful in illustrating how the revision has affected the

behavior of the firms with respect to the leniency program.

In 1994 the Division also published the Individual Leniency Policy.14 The program

is oriented to individuals that approach the Division representing themselves,

and not a corporation, and report an illegal antitrust activity. In the case of

individuals, leniency means freedom from any criminal charges. As with the

Corporate Leniency Policy, individuals must meet several requirements that run

along similar lines to those required by the corporations.

Currently, when the individual applies for leniency and reports an illegal

antitrust activity i) the Antitrust Division must have not received any information

about the illegal activity being reported; ii) the report must be complete and

collaboration throughout the investigation must be offered to the Division; and

iii) the participation in the illegal activity must be free from coercion to other

parties.

Firms usually run a race against the other cartel members to apply first for

leniency. With the introduction of the Individual Leniency Policy, they also run a

race versus their own employees. One of their employees could approach the

Division, win the race and qualify for leniency leaving the firm defenceless.

Directors of the Division15 have suggested that the utility of the program lies in

the number of corporate applications it produces. Firms, afraid of losing the race

against their employees, could apply for leniency as a corporation, securing

leniency for both the corporation and all its employees. The Division values this

more than the possibility of a great number of individual leniency applications.

2.3.2 E.U. Leniency Program

The old continent took longer to implement a leniency program and revised it

more than the U.S. The different versions of the E.U. programs take up more

pages than those of the U.S., which are clearer and easier to read.

14 Individual Leniency Policy (1994) 15 Hammond (2004)

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Notably, the E.U. Leniency program is oriented towards firms involved in cartels

that operate in more than one country of the European Union. If the cartel only

operates in one country then firms must seek leniency from the competing

authority of that particular country.

In 1996, three years after the revision of the U.S. program, the European

Commission published the Commission Notice on the non-imposition or reduction of

fines in cartel cases16. This notice explained the conditions that firms applying for

a reduction should fulfil.

Applying for a fine reduction or leniency in this first version came with

uncertainty. Despite some discussion, the notice set some basics for the following

versions of the program. This first version only allowed for firms to obtain the

total fine reduction providing they reported before an investigation had been

launched and when the Commission did not have sufficient information to prove

the existence of a cartel.

Firms had to meet several conditions. Ending its participation in the illegal

activity; being the first to report decisive evidence; providing the Commission

with all relevant information available as well as extending the cooperation

through all the investigation; having participated in the cartel without being the

instigator or coercing other parties; and reporting prior to all other firms involved

in that cartel were the important requirements that firms had to meet. If a firm

met all this conditions, it could have benefited from a reduction of at least 75% of

the fine that it could have received without the program.

If firms come to report after the investigation has started, but meet all the

aforementioned conditions, it still could have benefited from a reduction of

between 50% and 75% of that fine. The Commission also gave reductions of fines

between 10% and 50%, if firms that did not meet the named conditions cooperate

in the investigation. Firms from 4317 different cartels applied for leniency between

1996 and 2014, with the years 2001 and 2002 being when most firms applied for

a reduction.

This first version lacked clarity, particularly with regards to the type of

information that was deemed necessary to report and the precise nature of the

process. Firms applying for a reduction were not sure about the amount

discounted from the fine. This problem also appeared in the first version of the

U.S. program in 1978. The Commission had a lot of discretion in the process

resulted in lot of uncertainty regarding applying for it.

16 Commission Notice (1996) 17 Borrell, Jiménez, Ordóñez (2014)

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For these reasons the Commission revised the Commission Notice of 1996, and in

2002 made the Commission Notice on immunity from fines and reduction of fines in

cartel cases18 public. They admitted that, according to their judgement, the 1996

version was effective but could be improved by increasing its transparency and

certainty. One desired feature of the program was to clarify the conditions (not

for a fine reduction, but) for the immunity from fines.

This new version modified some important aspects of the former one. The

Commission granted immunity, as opposed to a high fine reduction, if the firm

was first in reporting the illegal activity to the authority, and providing that they

did not already have sufficient evidence to incriminate the cartel. Conditions like

not having coerce any other party, ending the participation in the illegal activity

from the point the cooperation starts or cooperating through the entire process

were also in this second version.

This second version introduces several novelties. It was open to both instigators

and ringleaders. Only parties that coerced others were restricted from applying.

It introduced the possibility to apply in hypothetical terms. In this kind of

application, the reporting firm must present a list of evidence it proposes to

reveal at a later agreed date. The documents shown are free from sensitive

information and are used to illustrate the nature of the evidence. The

Commission could withdraw the immunity, or fine reduction at any moment

during the investigation if the firm fails to meet the conditions required.

In this second version, firms that do not meet the mentioned conditions (a basic

requirement, or that apply after an investigation has started) can apply for a fine

reduction, but are rejected from the possibility of immunity. These firms must

report the collusive agreement with evidence that adds significant value to the

evidence already available to the Commission. The Commission Notice (2002) tries

to clarify what is meant by significant value in order to reduce any uncertainty

and to increase the transparency of the program. Firms that report after the first

can still benefit from a reduction in fines. The first firm will get a reduction of

between 30% - 50%, the second firm between 20% - 30% and, at best, any firm

thereafter will obtain a maximum reduction of 20% or less. This version of the

program has been used by firms in relation to 29 different cartels since 200219.

This second version still retained the basic elements introduced by the first

version in 1996 but increases transparency and certainty by clarifying its

conditions, the nature of the information required and by implementing new

mechanisms, such as a proper understanding of the application in hypothetical

terms. All this to make it easier for firms to end their participation in cartels since,

18 Commission Notice (2002) 19 Borrell, Jiménez, Ordoñez (2014)

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as stated in their Notices, the Commission is aware of the existence of firms

willing to finish its participation in the illegal activities.

In 2006 the Commission published the Commission Notice on immunity from fines

and reduction of fines in cartel cases (2006) going a step further in its work to increase

the transparency and clarity of the program and implement new mechanisms to

facilitate the report.

The fact that the program does not lack transparency and certainty is very

important. Reporting their involvement is a great risk for firms since it leaves

them exposed. Firms declare to the competition authority and confirm their

involvement in an illegal activity that has proved detrimental to consumers and

had great social costs. It is evident that the greater that a firm perceives the risk

of making a report backfiring, the more likely they are to back away and refrain

from doing so.

The 2006 version tries to eliminate uncertainty and provide applicants with

greater guidance owing to the evident shortcomings in former versions of the

program. The information handed to the Commission when seeking for leniency

must be sufficiently substantial that the Commission can carry out a targeted

inspection pertaining to that cartel, or can find an infringement of Article 81 EC20.

Article 81 EC states the behaviours that are incompatible with competition or

common markets. Agreements of firms fixing prices (directly or indirectly),

limiting the production, or sharing sources of supply among other practices are

considered as conforming to such behaviour.

With regards to the reductions of fines, the information handed to the authority

will be more valid, if it does not need corroboration. Flexibility in the process,

restringing evidence manipulation or obligating the continuous cooperation for

both immunity and fine reduction applicants are some of the new features of

the program.

Whereas in the 2002 version the novelty lay in the application in hypothetical

terms, in 2006 the Commission introduced the marker system. Firms can apply

by sending only limited information that must be completed in the future, but

they secure their approach position to the Commission. This means that a firm

can arrive first and report with limited information that must be completed upon

in the future and, in doing so, secure its place first for immunity. Since 2006 firms

have applied for leniency with regards to 9 different cartels21.

20 European Commission Treaty 21 Borrell, Jiménez, Ordóñez (2014)

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Each new version of the program has come with a fewer number of sentences

sanctioning cartels by the authority. As stated in section 2.2, a reason for this

could be that program is becoming more efficient with each consecutive revision.

