ADVERSE EFFECTS OF CORPORATE LENIENCY PROGRAMS IN VIEW OF INDUSTRY ASYMMETRY

This paper studies the effects, leniency programs have on cartel stability and the subsequent abuse of market power. A game-theoretical model, which allows for asymmetry and retaliation, is employed to analyze this problem. We find that a leniency program does not always lead to a breach of trust; in certain industries leniency programs are unable to break collusion. Moreover, they may have the adverse effect in the sense that they strengthen cartel stability or lead to abuse of market power. A relatively large firm can use coercion to remove the option to a smaller firm to self-report. In industries characterized by a certain degree of asymmetry in market shares and high exit costs this is an even more likely scenario. In view of this limitation, policies aimed at the removal of the threat of retaliation need to be considered. This paper’s emphasis is placed on leniency programs for cartels, but the line of reasoning may also be extended to corporate whistle-blowing programs.