Strictness of leniency programs and asymmetric punishment effect

We analyze the impact of leniency programs on the behavior of firms participating in illegal cartel agreements in a two-stage repeated game model. Our approach takes into account asymmetric punishment effect and allows to discuss the design of leniency programs in the setting with asymmetries. The main contribution of the paper is that we consider heterogeneous firms. This heterogeneity results in additional costs in case of disclosure of the cartel, which are caused by asymmetric punishments. Next, following current antitrust rules, we analyze effects of the strictness of leniency programs, which reflects the likelihood of getting a complete exemption from fine even in case many firms self-report simultaneously. Our main conclusion is that leniency programs work better for small companies, since a lower rate of law enforcement is needed in order to induce self-reporting by smaller firms, while big firms are less likely to start a cartel in the first place given the possibility of self-reporting in future. Finally, we analyze optimal enforcement strategies of the antitrust authority and conclude that the authority with limited resources should implement more generous leniency rules the more cartelized the economy is.     

Are leniency programs too generous?

I present a simple model of collusion in which the competition authority offers leniency rates contingent on the number of firms that report information. The optimal leniency policy involves what I refer to as a single informant rule—that is, leniency should be given only when a single firm reports information. The single informant rule allows to increase expected sanctions compared to the first informant rule, which overall improves cartel deterrence.     

The effect of leniency programs on endogenous collusion

The objective of a leniency program is to reduce sanctions against collusion if a participant voluntarily confesses his behavior or cooperates with the public authority’s investigation. Constructing a model in which the detection probability varies over time, Harrington (2008) pointed out that there are three channels through which the leniency program can affect the collusion amount; furthermore, he presented a sufficient condition under which the maximum leniency is optimal. After extending the model by endogenizing the degree of collusion as well as equilibrium selection in the self-reporting stage, we revealed that the Race to the Courthouse effect disappears and that the maximum reduction is always optimal.     

Price vs quantity in a duopoly supergame with Nash punishments

We examine the endogenous choice between price and quantity behaviour in a duopoly supergame with product differentiation. We find that (i) if cartel profits are evenly split between firms, then only symmetric equilibria s obtained; (i) if instead the additional profits available through collusion are split according to the Nash bargaining solution, there are parameter regions where all subgame perfect equilibria are asymmetric, with firms colluding in price–quantity supergames.     

ON THE SUSTAINABILITY OF COLLUSION IN A DIFFERENTIATED OLIGOPOLY WITH A CARTEL AND A FRINGE

We discuss the effects of the existence of non‐colluding (fringe) firms on cartel sustainability. We obtain, using trigger strategies, that with product differentiation collusion is always more easily sustained when firms compete in prices than when firms compete in quantities. This is true basically because (i) price competition is more intense than quantity competition, and (ii) fringe firms exacerbate the fact that cartel firms have more incentives to deviate from the agreement under quantity competition. This result reverses previous findings where, in the absence of fringe firms, product differentiation plays a crucial role in determining the effectiveness of price or quantity competition in sustaining collusion.     

Sustaining Cooperation with Joint Ventures

Antitrust agencies and courts have expressed concerns that jointventures and strategic alliances between firms that competein other markets might serve to reduce the vigor of their competition.This article explores a mechanism through which a joint venturebetween two (or more) firms in one market can serve to facilitatecollusion in another market—even one unconnected verticallyor horizontally by costs or demand. In the models studied here,play in one market has the effect of altering players' beliefsabout their rivals' play in the second market. A joint venturein one market may provide a credible punishment mechanism forfirms colluding in another market. The joint venture may alsoprovide a vehicle for the transmission, between players, ofinformation in a way that helps cooperative types find eachother and collude in other markets. (JEL L12, L41, K21)     

Vertical differentiation and collusion: Pruning or proliferation?

In this paper, we tackle the dilemma of pruning versus proliferation in a vertically differentiated oligopoly under the assumption that some firms collude and control both the range of variants for sale and their corresponding prices, likewise a multiproduct firm. We analyse whether pruning emerges and, if so, a fighting brand is marketed. We find that it is always more profitable for colluding firms to adopt a pricing strategy such that some variants are withdrawn from the market. Under pruning, these firms commercialize a fighting brand only when facing competitors in a low-end market.     

Backward integration and collusion in a duopoly model with asymmetric costs

This paper formalizes the idea that input transactions might be used to implement side payments among colluding firms. A model is proposed to analyze the effect of backward integration on collusive outcomes in a downstream duopoly with asymmetric marginal costs. Vertical integration expands the set of collusive outcomes that are sustainable for a given realization of the discount factor. This is an additional effect of vertical integration that antitrust authorities should consider. Side payments implemented by input sales are more relevant the larger the difference in marginal costs, since they allow for the shifting of production towards the relatively more efficient firms, while maintaining firms’ incentives to collude. A price of the input above that posted by an alternative source or sales of the input below cost may be observed, depending on the realization of downstream firms’ costs.      