However, this might also be explained through firms that have fear of incurring

even greater fines. This requires for further analysis and interpretation that goes

beyond the parameters of this work.

2.3.3 Differences between programs

The two main Leniency programs have some differences both in the prosecution

and the design of the program. Spagnolo (2006) names some of the differences

between the U.S. and the E.U. program.

Ringleaders

The leniency program in the E.U. is not restricted to ringleaders, whereas the U.S.

the program does not allow them to apply for leniency. This fact can create

differences in the formation of cartels. Firms might perceive taking leader

positions as being overly risky. Furthermore, it raises the question of how the

will define the role of the ringleader. With unclear criteria, firms might be

unwilling to enter to cartel or, perhaps more clearly stated, one might posit that

no firm is likely to want to take a leading role since that means rejecting any

possible future leniency agreement.

Milder leniency

If the information reported by a firms adds additional value to the investigation,

regardless of the order of the report, the European Commission awards the

informant with some form of leniency. At the very least, a reduction of the

imposed fine can be achieved by reporting significant information. The U.S.

program denies this possibility. It only allows the first reporting firm to obtain

full immunity. This is a very important point. The “winner takes it all” approach

from the U.S. increase the incentives to report first. The position of the European

Commission22 is that collaboration has an intrinsic value that must be awarded

with immunity or a reduction in fines. In the E.U. reducing sanctions not only to

the first firm makes that strategies like “wait and report, if somebody reports”

increase its value against “report first”. If the difference in terms of leniency and

fine reduction between reporting first and second increases, the incentive to

report first will also increase. Spagnolo also comments that this approach from

the E.U. will lead to lower fines paid by cartel.

22 Commission Notice (2002)

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Immunity

Whereas, in the U.S., the first reporting firm obtains automatic leniency, in the

E.U. firms reporting after an investigation has started may obtain leniency,

depending on the quality of the information. By quality is meant the novelty of

the information provided which that adds to that already possessed by the

Commission. In the E.U. there is a link between the value of the information

reported and the awarding of leniency. Spagnolo argues that there is in fact no

difference. The U.S. program sets conditions about the information reported.

These conditions determine that the information reported must have high value

to the Division either because it proves the existence of an unknown cartel or else

because it helps the Division in the investigation of a cartel where the Division

does not a have lot of evidence.

Individual liability

The Individual Leniency Policy complements the corporate program in the U.S. The

possibility of individuals, employees, directors or officers, obtaining leniency in

the U.S. can generate agency problems in the firms. The E.U. does not offer such

possibility so that individuals cannot approach the Commission seeking leniency

for themselves, but for the corporation as a whole.

One more abstract reason, which complements itself with individual liability, is

the difference in the perceived risk of the two programs because of the possible

sanctions as stated in Hammond (2000 & 2004). The Antitrust Division is a

national institution, whereas the European Commission comprehends a high

number of countries. Cartel activity is treated as an administrative offense in the

E.U. and the highest possible sanction is a very high fine. Nevertheless, cartel

activity is treated as a criminal offense in the U.S. With this explanation, it is clear

that, since the E.U. cannot incarcerate individuals, the fines imposed by the

Commission have to be much larger than the ones imposed by the Antitrust

Division. The Commission has to increase the level of fines. The other alternative

would not prove attractive to the applicants.

In the U.S., firms that do not obtain leniency often pay fines equal to 30% of more

of the revenue generated by the sale of the “cartelled” product during the entire

lifetime of the cartel23. On the other hand firms unable to obtain any reduction in

the E.U. have to pay a fine approximating 10% of the worldwide turnover for

every product sold by that firm24. It is clear that the difference between obtaining

leniency and a reduction could save the company a lot of money.

23 Hammond (2004) 24 Hammond (2000)

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Choosing between high fines and incarceration may be an easy decision, as

appears to have been the case for a lot directors of corporations which, according

to Hammond (2004), operated in cartel in Europe, Asia and other places around

the world but avoided operating in a cartel in the U.S. In some of these cases the

U.S. market was potentially the most profitable market for them but they refuse

to operate there, and the reason given by the directors of the cartel firms for the

avoidance of the U.S. on the cartel map was the possibility of getting caught and

going to jail in the U.S.

Hammond (2004) states that the leniency program of the E.U. is a very good one

for a jurisdiction that does not have criminal sanctions. Even so, he considers that

a jurisdiction with criminal sanctions and individual liability will always be more

effective at inducing amnesty applications. The fear induced by the U.S. program

thanks to the possible incarceration speaks for this statement.

3. Economic Theory

After the Antitrust Division revised the Corporate Leniency Policy in 1993 and three

years later with the adoption by the E.U. of its own leniency program, the

programs became well-known. Firms started applying for the program and

economists started studying the program. Economists tried to figure out whether

the programs set the proper incentives to the applicants or not. The programs

have to be designed in a way that they benefit the authority and not every cartel

member, but the leniency receiver. Concepts like “winner takes it all” or

“exploitable programs” were on the table. Economists have tried to produce

models which approximate real world situations in order to see how much

leniency has to be offered, who can apply for that leniency, when participants

can apply for leniency and, even, if offering leniency was the right decision.

Economists also have considered going a step further and not offering leniency

but a reward, whereas competition authorities did not consider this possibility.

This thesis chooses certain models and findings from an extensive bibliography

of papers that deal with leniency programs. The models shown in the papers are

based on an infinitely repeated interaction among firms. By proposing

environments with and without leniency programs and defining fines applied

and resources available to the competition authority, the authors take some

conclusions on how well-designed leniency programs should be designed.

Taking into account the idealized world described in the models, the aim of this

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Figure 2: Prisoner's Dilemma

section is to compare the results obtained by the authors with the “real world”

programs. Even some statements by directors of the Antitrust Division on how

leniency should be are challenged by the economists. There is also a debate

among economists regarding the design of leniency programs.

Most of the models on leniency programs are based on the infinitely repeated

interaction among firms; therefore, it is necessary to explain how this assumption

“changes the game” dramatically. Large established corporations operating in

multiple markets around the world meet each other and exchange information

or agree on market shares. Even if one of these agreements is detected by a

competition authority, the firm will probably pay the fine and make new

decisions on further collusion or collaboration, but certainly will not disappear.

These big corporations will make those decisions throughout all their lifetime.

The Folk Theorem is an important concept to be emphasized when dealing with

infinitely repeated interactions.

3.1 Folk Theorem

A game with a unique Nash Equilibrium played a finite number of times by

rational players will yield the same result in every period; namely, the Nash

Equilibrium. Looking at the Prisoner’s Dilemma, (D,D) is the unique Nash

Equilibrium. However, both players would be better off playing (C,C). Making

credible that both will play C is not possible, unless there are mechanisms to

punish a deviation (enforceable contracts) or the interaction lasts for a finite

number of periods. If the time horizon changes to an infinitely repeated

interaction, players will want to play (C,C) under certain conditions.

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The Bertrand Competition will better illustrate this effect. There is a market with

two firms that produce perfect substitutes. The firm that sets the lower price wins

the whole market. Both have the same production costs per unit of c. They

interact with each other T periods of time with T = ∞. In each period of time, the

firms choose prices simultaneously. Choices may depend on former decisions,

i.e., on the prices set in the previous periods. A firm i will want to maximize the

presented discounted value of its payoffs, i.e. ∑ 𝛿𝑡−1𝑇𝑡=1 𝛱𝑖(𝑝𝑖𝑡 , 𝑝𝑗𝑡) .

