Breaking the Silence: the Corporate Leniency Program

The Corporate Leniency Program (revised in August 1993), states that corporations would be granted leniency for blowing the whistle on their cartel.*

The aim of this program, really, is to overcome the greatest difficulty that the Antitrust Division has. That is, to find out about the cartel in the first place and there after obtain sufficient evidence to make a case against the cartel for cartels are necessarily shrouded in secrecy. When looked at in the form of a game, the government is introducing a new element with this program.

Initially, the game is what we have seen in class, where two firms choose either to collude or deviate and collusion results in higher profits for both firms, but each firm has an individual incentive to deviate, thus resulting in the Nash equilibrium of both firms deviating and relatively lower profits for both.

However, the game changes subtly with the introduction of the Corporate Leniency Program. Look at it as an iterated game where in each round, each firm simultaneously chooses either to (a) keep the faith or (b) break the silence. Payoffs increase every time both firms choose (a), but so does the chance of detection. If one of the firms chooses (b), the game ends with the final payoff of that firm being the accumulated profits, but the other firm loses all prior profits and pays a hefty fine besides. If both firms choose (b), the outcome is the same as in the prisoners’ dilemma, where both firms lose.

As such, the aim of each firm would be to keep the faith as long as possible and break it one round before the other firm does so. But since each firm would then be trying to preempt its opponent, the Nash equilibrium becomes much like the result of a Bertrand game, where P=MC and neither firm colludes.

This result is undoubtedly what the Department of Justice hopes for by introducing the Corporate Leniency Program and empirical evidence does grant it some success as many firms have since blown the whistle on their own cartels. Still, this game assumes that the deviating firm is protected by the government from any ‘punishments’ that the cartel might have implemented.

If the punishment/threat is credible (ie. the whistle-blowing firm cannot be protected by the government from the wrath of its fellow players), then its payoff in the game outlined above maybe negative if it breaks the silence, which would then result in a different equilibrium that allows for collusion.

This counter-strategy to the Corporate Leniency Program is, perhaps, why illegal cartels still exist outside of public knowledge.

*terms & conditions apply

-Risto Keravuori, Joseph Saunders, Cheryl Kong