Modeling the Birth and Death of Cartels with an Application to Evaluating Competition Policy

Abstract

One of the primary challenges to measuring the impact of antitrust or competition policy on collusion is that the cartel population is unobservable; we observe only the population of discovered cartels. To address this challenge, a model of cartel creation and dissolution is developed to endogenously derive the populations of cartels and discovered cartels. With this theory, one can infer the impact of competition policy on the population of cartels by measuring its impact on the population of discovered cartels. In particular, changes in the duration of discovered cartels can be informative in assessing whether a new policy is reducing the latent rate of cartels. Disciplines Business | Economics | Public Affairs, Public Policy and Public Administration CommentsAt the time of publication, author Joseph E. Harrington, Jr. was affiliated with the John Hopkins University. Currently, he is a faculty member in the Business, Economy and Public Policy Department of the Wharton School at the University of Pennsylvania.This journal article is available at ScholarlyCommons: http://repository.upenn.edu/bepp_papers/25 MODELING THE BIRTH AND DEATH OF CARTELS WITH AN APPLICATION TO EVALUATING COMPETITION POLICYJoseph E. Harrington, Jr. Johns Hopkins University Myong-Hun ChangCleveland State University Abstract One of the primary challenges to measuring the impact of antitrust or competition policy on collusion is that the cartel population is unobservable; we observe only the population of discovered cartels. To address this challenge, a model of cartel creation and dissolution is developed to endogenously derive the populations of cartels and discovered cartels. With this theory, one can infer the impact of competition policy on the population of cartels by measuring its impact on the population of discovered cartels. In particular, changes in the duration of discovered cartels can be informative in assessing whether a new policy is reducing the latent rate of cartels. (JEL: L13, L41)

Evaluating Leniency with Missing Information on Undetected Cartels: Exploring Time-Varying Policy Impacts on Cartel Duration

“…I adapt a model developed by Harrington and Chang (2009) where an industry of firms interact repeatedly over an infinite time horizon. An efficacious antitrust innovation increases a firm's short-run gains from unilateral deviation to a level that exceeds its long-run gains from colluding.…”

Measuring the Effectiveness of Anti-Cartel Interventions: A Conceptual Framework

“…For the relatively small number of industries in which cartels have recently been prosecuted, it is plausible to assume that, for a limited period of time, CAs can monitor activities in these industries with an intensity 16 that ensures that with a very high probability the price-fixing activity of the prosecuted cartel is brought to an end in the short-run. Indeed this probability could even be unity -the assumption of Davies and Ormosi (2014) and Harrington and Chang (2009). Treating this probability parametrically allows us to test the sensitivity of conclusions to this assumption and is also consistent with Connor's evidence of serial violations, and so the possibility that successful prosecution of a cartel by a CA does not always bring cartel activity to an end, even in the short-run.…”

“…As we will see below we consider these instruments and an additional two instruments that affect the re-birth of cartels. Essentially Harrington and Chang (2009) do not examine policy instruments that affect their parameter , the cartel rebirth rate. 9 We measure this by considering the fraction of those cartels that would have existed in the absence of a Competition Authority that continue to exist in the presence of a CA and its enforcement activities 10 Davies and Ormosi (2014), page 3.…”

Minority Share Acquisitions and Collusion: Evidence from the Introduction of National Leniency Programs

“…We now turn to the question posed earlier: why is there an increase in the volume of MS 30 The U.S. adjusted their 1993 LP in 1995 (see Sovinsky and Helland (2012)). Of the 1, 948 MS acquisitions which involve stakes of 40% − 50% (see Table 4), 202 are from the U.S.…”

“…11 Harrington shows that when an LP is optimally designed, the first two effects dominate the third, meaning that LPs hinder collusion. Harrington and Chang (2009) explore the interaction between the three effects of LPs in the context of a dynamic model in which cartels form and collapse on the equilibrium path. They show that the introduction of an LP reduces the longrun frequency of cartels and raises the rate at which they are discovered.…”