The payoff of a firm i depends on the payoff of both firms i and j. Furthermore,

(p1, p2) = (c, c) is the only Nash Equilibrium in the one-shot game where the

incentive to deviate outweighs every other strategy. The monopoly price pm can

be sustained as an equilibrium price through the trigger strategy “set pm in the

first period and continue with pm as long as both firms have set pm, otherwise

set p = c”. With this strategy, each firm obtains half of the monopoly profit each

period. The present discounted value of this strategy is

𝛱𝑚

2 ( 1 + 𝛿 + 𝛿2 … ) =

𝛱𝑚

2

1

1− 𝛿.

The alternative for a firm is to slightly underbid the monopoly price and to win

the entire market. If a firm underbids pm in the first period, it can count on

competition, and a payoff of 0, for the remaining periods. Even so, this firm will

obtain the entire monopoly profit in the first period. Therefore the present

discounted value of this strategy is 𝛱𝑚 .

The second strategy is a deviating strategy. For this section and the next ones, a

deviating firm will be a firm that was initially involved in a collusive agreements,

but deviates from the agreement setting a market variable which is not in line

with collusion and making higher profits with it. In the Bertrand Competition a

deviating firm will underbid the collusive price.

A comparison of the value of both strategies shows that the trigger strategy is

better off when 𝛿 ≥ 1

2 . Then

𝛱𝑚

2

1

1− 𝛿 ≥ 𝛱𝑚 → 𝛿 ≥

1

2 .

Applying this reasoning, any other price between c and pm can be an equilibrium

price.

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Figure 3: Folk Theorem in the Bertrand Competition

The Folk Theorem states that every pair of profits Π1 > 0 and Π2 > 0 so that

Π1 + Π2 ≤ Πm is an equilibrium payoff in each period for δ sufficiently close to 1.

In other words the grey zone contains every sustainable per-period payoff for δ

close to 1. This reasoning can be applied for the infinitely repeated interaction

between firms under a leniency program. If the competition authority does not

have a leniency program and does not carry out any investigations, firms will

have no impediment to collude and will probably do so. A well-designed

leniency program will change the per-period payoffs through fines and fines

reductions to make reporting more profitable.

3.2 Competition Model with Leniency Programs

The following model is described in Spagnolo (2005). It is a dynamic model based

on an economy made up of a lot of oligopolistic industries that, at the same time,

consist of a number of risk neutral agents (firms). There is also a benevolent

legislator (competition authority) who controls the market and determines the

policies. A discounted infinitely repeated oligopolistic game between the agents

takes place in each of the industries. The legislator is in charge of setting the

parameters of the law enforcement policy. Any collusive behaviour that reduces

the social welfare is forbidden.

Firstly, the legislator sets the enforcement parameters and afterwards, having

observed the parameters, the agents begin their interaction. Agents live infinitely

and discount their future payoffs through a factor δ that is common to all of them.

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The market game played every period to the infinity can be interpreted as a

Bertrand or Cournot competition. Competing is the only Nash Equilibrium in the

one-shot game. Firms competing obtain a per-period payoff of 𝜋𝑛. However, a

higher payoff could be reached if players can make a collusive agreement. 𝜋𝑑 and

𝜋𝑐 denote the period payoffs of deviation and collusion, respectively. A collusive

agreement (e.g. a cartel between agents fixing prices) reduces the social welfare

and is, therefore, forbidden by the legislator.

Firstly, a world without law enforcement will be considered. Firms can sustain

collusive agreements in a subgame perfect Nash Equilibrium, if the value of

collude indefinitely (Vc) exceeds the value of a unilaterally defection (Vd) from

this agreement. The discounted sum of expected payoffs must be compared

𝑉𝑐 = 𝜋𝑐

1− 𝛿 > 𝜋𝑑 + 𝛿𝑉𝑝 = 𝑉𝑑 .

Or, normalized by (1 − 𝛿), 𝜋𝑐 > (1 − 𝛿)𝜋𝑑 + 𝛿𝑣𝑝 ,

where πd denotes the value from defection when the others stick to the

agreement, Vp denotes the value expected, i.e. the discounted sum of payoffs, at

the beginning of the punishment phase that follows the unilateral defection, and

𝑣𝑝 denotes the time average payoff of the punishment phase with

𝑣𝑝 = (1 − 𝛿) 𝑉𝑝.

Since to make collusion credible agents must penalize a deviation, it follows

𝜋𝑑 > 𝜋𝑐 > 𝑣𝑝. After a deviation, the punishment stage always come. With 𝜋𝑏

denoting the payoff of sticking to the collusive agreement in a period when an

agent defects, it also follows 𝜋𝑑 > 𝜋𝑐 > 𝜋𝑛 ≥ 𝜋𝑏.

It can be argued that without a law enforcement policy agents will find the

collusive agreement more profitable. As described before, collusion requires

communication and this will produce some evidence every time agents meet.

With a law enforcement policy and a leniency program, the evidence generated

will become of greater importance. The law enforcement policy also affects the

communication among the cartel members and changes the timing of the game.

At a first stage, cartel members, having observed the policy parameters, exchange

information and update and confirm collusive strategies, generating evidence of

a collusive agreement. At a second stage, the same members set the market

variables and choose whether to report the collusive agreement or not. In the first

case a reporting member will apply for leniency through the leniency program.

The evidence produced disappears at the end of the period. However, as long as

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the evidence is valid, cartel members can transfer it to third parties at no cost. If

the legislator gets a report with evidence of a cartel, it is convicted with

probability one. The times the Legislator gets a report, it will go public at the end

of the period so that every agent in the industry will know who reported it.

The parameters of the law enforcement policy presented by Spagnolo are the

following:

A monetary fine F that convicted firms have to pay. This fine F is

restricted to be in an interval with 𝐹 ∈ [ 𝐹, 𝐹 ].

A reduced fine RF that a cartel member has to pay when he discloses

information to the authorities enabling the cartel to be convicted. The

reduced fine (positive transfer or reward if RF < 0) is also restricted to be

in an interval with 𝑅𝐹 ∈ [ 𝑅𝐹 , 𝐹].

Beside the leniency program, the legislator can carry out investigations

and has the following (per-period) probabilities of conviction.

- α, denotes the probability of a cartel being convicted when no cartel

member reports the illegal activity.

– γ, denotes the probability of cartel members that unilaterally deviate

from the agreement being convicted.

– β = γ + η, with η ≥ 0, denotes the probability of a cartel member that

sticks to the collusive agreement in a period when at least another

member deviates being convicted.

To focus on realistic parameters Spagnolo assumes α, β, γ < 1

2 . Whereas

administering fines has no cost, the implementation of such probabilities has

some costs. Ck(k) denotes the social costs of implementing the probabilities k,

with k ∈ (𝛼, 𝛽, 𝛾). In addition, it is also assumed that 𝐶𝑘(0) = 0, 𝐶𝑘΄ (𝑘) ≥ 0,

𝐶𝑘΄΄(. ) > 0. Costs rise with any new increase in the probabilities, but the increase

is higher when costs are at a low level.

3.3 Spagnolo (2005)

The paper from Spagnolo, on which the model from the previous section is based,

focuses on leniency programs and their ability to undermine trust, making the

deviation from a collusive agreement more profitable. Spagnolo differentiates

between courageous and moderate leniency programs. The first one gives a reward

to the reporting party financed by the fines from the rest of the cartel members.

Moderate programs only reduce or cancel sanctions and do not allow for rewards.

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In a world without leniency programs but with investigations from the

authorities, collusion can still be sustained. Namely, the value of colluding (VC),

which is the discounted expected per-period payoff of collusion minus the

probability of paying the fine, should exceed the value of defecting (VD), which

is the payoff of deviation minus the probability of getting convicted plus the

discounted sum of payoffs in the punishment stage, i.e.

