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17 Eur. J.L. & Econ. 5 (2004)

handle is hein.journals/eurjlwec17 and id is 1 raw text is: European Journal of Law and Economics, 17: 5-19, 2004 @ 2004 Kluwer Academic Publishers. Manufactured in The Netherlands. Leniency Program: A New Tool in Competition Policy to Deter Cartel Activity in Procurement Auctions KARINE BRISSET karine.brisset@univ-fcomte.fr LIONEL THOMAS lionel.thomas@univ-fcomte.fr CRESE, Universite de Franche Comte, Besangon, France Abstract This paper discusses the impact of a leniency program on incentives within cartels. The objective of this pro- gram is to encourage a cartel member to confess and implicate his co-conspirators with hard evidence about their collusive agreement. We develop a simple model of cartel behavior under a first-price sealed-bid procure- ment auction and we show how an effective leniency program can prevent the internal coordination of cartel members. Keywords: cartels, leniency programs, competition policy, auctions JEL Classification: L4, D43, D82 1. Introduction Cartels in auctions and procurement auctions are prohibited by article 81 E.C. Two reasons can explain this prohibition. Firstly, in a procurement auction, collusion between firms constitutes a restriction of competition and therefore increases the equilibrium price at which the market is allocated. Therefore, because of the social costs of public funds, it is necessary to prevent any collusion between firms in public procurement auctions. Secondly, in practice, the cartel leader, i.e. the cartel's designed winner, is not systematically the firm with the lowest cost, giving rise to a loss of efficiency and therefore to a loss of welfare. For all these reasons, cartels must be investigated and sanctioned by the competition authorities. However, the competition authorities have often faced serious difficulties in detecting and obtaining sufficient hard evidence to prosecute cartel members. Because they are illegal, cartels often organize clandestine meetings and communication, making detection very hard. The prosecution of secret cartels is therefore difficult and costly for the authorities. Reports by the French competition authority relate that successful prosecutions against cartels in public and private procurement auctions often result from their being reported or from indiscreet cartels. In other cases, prosecution has failed because of a lack of hard evidence or because of a flaw. It is rather difficult to estimate the efficiency of cartel law enforcement. However, in France, we have about 170000 annual public markets and only 15 prosecutions against cartels in private and public procurement auctions. This does not mean that there are few cartels in procurement auctions but rather that the risk of being investigated and prosecuted

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