Heterogeneous effects of merit scholarships: do program features matter?

This paper examines the role of program features in determining the effectiveness of merit scholarships on educational outcomes using data from the 2009 to 2014 American Community Survey. Exploiting the variation in the timing of program adoption as well as program features across states, I find that leniency of academic requirements for initial eligibility largely contributes to program effects on associate’s degree completion, whereas generosity of scholarship amount significantly increases college attendance and bachelor’s degree completion. The estimates also indicate that lower requirements for scholarship renewal appear to positively affect the likelihood of completing a degree in science, technology, engineering, and mathematics fields (STEM). The findings suggest that leniency and generosity are important determinants of program effectiveness on educational outcomes. It is thus relevant to take program features into account when designing merit scholarships.     

Foreign direct investment subsidy in a dynamic stochastic general equilibrium model with heterogeneous firms

This study analyzes the macroeconomic impacts of subsidies to attract multinational corporations when firms are determining whether to enter or how to serve foreign markets. We show that a small FDI subsidy scheme induces consumption gains and delivers short‐term welfare improvement for the FDI host country if firms differ in productivity. However, the subsidy generates a new problem and results in the wealth reallocation effect, leading to welfare deterioration for the host country in the long run. Moreover, we find that a subsidy program induces a welfare improvement for the host country if it is offered to all domestic producers instead of foreign producers only in the host country.     

Plant location and strategic environmental policy with inter-sectoral linkages

In recent debates on trade liberalisation the concern has often been expressed that with more competitive international trade governments will be worried that by setting tougher environmental policies than their trading rivals they will put domestic producers at a competitive disadvantage, and in the extreme case this could lead to firms relocating production in other countries. The response by governments to such concerns will be to weaken environmental policies (‘eco-dumping’). In competitive markets such concerns are ill founded, but there is a small amount of literature which has analysed whether governments will indeed have incentives for eco-dumping in the more relevant case of markets where there are significant scale economies; even here there is no presumption that the outcome will involve eco-dumping.In this paper we extend the analysis of strategic environmental policy and plant location decisions by analysing the location decision of firms in different sectors which are linked through an input-output structure of intermediate production. The reason why we introduce inter-sectoral linkages between firms is that they introduce an additional factor, relative to those already analysed in the literature, in the plant location decision, which is the incentive for firms in different sectors to agglomerate in a single location. This has a number of important effects. First, there is now the possibility of multiple equilibria in location decisions of firms. Following from this there is the possibility of catastrophic effects where a small increase in an environmental tax can trigger the collapse of an industrial base in a country; however there is also the possibility that a country which raises its environmental tax could attract more firms to locate in that country, because of the way the tax affects incentives for agglomeration. Finally, and again related to the previous effects, there is the possibility of a hysteresis effect where raising an environmental tax in one country can cause firms to relocate to another country, but subsequently lowering that tax will not induce firms to relocate back into the original country.We consider a simple model with two countries, two industries, an upstream and a downstream sector, and two firms per industry. The analysis proceeds through a three-stage game: in the first stage the governments of the two countries set their environmental policies; in the second stage the firms in both industries choose how many plants to locate and where; in the third stage firms choose their output levels, with the demand for the upstream firms being determined endogenously by the production decisions of the downstream firms. We assume that there are no limits to production capacity, so that firms do not build more than one plant in any country. However, firms may build plants in different countries because of positive transport costs. Although the model appears very simple, it cannot be solved analytically, so all the conclusions must be drawn from numerical simulations.     

Vertical integration, raising rivals’ costs and upstream collusion

This paper analyzes the impact vertical integration has on upstream collusion when the price of the input is linear. As a first step, the paper derives the collusive equilibrium that requires the lowest discount factor in the infinitely repeated game when one firm is vertically integrated. It turns out this is the joint-profit maximum of the colluding firms. The discount factor needed to sustain this equilibrium is then shown to be unambiguously lower than the one needed for collusion in the separated industry. While the previous literature has found it difficult to reconcile raising-rivals’-costs strategies following a vertical merger with equilibrium behavior in the static game, they are subgame perfect in the repeated game studied here.     

The Prodigal Corporation: an Analysis on the Effectiveness of the ACCC's Immunity Policy for Cartel Conduct

We examine the impact of the ACCC's leniency policy (Immunity Policy) on cartel stability. The policy, by reducing the fines of the first cartel members who cooperate with competition authorities, can act to deter collusion. However, we find that care is needed in how a leniency policy is implemented. It is possible that the leniency policy can make collusion easier to sustain than in its absence. Further, the ACCC's Cooperation Policy, which applies to all parties who assist the Commission with an investigation, can act to undermine the effectiveness of the leniency policy.     