𝑉𝑐 = 𝜋𝑐−𝛼𝐹

1−𝛿 > 𝜋𝑑 − 𝛾𝐹 + 𝑉𝑝 = 𝑉𝑑 .25

Observing this condition, it follows26 that for γ below a certain threshold (think

of a very low γ) is optimal for cartel deterrence to set the maximal possible fine

(𝐹). For a higher γ (even higher than α), increasing fines does not increase cartel

deterrence, but deviation deterrence. Members will stick to collusive agreements

because deviation has a high probability of conviction (γ). Since increasing γ is

costly, the optimal policy leads to γ = 0. For further analysis, Spagnolo assumes

𝛼 > 𝛾 and the optimal fine set at its maximal possible level.

Leniency effects

Spagnolo also names two possible characteristics of leniency programs; namely,

exploitable and effective leniency programs. An exploitable leniency program makes

members of a collusive agreement benefit from reporting it.27 If the program is

too generous (low RF), cartel members could consensually report the cartel to the

authorities but may keep colluding and reporting in the following periods.

An effective leniency program makes deviating firms increase their payoffs

through a report.28 When a firm deviates from a collusive agreement, it can report

the collusion or remain silent. Within an effective program, firms will always

report the cartel after a defection. For deviating firms this means that the

probability of being convicted and paying the fine should exceed the reduced

sanction (𝑅𝐹 < 𝛾𝐹). Spagnolo calls this the protection from fines effect.

Courageous Leniency programs

As explained before, Spagnolo classifies leniency programs into courageous and

moderate leniency programs. Courageous leniency programs are self-financing, i.e.

the reward is paid by the fines imposed on the other cartel members. Observing

the possible effects of leniency programs, it turns out that restricting eligibility to

the first reporting party reduces the set of exploitable programs. A leniency

25 Spagnolo (2005) p.14 Condition 2 26 Spagnolo (2005) p.14 Proposition 1 27 Spagnolo (2005) p.15 Definition 2 28 Spagnolo (2005) p.16 Definition 3

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program looking for optimal cartel deterrence will restrict leniency to the first

party only29.

The introduction of leniency programs creates an incentive compatibility

condition (IC)30 to colluding agents. The value of any kind of collusion (both the

regular one (VC) and the consensual reporting one (VC/)) should exceed the value

of deviation (both deviation with (VD) and without (VD/) reporting after

deviation). A collusive agreement is only possible if this condition is met.

max { 𝑉𝐶 , 𝑉𝐶/} > max{ 𝑉𝐷 , 𝑉𝐷/} (𝐼𝐶)

Spagnolo concludes that for every possible fine level, the reduced sanction must

be negative, i.e. the legislator must reward the reporting party.31 Rewards make

programs more efficient by increasing the value of “deviate and report” (VD) and

this narrows the (IC). A deviating firm facing the decision whether to report the

cartel or not will be more likely to report, if the leniency to be obtained has the

form of a reward.

On the other hand, too high rewards can make the program exploitable. Spagnolo

finds that when fines are high enough and the detection probability (α) increases,

the optimal reward (RF*) decreases. This implies that in optimum, investigations

are a substitute for rewards as law enforcement instruments. When α is large, the

optimal reward must be small. In that case, the high probability of detection (α)

even allows a fewer reward level. At the same time, the optimal reward (RF*)

increases in fines, making fines and rewards complementary instruments.

Regardless of any other policy parameter, increasing fines allows for a higher

reward without making the program exploitable.

As described, investigations and rewards are substitutes. Whereas investigations

are costly, rewards are self-financing, making it much more profitable for an

optimal law enforcement policy to rely, whenever possible, on self-financing

rewards. Spagnolo finds that there is a finite level of fines at which complete and

costless deterrence (α = β = γ = 0) is achieved.32 This can be done by setting the

reward for the first reporting agent at an amount equal to the sum of all the fines

paid by the cartel and, at the same time, interrupting any investigation. The

authority can reject every possible investigation and wait for reports. The high

level of fines empowers the leniency program making investigations redundant

and suboptimal. This is the first time that the first best is achieved in such an

environment.

29 Spagnolo (2005) p.17 Proposition 2 30 Spagnolo (2005) p.17 (IC) Condition 31 Spagnolo (2005) p.17 Proposition 3 32 Spagnolo (2005) p.19 Proposition 4

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Moderate Leniency programs

On the other hand, moderate leniency programs put some constraints on fines and

rewards. Moderate leniency programs also have the protection from fines effect and

enable a protection from punishment effect. If the optimal first best fine cannot be

achieved because of the constraints on fines, the second best law enforcement

policy will imply positive investigation costs and also a non-maximal reward.33

Since the constraint on rewards does not allow for any reward, i.e. a positive

transfer, the optimal reward would be a complete reduction of the fine (RF = 0).

Spending resources on investigations will also be optimal considering that fine

reductions are not as attractive as rewards to cartel members.

When complete reduction of fines (RF = 0) is implemented with a probability of

conviction when deviating (γ) of zero, moderate leniency programs do not have

deterrence effects. It is clear that protection from fines effect (RF < γF) disappears

making the program ineffective. The program needs γ > 0 to enable this effect

and make the program effective. This means that even deviating firms could be

convicted for past collusive agreements. Firms only care about the value of γ if

they are willing to report.

Even in a scenario with γ = 0 and firms using a “stick-and-carrot” strategy, a

moderate leniency program may disrupt cartel activities. Firms in a “stick-and-

carrot” strategy incur a cost in the “stick” phase but they do so because this

allows them to enter the “carrot” phase in the next period. If the authority

punishes repeated wrongdoers more firmly, imposing higher fines and looking

more closely into their activities, making the probability of detection (α) higher

for them, incurring the “stick” phase cost will not be profitable anymore. The per-

period payoff of collusion would be the same but the fines will increase in each

new “stick” period making collusion unworkable. This is called the protection

from punishment effect.

Through both of these effects, moderate leniency programs, if well implemented,

can deter and detect cartel activity.

Risk of cheating

Spagnolo states that an additional reason explaining the deterrence effect of

moderate leniency programs is the perceived risk of being involved in collusive

agreements. In previous analysis, collusion was sustainable if the (IC) was

satisfied and cartel deterrence was achieved with an (IC) violation. Now it is

assumed that trust is also required for a collusive agreement. Without knowing

33 Spagnolo(2005) p.20 Proposition 5

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for sure that cartel members will stick to the agreement, no agreement can be

made.

Spagnolo presents a simple model of two firms that entered into a collusive

agreement and in each period must decide whether to stick to the agreement or

to deviate from it and expect punishment from its partners. Spagnolo applies

Harsanyi and Selten’s definition of risk dominance and calculates the Nash

products of the two pure strategy equilibria; namely, both agents colluding and

both agents deviating. He does so to measure the riskiness of both equilibria for

situations with and without a leniency program. Spagnolo concludes showing

that the colluding equilibrium with a restricted leniency program is the most

risky.34 This means that agents colluding in an environment with a restricted

leniency program will gain more from deviation than deviating in any other

environment (unrestricted leniency program or no leniency program situations).

Conclusions

A leniency policy that rewards reporting firms as well as a lack of active

investigations by competition authorities is fully against the reality. Active

investigations inducing fear in cartel members, as stated in Hammond (2000 &

2004), are crucial in cartel deterrence for the Antitrust Division.

Restricting the leniency program to the first reporter only is in line with the policy

applied by most of the competition authorities. Spagnolo shows how a restricted

program makes both the program more efficient and gives greater incentives to

deviate from a collusive agreement. This view is shared by the Antitrust Division

that considers the fear of arriving second as key to the efficiency of the program.

The European Commission goes in the opposite direction with its perception that

a collaboration has an intrinsic value to be awarded. In my opinion, a policy as

designed in the U.S. will induce much more fear in cartel members since “wait

and see” strategies lose all of their value. Awarding the second, third or

subsequent reporting parties with a fine reduction seems too generous to me and

goes against the spirit of what I suppose was the intended purpose of the leniency

program.

