Leniency Policy in Hub and Spoke Cartels

Abstract

The competition literature documents that leniency programs can either destabilize or reinforce the sustainability of horizontal cartels. We contribute to this body of literature by looking at a specific type of cartels, namely hub and spoke cartels: horizontal collusions between spokes facilitated by, at least, one party operating at a different level of the supply chain, the hub. Drawing on earlier work of Van Cayseele and Miegielsen (2013) on hub and spoke cartels, and Chen and Rey’s dynamic leniency model for horizontal cartels (2013), this paper builds a model that measures the impact of leniency programs on hub and spoke cartels. We show that it is always desirable to offer some ex-ante leniency to the first-reporting hub-and-spoke cartel member to discourage cartel formation and assess the optimal leniency rate for both the hub and spokes. We then compare these results with the situation where the hub is excluded from the leniency program and argue that including the hub increases this program’s efficiency in discouraging cartel formation, suggesting that EU leniency programs (which allow the ringleader to benefit from leniency) are more effective than US ones (which do not).