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Connor Kincheloe
Agenda
Briefly review the DOJ Leniency Program Discuss the value my thesis adds to the existing literature
Methodology
Value of Collusion The Game played between two symmetric firms DOJ Optimization Problem
Leniency Program
Grants firms a reduction in fines if they come to the DOJ and admit their involvement in a cartel Three key stipulations to be eligible for Leniency
The DOJ must not have any prior knowledge of the cartel The firm took prompt-action to end its involvement when it learned of the cartel. The firm agrees to fully cooperate in the following investigation
Controversial Stipulations
Prompt-Action Requirement
What is prompt Introduces uncertainty Could it create trust amongst the firms?
There are two underlying incentives pushing the firm to use the policy Prosecution Effect Firms seek leniency because they fear the DOJ may soon begin to prosecute Pre-emption Effect Firms will apply for leniency because they fear another firm may be apply for leniency
Value Added
Synthesis of existing literature regarding the probabilities of investigation and conviction Examined the game if the firms are using mixedstrategies DOJ Optimization Problem
Many of the papers made the assumption that the probability of detection and conviction are the same Papers by Harrington and Motta & Polo recognized they are two different probabilities, and modeled them as such
Probability of Investigation
DOJ does not forget any information after a period has passed Simple example: Cartels raise prices above market expectations Vitamin pricing cartel 19802011
Snapshot in time versus longer time horizon
Probability of Investigation
Cai(2012) puts forward a nice way to view the probability Probability of investigation = B/(B + k), where B is an anti-trust index and k represents the natural barriers to detection k is decreasing over time, and thus the probability of investigation is increasing over time
Probability of Conviction
The DOJ is able to continue to gather evidence over time, which will increase probability of conviction Additionally, there is an underlying incentive for firms to keep evidence of collusive behavior if they think they will need or want to apply for Leniency Aubert et al(2003)
Firms keeping more detailed records will make it easier for DOJ to be able to convict
Methodology
Value of Collusion The set up of the game Pure Strategies Nash Equilibrium Mixed Strategies Nash Equilibrium
Derivation of g and the DOJs decisions to make sure g is played
Value of Collusion
VC = p(N F) + (1-p)(N) + (1- )M
= probability of investigation with value [0,1] p = probability of conviction with value [0,1] = the fine reduction given to firms with value [0,1]
Note: a lower value of indicates a more lenient reduction
F = the fine amount determined by the DOJ with value [0,F] N = the profits from competing M = the profits from colluding (monopoly profits)
CR vS CNR
VCR > VCNR p> Not appropriate to few the policy in this way as this condition may not be sufficient to guarantee R is played if the firms are utilizing mixed strategies
The Game
W = (N F) + (1- )M Payoff for the firm that reveals, while the other firm has chosen NR X = (N ((.5+.5)F) + (1- )M Payoff for the firms when they both chose R simultaneously Y = p(N F) + (1-p)(N) + (1- )M Payoff where both firms chose NR
Z = (N F) + (1- )M
Payoff where the firm chose NR, while the other firm has chosen R
Pure strategies
By looking at the best responses for Firm 1 to Firms 2 strategies, we can determine that there are two Nash equilibria They occur at (R,R) and (NR,NR); so at these points, neither firm has an incentive to change their strategy choice.
Mixed Strategies
To determine the value of g that makes Firm 1 indifferent to Firms 2 strategy choice we get the following equation
Mixed Strategies
g = ( p) / (0.5 + 0.5 p) To guarantee R is played at least part of the time, there are two situations that make g positive
The numerator and denominator are both positive The numerator and denominator are both negative
Mixed Strategies
This can be though of the DOJs punitive strategy leniency has to decline over time as p is increasing
Mixed Strategies
This can be though of the DOJs lenient strategy In this situation, if p < 0.5, then the DOJ must use positive rewards to help get firms to reveal
Costs = C(N) + [(1- )F x N(1- (1-g)2)] Costs come from the investigations and the loss of fine revenue from giving leniency
Highlights why it is not always optimal for the DOJ to offer full leniency Tradeoff between maximizing fine revenue, and maximizing the number of amnesty applicants
Recommendations
According to Miller(2009), analyzing the effects of leniency hinge on specific parameters and those values are unknowable theoretically, and difficult to estimate empirically We only know about the cartels once they have been prosecuted; they are secretive agreements While the data says the policy has been effective, we do not know if there could be another factor that is helping to break apart cartels.
Only considered symmetric firms, which is the prevailing way in the literature, but the real world operations may be closer to asymmetric firms Assumed perfect information; both firms have access to the same information, and can see all of the enforcement choices by the DOJ
Key Takeaways
The probabilities of investigation and conviction should be considered separately, and should be viewed as increasing over time In a game of mixed strategies, the DOJ can take a punitive or lenient stance Depends on how the DOJ considers VQS; that is, does the DOJ value maximizing fine revenue, or does it value breaking apart cartels