Advances in Management and Applied Economics

Effect of Corporate Leniency Program on Cartel Dissolution under Market Uncertainty

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  • Abstract

    Cartelists operate in an uncertain environment, facing market demand uncertainty and the possibility of being detected by the antitrust agency. We develop a dynamic model in which an incumbent cartel decides whether or not to voluntarily dissolve the cartel based on the observed profit and the antitrust agency’s cartel deterrence index when there is leniency program available and when there is none. We find that the government does not have to spend equal amount of resources on cartel detection and prosecution across industries. Based on the market structure such as the concentration level, demand elasticity, industry size, and the cost of entry which determine excess profits jointly, the antitrust agency might be able to use appropriate damage multiplier and allocate just a small amount of resources to result in the self-dissolution of the ongoing hard-core cartels if there is no leniency program. With the introduction of a leniency program, even less resources can be enough to deter cartel operation. Our paper sheds light on the effective allocation of current antitrust resources to limit cartel operation in different industries, and how to evaluate the effect of the leniency program on the cartel’s voluntary dissolution decision.