The Impact of the Corporate Leniency Program on Cartel Formation and the Cartel Price Path∗

Previous research exploring the effect of corporate leniency programs has modelled the oligopoly stage game as a Prisoners’ Dilemma. Using numerical analysis, we consider the Bertrand price game and allow the probability of detection and penalties to be sensitive to firms’ prices. Consistent with earlier results, a maximal leniency program necessarily makes collusion more difficult. However, we also find that partial leniency programs such as in the U.S. can make collusion easier compared to offering no leniency. We also show that even if cartel formation is not deterred, a leniency program can reduce the prices charged by firms. ∗This paper was written for Political Economy of Antitrust, Vivek Ghosal and Johan Stennek, editors, North-Holland, forthcoming. The authors thank Giancarlo Spagnolo for suggesting this research topic. The first author acknowledges the support of the 21st Century Center of Excellence (COE) Program at the Graduate School of Economics of the University of Tokyo. The second author acknowledges the support of the National Science Foundation under grant SES-0209486.