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

You Speakin’ Greek? – Entry Deterrents using long-term contracts

Vantine Imaging is a photography company that holds a large portion of the market share here at UVa for sorority and fraternity composite production. There are over 30 fraternities and 15 sororities and I personally know of at least 25 of these that are customers of Vantine. The composite market is one that is easily defined, with a clear number of customers; there being a limited number of fraternities and sororities at UVa. Furthermore, the product in question, composite photographs, is almost perfectly homogeneous leading one to believe that entry should be quite easy into the market and competition levels should be high.

When speaking of entry deterrent methods we discussed the use of long-term contracts as a way for companies in the cell phone or housing industry to prevent new entrants into the market. Due to a long-term contract scheme, Vantine is successful in deterring entry into the market, and thus paving the way for the company to charge higher prices. The contracts they issue are for a three year period, and are renewed each year by a new house representative (as I know from personal experience). The contract can be broken, but large penalties are incurred if this is done. With fraternities and sororities operating on tight budgets (college students are not the wealthiest bunch) paying such a fine is out of the question. In addition, with such a quick turnover rate for undergraduate students, this process continues on and on without attracting much attention.

Vantine has slowly increased their prices over the years and will be able to continue doing so as long as they maintain their long-term contract agreement. From Vantine’s perspective, this is great; slowly but surely Vantine is achieving monopoly power by successfully deterring entry. However, as we know, this is not best for the consumers, students at UVa. Understanding that this strategy is being utilized shouldn’t we be taking action to combat the rise in prices and market predation? Ideas and counterattacks are welcomed. Game on Vantine!

Fool me once, shame on you. Fool me twice, still shame on you.

Last month European antitrust authorities fined Otis Elevator Co. and ThyssenKrupp AG, the world's two largest elevator makers, and three competitors a record 992.3 million euros ($1.3 billion) for price-fixing.

The European Commission penalized ThyssenKrupp 479.7 million euros, the biggest fine against a company for a cartel, and levied 224.9 million euros on Otis, a unit of United Technologies Corp. It also fined Schindler Holding AG 143.7 million euros, Kone Oyj 142.1 million euros and Mitsubishi Elevator Europe BV 1.8 million euros for fixing prices of elevators and escalators. The penalty is the highest imposed by the Brussels-based commission for a cartel, surpassing a 790.5 million-euro fine imposed on eight companies for fixing vitamin prices in 2001. Otis, Schindler, ThyssenKrupp and Kone control about 75 percent of the global elevator and escalator market, which has annual sales of 30 billion euros. ThyssenKrupp's fine was raised by 50 percent because it was a repeat offender, the regulator said.

The commission, the EU's antitrust regulator, said the companies set prices in Belgium, Germany, Luxembourg and the Netherlands between at least 1995 and 2004. The cartel rigged contract bids, allocated projects to each other and shared confidential information. Moreover they dominated the market illegally and consumers, public authorities and property developers were “ripped off” in result.

``It is outrageous that the construction and maintenance costs of buildings, including hospitals, have been artificially bloated by these cartels,'' Competition Commissioner Neelie Kroes said in a statement. Kroes has made fighting cartels a priority for her five- year term. On Jan. 24, she fined Siemens AG, Areva SA and eight other companies that make electricity network gear 750 million euros. The commission fined seven cartels a total of 1.84 billion euros last year, an annual record.

With authorities striving to fight against price-fixing cartels, hopefully those companies that might be tempted to get involved would think twice before they do anything wrong.

On behalf of Kara Ivy Goldberg, Wei (Grace) Song, Cheung Fai Yeung, Thomas Li

Vitamins Gone Bad

Hoffman-LaRoche, a Swiss global health care company, was involved in an illegal price-fixing cartel for vitamins along with seven other companies, including BASF and Rhone Poulenc SA in the 1990s. Hoffman-LaRoche, the world’s largest vitamin producer with a 40 % market share, instigated the cartel. The eight firms were colluding to reduce competition, increase prices and earn inflated profits. In addition to fixing the prices of the pills, the conspirators agreed to allocate the sales volumes and market shares of the vitamins as well as divide contracts to supply premixes to consumers. In 1999, Hoffman-LaRoche pleaded guilty in the US and faced a $500 million fine, the largest fine at the time a firm had ever faced in the US. Subsequently, in 2001, the EU prosecuted LaRoche because it was in violation of EU law, which forbids price fixing. LaRoche faced a €462 million fine from the EU.

This is a clear example of a cartel. Because Hoffman-LaRoche controlled 40 % of the market and was the producer of all 12 vitamins under investigation, it was able to collude with the other firms and use its market power to fix prices above competitive levels. By coordinating their actions, the firms were able to raise their prices and consequently their profits. As a group of suppliers behaving collusively, they eliminated competition. Although the firms were successful as a cartel, they faced enormous fines, and in 2002 LaRoche sold its vitamin business as a result of the anti-trust violations.

Posted by: Jessica Halper, Michael Ledwith, Jake Carter-Lovejoy, and Drew Muir