The Agency Cost of Internal Collusion and Schumpeterian Growth

This paper analyses the link between the internal organization of the firm and the growth process. We present a Schumpeterian growth model in which monopoly firms face agency costs due to collusion between managers inside the organization. These costs affect incentives to invest and the rate of innovation in the economy. When collusion is self-enforcing, higher growth and more creative destruction shortens in turn the time horizon of colluding agents in the organization and makes internal collusion more difficult to sustain. We analyse this two-way mechanism between growth and agency problems and show how the transaction costs of side-contracting within the firm and the growth rate of the economy are simultaneously derived.     

Endogenous Timing in a Strategic Trade Policy Game: A Two-Country Oligopoly Model with Multiple Firms

This paper examines strategic trade policy games where the number of firms in the importing and exporting countries differs and all firms play as Cournot oligopolies. Under the assumption of linear demand and constant marginal cost, we show that, if the number of firms in the exporting country exceeds that in the importing country by more than three, the government of the exporting country chooses to move as a leader, imposing an export tax on firms. The government of the importing country then becomes a follower and imposes an import tariff. This lies contrary to the previous study, which assumed that there is only one firm in each country.     

International trade and competitiveness

We analyze the role of international market size differences in determining the investment in process R&D (and thus firms?? competitiveness) in a trade model with oligopolistic market structure, non-homothetic production technology and costly trade. We show that the R&D effort is higher (or even disproportionately so) for firms in the larger market, which causes endogenous asymmetries across countries. As a result, firms in the larger market have higher competitiveness, which increases their market shares in international markets. Furthermore, and contrary to what is predicted by Krugman (Am Econ Rev 70:950?C959, 1980) ??home market effect??, in equilibrium the larger country does not need to host a disproportionately higher share of the world??s industry than of the world??s demand. Despite this, the larger country can still continue to run a trade surplus in the oligopolistic sector, since it hosts firms with higher competitiveness than firms in the smaller country.     

Export–Oriented Foreign Direct Investment and Local Content Requirement

We develop a model in which foreign firms locate in a host country and export their produce to another (consuming) country. We consider both exogenous and endogenous numbers of foreign firms. These firms compete with domestic firms in the consuming country under oligopoly. Unemployment exists in both countries. We analyse the conflict of interest between the two countries on the level of local content for the foreign firms. Under free entry of foreign firms, the consuming country may want a less severe restriction on local contents than the host country, but not so when the number of foreign firms is exogenous.     

Open technology innovation activity and firm value: evidence from Korean firms

Despite the importance of Open Technology Innovation Activity (OTIA) for firm value, the literature investigating effects of OTIA announcements of developing country firms is not known in international academic circles. Our study using an event study approach examines the effects of OTIA (technology import and joint R&D) announcements of firms in Korea, one of the leading developing and highly innovative countries. We find that the announcements of OTIA produce positive average abnormal returns. Interestingly, unlike the prior studies on developed country firms, OTIA with firms in the homogenous industry leads to greater firm value than that involving firms in heterogenic industries. This implies an importance of a technological fusion with external firms in different industries for value of developing country firms. In addition, this article finds no home bias that a nationality of partner firms is not essential for the relation between OTIA and value of firms.     

The effect of non-employment-based health insurance program on firm's offering of health insurance: Evidence from the social health insurance system in China

To achieve universal health insurance coverage, many developing countries have established a segmented health insurance system, which contains separate programs for workers with formal employment and residents without formal employment. A potential concern with such a segmented system is that the establishment of a non-employment-based insurance program may generate a disincentive for firms to provide health insurance benefits to workers. In this study, we empirically examine this crowd-out effect of a non-employment-based insurance program, the Urban Residents Basic Medical Insurance (URBMI), in China. Exploiting city-by-year variations in the roll-out process of the program and utilizing a unique administrative dataset on Chinese firms, we find that the enactment of URBMI reduced a firm's offering of an employment-based health insurance program by a statistically significant 0.94-1.29 percentage point. This crowd-out effect was stronger among domestic private firms, new firms, and firms that are individual-owned.     

On the International Linkages between Trade and Merger Policies*

In a three‐country model, this paper investigates linkages between merger incentives of exporting firms and the trade policy of an importing country. When exporting firms come from only one country, the tariff response of the importing country reverses the welfare effects of a merger in the exporting country. If there exist two exporting countries, a merger creates two types of conflicting international externalities. First, a merger in one exporting country increases profits of all firms. Secondly, non‐merged firms lose if the importing country is free to raise its tariff in response to a merger of foreign exporters.