Question

12. What are the so called leniency policies against cartels and collusive agreements? Do they always work Explain when leniency can be successful.

Answer 1

Cartel detection and collusion are among the top most priorities for anti trust authorities. In order to maintain market competition and fair prices for the consumers, authorities discourage Cartels and deterence. However often, cartels are usually secret. If they would have been public, then there are repucussions for both the firms. Therefore, an important consideration for authorities is how do they extract information about the possible cartel.

One way to do is through Leniency programs. it works like this: if a firm reports to the authorities about the possible/existing cartel, applicable penalties are partially/wholly removed. Basically, its like saying that you come tell us and we will reduce the quantum of punishment.

however, Not very often leniency policies are effective we consider 3 possible cases which a firm faces:

1. Dissolve cartel quietly

2. Seek leniency

3. Continue cartel

The firms have to trade off between the above points. The costs can be defined as below:

1. If the firm seeks dissolves cartel, it will forgo future cartel benefits

2. If the firm seeks leniency, it will pay partial penalty costs and also will dissolve cartel

3 Continue cartel: In this case, there may be a higher costs associated with settlement costs if authorities find out the cartel.

Thus, if the leniency penalty costs are low enough or incentives are high enough, then firms are more likely to report cartel. However, this depends upon the size and influence of the firms in cartel.