A STUDY OF THE REGULATIVE ACTS’ LENIENCY CLAUSE EFFECT ON THE BEHAVIOR OF THE FIRMS

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Abstract

This paper experimentally investigates the effect of leniency clause on cartel formation and self-reporting by firms in an asymmetric cartel. The notion of asymmetric is used in terms of different market share of the firms, which form a cartel. This setting is used to bring the experimental design closer to reality. We experimentally controlled for ‘Provision of Deal’- when a firm with larger market share can offer some side payments to the firms with smaller market share and induce them not to report. We run three treatments: 1) Leniency without Deal (LWOD), 2) Leniency with Deal (LWD) and 3) Reward with Deal (RWD). In LWOD treatment players can come forward and self-report their communication to the authority. In LWD treatment before self-reporting there is another step where big players can transfer 10 points to the small player and induce them not to report. In RWD treatment players earn 25 points if they report, unlike LWD or LWOD where they paid some amount after reporting as well. The results of the experiment demonstrate that there is no notable difference in the formation of cartels among the three treatments. However, cartel members see the adverse effect of the provision of a deal on the self-reporting of cartels. The incidence of reporting falls significantly from 61.48% in Leniency without Deal treatment to 25.86% in Leniency with Deal treatment. Further, giving positive rewards to the self-reporters counteract the effect of the deal to a large extent. Thus, reporting is remarkably high at 41.44% in Reward with Deal treatment as compared to 25.86% in Leniency with Deal treatment. To sum up, the experiment accentuates the waning effect of leniency clause in an asymmetrical cartel.

Keywords: cartels, leniency programs, Bertrand competition, experiment

Received: 19.06.2017

Accepted: 15.12.2017

How to cite this paper: Kaur, H. (2017). A study of the regulative acts’ leniency clause effect on the behavior of the firms. Journal of Governance & Regulation, 6(4), 61-68. https://doi.org/10.22495/jgr_v6_i4_p6