The European Commission has been accused of bureaucracy since its inception.

Acknowledging that the collaboration of cartel members will reduce the time and

resources spent in such processes. I consider that announcing a reduction for

every useful collaboration is too generous. Probably, these cartels have operated

in a lot of countries damaging consumers from different nationalities.

34 Spagnolo (2005) p.26 Proposition 7

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To measure exploitability the following reasoning can be used. Assuming that

with the adoption of a leniency program cartel fines increased, as stated in

Spagnolo (2006), it could follow that strategies of reporting in turns decrease their

value, since programs only accept the first party. Cartel members accept this kind

of “stick-and-carrot” strategies, especially in the stick-phase, because of the carrot

following in the next periods. If the authority toughens the fines but maintains

the awarded leniency constant, at a certain point this strategy will turn out

unprofitable.

Rewarding without investigating is the most important point of Spangolo’s

work. A self-financing reward that is fully paid by the fines of the cartel members

can become problematic. The authority only changes the money from hands.

Under a legislation as the E.U. this could be a problem. Firms could make an

agreement under which every cartel member pays an amount of the total fines

and after the reporting member gets the reward, the cartel members distribute it

among them. Firms could participate in a collusive agreement that is reported in

every period, paying and receiving the same amount without any loss. Of course

this is a very simplistic view and the authority will react to such behavior.

Nevertheless, Spagnolo does not count on such agreements. He models

consensual reports in which every cartel member reports the cartel every period.

In some periods a cartel member will have to pay the fine and in others, when he

manages to be the first one to report, he will receive the fines from the other

members. Since no good can be expected from a multinational operating cartel,

any kind of collusive agreement could be used by the cartel members, no matter

how “diabolic” in terms of taking advantage of the authority. This reasoning

could be reinforce with the fact that there are no investigations (in Spagnolo’s

framework) which makes the fear of being discovered disappear. Such

consensual reporting strategies will work in legislations without prison

sentences, but only if monetary fines are imposed as penalty, as the E.U.

A lack of investigation tools to spare resources is completely contrary to any

competition authority in real life. What induced the fear in the directors of

collusive firms were ultimately the tough sanctions, especially the possibility of

imprisonment. A fear of high sanctions could result in more reports but, as

explained in section 2.2., after the reports comes the learning. Knowing how firms

fix prices, exchange information or limit bids will help following investigations

of collusive agreements.

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3.4 Chen & Rey (2013)

Chen and Rey study the optimality of offering leniency before and after an

investigation is launched. Characteristics such as restricting the program to the

first informant only or offering leniency to repeated offenders are also studied.

The model suggested by Chen and Rey is much more technical than the model

from Spagnolo. However, the infinitely repeated interaction between firms is

repeated. An environment with multiple industries is presented. Collusion can

be sustained without a leniency program in some industries. This means that

firms will want to collude without breaking the agreement even without antitrust

enforcement. The discount factor of future payoffs (δ) is the same across

industries, whereas the potential win from collusion differs across them. This

sounds realistic considering that in the real world not every industry has the

same sales volume or “collusive” potential.

The parameters of the antitrust enforcement policy are exogenously given. Given

a collusive agreement and no-one reports, there are two probabilities: the

probability of carrying out an investigation (α) and the probability of success (p)

of this investigation making the probability of success of any investigation (αp).

With probability α an investigation is launched in a collusive industry. If an

investigation is launched, the collusive agreement is discovered with probability

p. Therefore, a firm involved in a collusive agreement that has no intention to

report, must expect discovery of the cartel probability αp.

The level of fines (F) is also exogenously given and is set to its maximal possible

level, which the authors think is the level where optimal deterrence is achieved.

Investigations are public and can be observed by any firm. Collusion, as in the

previous model, leaves some evidence that only remains valid for one period.

The authority implements a leniency program with two different leniency levels,

depending on the state of the investigation at where the report arrives. The

leniency offered can vary depending on the firm reporting before or after an

investigation has started. The leniency offered is a reduction (q) on the fine so

that a convicted firm will have to pay (1 − q)F. With q > 1 the leniency would be

offered in form of a reward; otherwise, the firm would only obtain a fine

reduction.

The timing of the game increases and so does the number of strategies firms can

use. Firms agree on collusive agreements and, at the same time, the competition

authority launches investigations. Firms can report before the investigation is

launched as well as with the investigation ongoing. A deviation from the

collusive agreement, i.e. in the Bertrand Competition underbidding the collusive

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price and winning the whole market, is not observed until the end of the period.

A deviating firm can also report the cartel and benefit from the leniency.

The Benchmark without a leniency program sets a critical value for the payoff

needed for collusion.35 Firms in an industry achieving, through collusion, a per-

period payoff higher than the critical value will always collude without a

leniency program. In industries where the collusion payoff is below the critical

value, collusion is not sustainable.

Before determining the optimal leniency program, the various collusive

strategies must be considered. `Normal collusion’ (N), `collude and report

systematically´ (R) or `collude and report in case of an investigation´ (I) are the

possible collusive strategies. Firms can also deviate from any collusive

agreement, which leads to multiple possible scenarios. The objective of Chen and

Rey is to focus on the deviation from these agreements and to look for the optimal

level of leniency where deviation becomes profitable.

Leniency before the start of an investigation

When no leniency after the start of an investigation is considered, only the

`normal collusion´ (N), stick to the agreement and no report, and the ̀ collude and

report systematically´ (R) agreements are available. The optimal value of fine

reduction (�̂�) will be the level that makes a firm indifferent between the per-

period payoffs of the two deviations from the two possible agreements (N) and

(R).36 The optimal value (�̂�) decreases when the probability of success of an

investigation (αp) increases. There would also be an interval where this optimal

value can remain making the leniency policy effective. Outside this interval the

program is either too unattractive to cartel members or increases the value of the

strategies involving consensual reporting.

With the optimal leniency level (�̂�) a per-period payoff threshold (�̂�) will be

defined37. In industries where firms can achieve a per-period payoff of collusion

higher than the threshold (�̂�), collusion is sustainable. Firms that cannot achieve

a collusion profit as high as the threshold will not enter into any collusive

agreement. The works looks for the optimal leniency level without any

restriction. Depending on the parameters, leniency can be a fine reduction or a

reward.

Therefore, Chen and Rey find that leniency is required before an investigation is

launched and also that the amount of leniency decreases when the probability of

success of an investigation (αp) increases. They consider that the best way to fight

35 Chen & Rey (2013) p.925 Condition (1) 36 Chen & Rey (2013) p.931 Condition (4) 37 Chen & Rey (2013) p.931 Condition (5)

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collusion is to crack cartels from inside. Giving incentives to deviate, such as

offering some leniency before the launch of an investigation, will help eliminate

the cartel.

This work also studies the first informant rule. Awarding leniency to more

informants decreases the per-period payoff threshold. This threshold marks the

level above which collusion is sustainable even with a leniency program. A lower

threshold will results in more “collusive” industries.

Leniency before and after the start of an investigation

When leniency is offered both before and during investigations, more collusive

strategies are available. The authors show that a program offering also post-

investigation leniency will perform strictly better when investigations are

unlikely to succeed.

As in the previous situation, the work focuses on finding the optimal leniency

levels to make deviation from collusive agreements more profitable. Two

strategies can destabilize cartel collusion: i) deviate and report in case of

investigation and ii) report in case of investigation.

Looking at the parameters that make firms want to destabilize cartels through

the first option, a critical value of success in random investigations (p) is found.38

If the probability of success of an investigation (p), exogenously given, is below

this critical value, offering some leniency during investigations will destabilize

normal collusion.

