The Effects of Global Leniency Programs on Margins and Mergers

Researchers, policy makers, and media have recently raised concerns about potentially decreasing product market competition in the United States (US) and the rest of the world. Reduced competition may come from increasing industry consolidation as well as collusion among market participants to retain their individual market shares. Recently, many countries, including the United States, have sprung into action to combat anticompetitive misconduct by making the formation of cartels more difficult. However, whereas stronger enforcement has been shown to deter cartels and enhance detection (Miller, 2009), observations that product market competition has not intensified and in fact may even have weakened, raise questions about the effectiveness and unintended consequences of antitrust enforcement.

One possible reason for such ineffectiveness could lie in the substitutability between cartels and mergers in achieving market power. We study this issue by focusing on the staggered passage of leniency programs around the world as a proxy for strengthening antitrust enforcement against cartel activities. We focus on firms from 63 countries and territories over 1990–2012, using data from the Compustat Global and North America databases. 

In a cross-country study, we investigate how staggered passage of national leniency programs from 1990–2012 has affected firms’ margins and merger activity. We find that these programs, which give amnesty to cartel conspirators that cooperate with antitrust authorities, reduced the gross margins of the affected firms. However, firms reacted to new regulations by engaging in more mergers that had negative effects on downstream firms. Our results imply that although these programs were generally effective, their full potential was mitigated by mergers that substitute for cartels, and that a strong merger review process might be a prerequisite for strengthening anti-collusion enforcement.