Cartel Formation and Cartel Stability - Experiments on the Role of the Leniency Rule and with open Communication

• Applicants: Professorin Dr. Lisa Bruttel; Professorin Dr. Jana Friedrichsen
• Subject Area: Economic Policy, Applied Economics
• Term: from 2018 to 2022
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 389447910

Cartel prosecution is an important part of the work of antitrust authorities all around the world, because cartels can severely harm social welfare. Recently, many antitrust authorities introduced leniency rules to destabilize existing cartels and hinder the formation of new ones. Empirically, it is difficult to judge the success of these measures, because researchers cannot observe (the number of) functioning cartels. Therefore, experimental studies on the topic are needed. However, previous experimental studies have simplified the decision framework in many aspects so that it is hard to draw conclusions about the effects of the leniency rule on real cartels from their results.The main objective of the project is to analyze the effectiveness of leniency policies when the antitrust authority is included as an active player in the experiment. This is crucial with respect to the external validity of the results. Most importantly, the presence of an active antitrust authority allows communication to take place without necessarily resulting in cartel formation and allows for free text communication. Previous studies on the leniency rule did not distinguish explicit price agreements from communication about harmless topics and in case of a control, the decision to communicate was automatically interpreted as the formation of a cartel. However, real employees of real firms meet the employees of other firms anyway from time to time, for example in the context of trade fairs. Moreover, while according to the law firms cannot be prosecuted for talking about topics that are unrelated to market conduct or prices, even such communication may facilitate collusion by generating trust. Previous studies on the role of communication for cartel formation and stability did not consider the interaction with an antitrust authority or the introduction of a leniency rule. The project has three further objectives. First, we will analyze how cartel formation and stability is affected by an even more flexible approach to communication where subgroups of firms can also communicate if the group as a whole does not unanimously agree to communicate. Second, we will explicitly analyze cartel prosecution with active antitrust authorities when an identified ringleader is exempt from fine. Finally, we plan to test whether market conduct changes when, in contrast to current practice, the consumer surplus is actually paid to experimental participants in the role of consumers.

• DFG Programme: Research Grants