Indeed, the optimal levels of leniency, before and during investigations, will

make firms feel indifferent to any deviation from the three possible collusive

agreements ((N), (R) and (I)).

Applying this same procedure to make firms destabilize cartel collusion through

the second option, i.e. by reporting in case of an investigation (without

deviating), leaves the following conclusions depending on the level of the

discount factor (δ).

The idea is to differentiate between firms being patient (high δ) and firms being

rather impatient (low δ). In each of these two cases, depending on the level of the

investigation probabilities α and p, a specific leniency policy would be optimal.

There are three candidates for an optimal leniency policy: a leniency policy

available only before the investigation start, a leniency policy available both

before and during an investigation focused on cartel destabilization by firms

38 Chen & Rey p.934 Condition (9)

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deviating and reporting, and a leniency policy available also at both stages

focused on cartel destabilization through reports without deviation.

When firms are patient, but both probabilities α and p are low, the authority will

set a leniency policy designed so that firms will have incentives to report without

an early deviation. If instead one probability is high and the other low, another

leniency policy would be optimal for implementation. When there is a situation

with high p and low α, a leniency policy based only on pre-investigation reports

would be optimal. The small number of investigations launched will end

successfully most of the times and the best option would be a leniency program

that enables cartel destabilization through reports before the investigation starts.

In the opposite situation, high α and low p, a leniency policy that provides firms

with incentives to deviate from the collusive agreement and to report, either

before or after the investigation start, will be the optimal program.

When firms are less patient, the authority cannot count on a cartel destabilization

through reporting only without deviating. In such cases, firms value more

payoffs in earlier periods than in later ones. Deviating from the cartel agreement,

i.e. underbidding the cartel price, is too attractive for firms in situations with a

low discount factor (δ). Again, the authority chooses to implement one leniency

policy or the other based on the policy probabilities α and p. A high p and a low

α will promote a leniency policy, as explained in the previous paragraph, based

on reports before the investigation phase. The opposite situation will call for a

leniency policy allowing reports any time focused on cartel destabilization

through cartel deviation and report.

The conclusion of the authors is that offering some leniency before the start of an

investigation is always optimal. Offering leniency during investigations will be

optimal only under certain conditions.

The work focuses briefly on repeated offenders. The analysis does not focus on

the firms that apply for leniency more than once, but on the application of the

leniency program in the whole industry more than once. The analysis defends

the existence of an unlimited leniency program in terms of firms applying for

leniency in different periods, but only one firm obtaining it per period. In other

words, the restriction of leniency to the first party that reports in the industry will

not be effective in cartel destabilization.

Conclusion

Considering internal destabilization as the best form of cartel detection is a very

important remark in the work. The approach of other economists was to look for

an effective leniency program, since the authorities have scarce resources and

could not launch an infinite number of investigations. The approach, from the

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very beginning, of focusing on cartel destabilization through an effective leniency

program is a very important feature of this paper. The Antitrust Division could

have shared this view when implementing its leniency policy. As explained

before, leniency programs discover most cartels from all deterrence tools. This

work shares this idea with the Antitrust Division.

Chen and Rey defend that, under certain conditions, offering leniency after the

beginning of an investigation will increase the efficiency of the leniency policy.

Leniency programs have evolved in that direction. Being less strict in the

conditions required from firms applying during investigations was a common

characteristic of the leniency programs revisions.

They distinguish between the launch and the success of an investigation. A

competition authority in an investigation will consider the verdict as fair and

correct, whereas in some cases it would have not made the right decision.

Whether the authority makes the right decision or not is not observable. Thinking

of “real” probabilities to see which leniency policy would be the right one to be

implemented is a hard task but, in my opinion, the reasoning behind the leniency

policy decision is consistent with the view of the competition authorities.

Even so the authorities are more reluctant to guarantee leniency during

investigations. The fear of turning the leniency program exploitable could be a

reason. The truth is that leniency programs are a recent innovation in most of the

countries. The lifetime of cartels exceeds the lifetime of leniency programs. When

collusion began, leniency programs were not an issue. This work shows a very

good interpretation of the decisions firms must make nowadays whether to enter

or not into collusive agreements.

Restricting the program to the first informant only is an essential characteristic

for both competition authorities and economists. Leniency programs in the U.S.

have restricted leniency to the first party only. Awarding leniency to every

reporting member will make collusive agreements an unpunished activity.

Despite the different frameworks presented in different economic papers,

restriction to the first party is a common conclusion. As explained in previous

sections, the position of the European Commission is different. Collaborations

that help investigations should be awarded leniency regardless the entry order.

Chen and Rey also study the optimality of leniency to repeated offenders. They

could have thought collusive agreements are not a one-time decision of firms.

Entering into a collusive agreement is an illegal activity and must be carefully

considered. Multinationals can enter into and maintain multiple collusive

agreements in different markets and countries. The Antitrust Division has

offered mechanisms such as the Amnesty Plus to help firms leave not one but

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every collusive agreements in which they participate. The Division also punishes

any lie, if it is discovered, when a firm is asked if it is involved in any other

collusive agreement.

The model is a very good approximation of firm decisions nowadays. Having the

possibility to report at multiple stages and operating in a lot of markets, each of

them with different competition authorities, the number of available collusive

strategies increases. Competition authorities should be careful and design a

leniency policy which is as effective as possible.

3.5 Aubert, Kovacic & Rey (2005)

The authors compare leniency programs with reduced fines to programs with

positive rewards. They also study the case of awarding leniency to individuals

and how leniency programs can affect business decisions. In addition, reasons

for the puzzle of firms keeping hard evidence are given.

Firms play an infinitely repeated game. In each period firms can decide

communicate first (it is a choice). After that, firms can choose whether to collude,

if communication took place, or to compete. Firms discount payoffs using the

same factor 𝛿 ∈ (0,1). The model has the same assumption of evidence only

lasting one period. Communication (and thus collusion) leaves some evidence

that cannot be manipulated. The maximal possible fine (𝐹) does not succeed in

deterring collusion. The competition authority launches investigations with a

probability p. Moreover, it is assumed that collusive agreements will be

discovered in case of an investigation, as opposed to Chen and Rey (2005), where

investigations in collusive industries would not necessarily end successfully.

Leniency programs only reducing sanctions

Without a leniency program, collusion will be more profitable than deviating

from a collusive agreement as long as the gain from the collusive agreement is

higher than the gain from the deviation from a collusive agreement, when the

rest sticks to it. If this condition (A)39 holds, collusion is sustainable.

In the situation with a leniency program, the model assumes that a firm choosing

to report will also deviate from the collusive agreement since competition is

going to prevail in the market afterwards anyway. The reduced fine is lower than

the fine times the probability of investigation (𝑅𝐹 < 𝑝𝐹), as in any previous

model. With a leniency program, collusion will be sustainable only if the gain

39 Aubert, Kovacic, Rey (2005) p.11 Condition (1)

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through deviation is higher than the gain from collusion. Without this condition

(B)40, collusion would not be sustainable.

The difference between two conditions with and without leniency program is

that the first one does not include the leniency obtained through deviation (thus

reporting).

Leniency programs restricted to fine reductions/cancellations can only deter

collusion by setting the policy parameters in a way that (A) holds and (B) not.41

The authors conclude that “leniency programs (only reducing/cancelling fines)

have no impact on the profitability of collusion and affect its sustainability only

by giving the deviators the opportunity to avoid fines from random audits”. The

probability of investigation (p) or the fine (F) have to be very large in order to

make the leniency program effective. However, in these two cases, collusion

would not be sustainable. Fear of being or fined would outweigh the profit from

collusion.

Leniency programs rewarding reports

The authors only focus on reports before the investigation phase, considering

reports during investigation as more costly to implement.

To make the analysis the easier, only deviating firms can report. The analysis

rejects the possibility of strategies based on consensual reports. The reward must

still be higher than the costs of conviction (− 𝑅𝐹 > − 𝑝𝐹) and must also

compensate the payoffs of the punishment phase that follows a report. If the

reward needed is positive (fine reduction), a full reduction of the fine would be

enough to deter collusion. The reward will tend to minus infinity if the discount

factor δ goes to 1.

Leniency programs oriented to individuals

The authors defend individual leniency programs that reward individual

informant as a complement of the corporate leniency programs. They mark

potential agency problems as an issue. The individuals who will have greater

incentives to report are the employees. Directors or Officers will have more direct

profits from collusion than employees.

Firstly, the authors suppose employees only live for one period. The idea is that

when leniency programs reward individuals firms will have to bribe these

individuals. By doing so, firms “buy” the silence of these individuals. This

additional cost decreases the benefits from collusion. Therefore, an increase in

40 Aubert, Kovacic, Rey (2005) p.11 41 Aubert, Kovacic, Rey (2005) p.11 Proposition1

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the reward by the competition authority decreases the value of collusion and

makes it “less” sustainable.

Even if the leniency program restricts the reward to the first individual only,

firms will have to pay the reward to every employee in the firm. If they do not

bribe every individual, the non-rewarded employees could have incentives to

report the agreement and cash the reward. Using the same reasoning, collusion

is more fragile when the number of employees increases.

When employees are “long-lived”, corporate leniency programs also play a role.

An individual leniency policy will not affect the sustainability of the collusion,

when there is no corporate leniency program. By adopting a corporate program,

the individual program can destroy collusion. This effect, as the previous one,

increases as the number of involved individuals rises. The authors point out that

the level of the rewards should be finite and not too high since rewards are not

supposed to be cashed in the equilibrium. Firms will react to the reward program

and bribe their employees with this amount so that no employee has incentives

to report (in the equilibrium).

Side effects of leniency programs

Although cartel deterrence can be achieved through reward programs42, the

authors think such programs may have some side effects. The nature of the

communication between competitors does not have to be necessarily bad. Firms

could exchange information making their competition more efficient. Also, a

reward program can have a huge impact not only on collusive decisions but on

internal firm decisions too. The authors present both the impact of the programs

on some of these decisions and the adjustments needed in the programs to limit

the impacts on the decision.

Thinking that not every communication is necessarily bad, firms can

communicate only to increase the efficiency of their competition, i.e. compete but

at a lower level of social costs. A model similar to the model first addressed in

this papers is presented. Firms can choose whether to communicate (with good

or bad intentions) or not. Communication with good intentions will lead to

higher profits in competition made by the firms and will also increase social

welfare with respect to competition without communication. Once again, firms

can deviate from a collusive agreement. If firms choose to communicate with

good intentions, the market outcome will be a more efficient competition.

As in previous models, any kind of communication leaves evidence. Firms can

report the evidence of communication to the competition authority. Since not

42 Leniency programs awarding rewards to informants.

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every piece of evidence is a signal of a collusive agreement, the competition

authority will have problems in classifying it. The competition authority

interprets “good” evidence as “bad”43 with a certain probability �̂� and, the other

way around, “bad” evidence as “good” with a certain probability 𝜇. 44 If the

authority does not receive any report, it will launch an investigation with

probability p, the same one as in the previous models.

By offering positive rewards to reporting firms, firms could make a false

denounce to benefit from the reward. Such firms will present “good” evidence to

the authority and cash the reward with a probability �̂�. Firms will only cash the

reward if the authority misinterprets the “good” evidence and this happens with

probability �̂�. An additional fine to false reports could be implemented. On the

one hand the additional fine can deter false reporting, but it can also deter the

good intention reports. This last scenario happens whenever the authority

misinterprets “bad” evidence imposing the additional fine on a firm that truly

reports “bad” evidence.

The authority should anticipate that and adjust the reward program accordingly.

It could do so by setting the reward and the additional fine so that two conditions

are met; namely, deviating firms would prefer to report any collusive agreements

and firms communicating with good intentions would find false reports

unprofitable. Such program avoids false reports and incentives the true ones.

Individual reward programs can also have some effects on internal firm

decisions. As stated before, collusion is more sustainable if employees are long

lived. Firms will therefore want employees to stay in the firm by bribing them

rather than allowing them to report. This will result in a rather fix employment

structure where informed employees will not leave the firm. Having a certain

group of informed employees staying at the same position with no internal

restructuring could result in loss of productivity. Informed employees that the

firm would want to replace will remain at their jobs. Otherwise they will report

collusive agreements and cash the rewards.

If firms must choose between entering into collusive agreement and restructuring

to compete, a high reward, as well as a high competition outcome after

restructuring, make the collusive agreement less profitable. By restructuring an

employment restructuration to achieve a higher competition payoff is meant.

Firms, at the time of the choice, are not bribing any employees and will not incur

in any cost if they leave. Restructuring will be the best choice, if the reward is

high enough. In this case a highly enough reward will deter collusion.

43 By “good” evidence, evidence of well-meaning communication is meant. “Bad” evidence refers to

evidence from a collusive agreement. 44 Aubert, Kovacic, Rey (2005) p.20

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When colluding firms have to choose between sticking to collusive agreements

and restructuring to compete, the level of the reward will not affect the choice. In

both cases, firms do not need to bribe any new employee. The expected fine and

the expected competition outcome after restructuring affect the decision. Firms

will stick to the collusive agreement (worst outcome for society) and will not

restructure to compete (best outcome) whenever the fine is high or the

competition gain through restructuring is moderate. The reward offered to

individuals by the competition authority will not affect these choices of already

colluding firms.

Keeping hard evidence in the firm

If firms agree to collude in the future, they, in theory, do not have any reason to

keep evidence of collusion, otherwise, the competition authority could find this

evidence when investigating. It is known that firms keep such evidence, since

leniency programs have been widely used and firms need this evidence to report.

The authors give several reasons to the puzzle of firms keeping evidence of

collusive agreements within the firm.

A reason given is the expectations of breakdown in the collusive agreement.

Firms keep evidence because they expect the agreement to be short-lived and

want to benefit from rewards in the future. This will only apply for high rewards.

Rather low rewards will not make firms want to keep evidence.

Threatening the cartel members with a report of the illegal activity to the

competition authority based on the evidence of collusion is another reason.

Designing leniency programs in a way that makes collusion unprofitable will

make firms destroy evidence. When collusion is no longer sustainable, firms do

not want to keep evidence of it because of the potential risks of being discovered.

As throughout the entire paper, the authors also focused on how the leniency

program and its consequences affect individuals. Firm employees could keep

evidence of collusion because of agency problems. Leniency programs can make

these agency problems bigger. The evidence of collusion is a very good card for

employees to play in the future when bargaining with the manager. On the other

hand, the firm can delay bonus payments, if an employee does not promise that

he will not report the collusive agreement.

Conclusions

`A leniency program that does not allow rewards to informants will not be as

effective as one that allows them´. This work shares this view with Spagnolo

(2005). Aubert, Kovacic and Rey conclude that moderate leniency programs can

truly deter cartel formation when fines or the probability of conviction are large,

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but collusion in the absence of leniency programs will not be sustainable in any

of these two situations making a leniency policy redundant. Since in the real

world there are only moderate leniency programs, based on the view from this

paper, it can be assumed that real world programs only affect sustainability. The

fact that application rates increase with the adoption of the truly “moderate”

programs explains this effect. When the leniency policy is implemented, it affects

the sustainability of the reigning cartels by increasing the application rates.

As time passes, application rates for the leniency programs have been decreasing

gradually.45 A reason could be that all cartels that were active, at the time the

leniency programs were introduced, already reported.

The increase in the application rate with the introduction of the leniency

programs links this effect to the issue of keeping evidence. Firms did not destroy

hard evidence, despite the inexistence of a leniency programs. Most of the cartels

applying for leniency in the early programs were not recent. As stated in Borrell,

Jiménez, Ordóñez (2014), some of the cartel activity expired and could not be

fined. Firms forming a cartel to benefit from leniency could not be the case, since

cartels were much older than leniency programs. This effect could stem from the

little fear competition authorities instilled on colluding firms. In the pre-leniency

programs era, competition authorities did not succeed in cartel detection, as

stated in Hammond (2000, 2004). A reason for that could be that firms were not

afraid since cartel detection tools were not very effective.

The view of the authors from reward leniency programs is in line with Spagnolo

(2005). Courageous leniency programs will perform better that moderate ones.

Competition authorities must have their own reasons not to implement rewards,

but the economic analysis of leniency programs makes a good point for its

implementation.

One of the most interesting parts of this papers are the views on the individual

leniency program. While the individual program has not been studied as much

as the corporate one, this analysis is in line with the view of the Antitrust

Authority. The great value of the individual program is that it is complementary

to the corporate one. This value increases when employees are long lived. The

individual leniency analysis, being close to the classic economic problems, could

be the reason not to focus on it too much.

Misinterpretations of “bad” evidence by the competition authorities are hard to

measure. The additional fine for badly intentioned reporting could be a good

mechanism against it. The authority has some mechanisms implementing

45 Borrell, Jiménez, Ordoñez (2014)

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additional punishment as the Penalty Plus whenever firms avoid telling relevant

information or want to abuse leniency programs.

In many of the cartel cases in Spain, in which at least one member applied for

leniency, the association of the sector was involved. The association of the sector

includes the firms in the sector and looks after the interests of the sector as a

whole. Reunions of the firm in the sector and the association are a particular case.

Although they can make collusive agreements damage consumers and increase

the profit of the sector, information exchange or communication between

competitors can be used only to improve competition. Being in such reunion does

not necessarily mean a collusive attitude. Competition authorities must be

careful and clearly define collusion. The above mentioned woodpulp case serves

as an example of a misinterpretation of collusive agreements.

4. Conclusion

The three representative papers have shown some of the similarities and

differences between the economic analysis and real programs and, therefore,

differences between the thinking of economists and politicians and directors of

competition authorities. Leniency programs can be divided into three parts: the

requirements agents must meet to obtain leniency, the time when agents can

apply for leniency and the form that leniency takes.

The earlier programs add some hindrances to informants applying for leniency.

The analysis shows how the effectiveness of cartel fighting increases by awarding

leniency to the first informant unconditionally as regards the role played in the

cartel. The European Commission, after having restricted leniency to ringleaders

in the first programs, has retracted and now allows ringleaders to obtain

leniency. The Antitrust Division, after much consideration, still does not permit

ringleaders to apply. I think that restricting the program to ringleaders, despite

of the loss in effectiveness, could respond to moral reasons.

Not having coerced another party to participate is still a requirement in both

competition authorities. The economic analysis does not take this situation into

account. Beside the collusive agreement, coercing another party would be a

separate incriminating activity and any authority condoning the sanctions of two

different crimes would be too generous. With some exceptions, the real policy

and the economic analysis agree on the conditions required to obtain leniency.

Every economic analysis finds the restriction of the program to the first informant

necessary only for the effectiveness of the leniency policy. A view shared by the

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Antitrust Division. The European Commission does not entirely restrict the

program. Second, third or subsequent reporting parties can benefit from a

substantial reduction of the fine. The incentives to report will be higher in an

environment with a restricted leniency program. As stated in Spagnolo (2005),

restricted programs make the collusion very risky and encourage cartel members

to deviate. Conditions such as extending the collaboration throughout the entire

process or ending the participation in the illegal activity at the time of the

application are not studied, but seem reasonable to minimize the damage of the

cartel.

The beginning of an investigation sets a critical point in the process. Applying

before or after that point can determine the amount of leniency obtained and the

requirements needed. Chen and Rey (2013) find that leniency after the

investigation starts can be effective and does not necessarily damage the

program. Programs were revised accordingly. Competition authorities are not

almighty and will not always end the investigation successfully. The beginning

of an investigation in a collusive industry starts a race between the colluding

members to report first. The European Commission does not offer full leniency,

only a fine reduction, after the start of an investigation making the community

leniency program less effective according to the economic analysis. In the U.S.

program, full leniency can also be obtained during an investigation. The

economic analysis agrees with the Antitrust Division on awarding leniency

before and during investigations. The efficiency of the E.U. program could

therefore be improved through awarding leniency, only under certain situations,

during investigations.

While in the first two points real policies and economic analysis agree (with some

exceptions), in the third point they do not agree at all. Firstly, I want to emphasize

what I think a leniency program expresses. The Authorities set free from

sanctions a confessed wrongdoer. Why would the Authority release a wrongdoer

that has economically damaged thousands of consumers? In my opinion, the

Competition Authority makes it clear that it would rather see an entire cartel

convicted, except for the informant, than not being able to convict the cartel

because of the poor effectiveness of the competition weapons other than leniency

programs, as stated by the Antitrust Division itself.

Authorities could have taken this decision because its cartel fight was not being

too effective. With leniency programs the authorities managed to induce mistrust

and achieved to crack the cartel from inside. This turned out very effective. The

idea of leniency can be criticized for moral or philosophical reasons, but once the

program is implemented another question appears. Why not make the incentives

to report stronger, according to economic analysis, by setting a reward? What

stop the authorities from setting a reward?

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According to economic analysis, real leniency programs are not performing as

well as they could. Not rewarding informants cannot be explained as an

economic factor. A reward paid as a fraction of the fines, not even the entire

amount of the fines, illustrates that it is not an economic reason. In my opinion,

competition authorities are afraid of paying a high political cost by setting a

reward. Public opinion could be against rewarding wrongdoers. I believe that

rewarding informants is not as impacting as implementing a leniency program.

By rewarding informants, the leniency program increases its effectiveness, a

price, which I think, outweighs the public cost of rewards. Chen and Rey (2013)

is the less strict work about rewards. Even a fine reduction could, in some

circumstances, be the best form of leniency, according to Chen and Rey (2013).

Spagnolo (2005) and Aubert, Kovacic and Rey (2013) express the need of rewards

in leniency programs to be effective.

Individual leniency programs play the same important role in cartel fighting for

economists and policy directors. Both consider that the real value of the

individual program is the number of corporate application it generates. The

European Commission and other authorities could implement an individual

leniency program that could benefit from this effect too.

The form of leniency awarded is the main difference between real policies and

economic analysis. The analysis is clear, but no significant competition

authority has implemented a reward leniency program at corporate level. In my

opinion, future revisions of the program must progress in that direction. Setting

a reward and see how it affects the application rates, the size of the cartels

reported and compare it to current leniency programs. I think that the

experience of a reward leniency program is necessary to go on with the study of

leniency programs and the incentives of collusion.

Other substantial difference are the possible sanctions. By sanctioning in a

different way, firms will want to collude in the market with the less strict

legislation. Equalizing possible sanctions will avoid firms colluding in the

market with less severe sanctions. Competition authorities should work tightly

and communicate with each other. Firms should race to the competition

authorities only once and not race to report in country and community

authorities. A single race increases the incentives to deviate and the loss from

sticking to the agreement.

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References

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Statutory Declaration

I declare that I have authored this thesis independently, that I have not used

other than the declared sources and that I have explicitly marked all material

which has been quoted either literally or by content from the used sources.

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