Silviase/jgov_v1.4_full_ann huggingface dataset:
have even more direct information in some cases. For example, a sales representative might be told not to bid for some company’s business - which could be part of a customer allocation scheme - or told not to deviate from the price list under any circumstances when previously it was allowed to so when it thought the business would be lost. Administrative staff for a colluding executive may stumble across evidence of clandestine meetings in the form of expenses, a manager personally handling certain appointments, and other suspicious behavior.

To make these points more concrete, let us point out that apparently some employees suspected the upper management of Christie’s and Sotheby’s were colluding:

Sotheby’s submits that some of its personnel across Europe commented when interviewed by Sotheby’s outside legal counsel that they had a “feeling” that the introduction of the fixed vendor’s commission structure may have arisen out of some sort of understanding with Christie’s. Such suspicions were supported “by the fact that London had given strict instructions (i) not to depart from the published commission structure (ii) to assemble and forward data regarding clients to whom Sotheby’s had already made oral or written commitments at lower rates (so-called “grandfather lists”) and (iii) to monitor and report any discounts offered by Christie’s in contravention of its published rates to senior management in London. [Fine Art Auction Houses (2002), p. 36.]

Another example comes from the carbonless paper cartel:

The following recollection of a Sappi employee ... from February 1993 regarding his then superiors' and colleagues' participation in the cartel meetings confirms that prices were agreed at the official AEMCP meetings or at meetings held on the occasion of these meetings: However, he admits that he had very strong suspicions, close to a degree of knowledge, that [two Sappi employees] had been to meetings with competitors. He recollects that one or other of them would come back from meetings, including AEMCP meetings, with a very definite view on the price increases.
that were to be implemented and that they were relatively unconcerned by competitor reactions. [Carbonless Paper (2001), p. 20]

Compared to buyers, it is a much greater challenge to motivate these employees to report. If their accusations are not substantiated by the antitrust authority, the superior has considerable range to punish them. And even if they are substantiated, such reporting could be construed as being disloyal to the company. An employee may then be harmed in terms of fewer promotions, lower bonuses, and being ostracized if not fired in addition to feeling guilty for what they have done. A policy then needs to be designed whereby not only the individual benefits financially but also the company so that one can reasonably argue that it is in the company's interest to report suspicions about collusion. One suggestion is for the antitrust authority to give a company the opportunity to receive full leniency (under the usual conditions) when one of its employees reports that it thinks the company is engaged in collusion. The employee - who should be eligible for financial rewards - might then be perceived as acting in the company's best interests and avoid both monetary and non-pecuniary sanctions within the firm.

### 5.3 Non-cartel Competitors

Finally, a firm who competes in this market but is not a member of the cartel also has access to information about what its competitors are doing which might allow it to infer or suspect that there is some collusion. The problem I see here is that either such a firm significantly benefits from collusion - in which case it'll be difficult to design a policy to induce them to report - or they are significantly harmed by it - in which case they already have an incentive to report their suspicions. Let me elaborate on these two points.

If the cartel is content to have this firm outside of the cartel then that firm has the best of all worlds. Its competitors restrain supply and raise prices, while it is left to produce and price as it wishes. It experiences a rise in its demand from its competitors' higher prices and it can maximally benefit from it by raising price - but
still undercutting its rivals' prices - and expanding supply. As it significantly profits from its rivals colluding, it could prove difficult to design a program - short of offering excessively large financial rewards - that would induce it to forego those profits by informing the authorities of their suspicions.

Returning to Table 1 of Hay and Kelley (1974), it is rather interesting in light of the previous discussion that 20% of the cartels were discovered by a complaint by a competitor. This is because cartel members are often not content to allow non-cartel members to expand supply in response to their coordinated contraction of supply. The cartel may act in an anti-competitive manner against them so as to limit their supply - by buying up input, for example - or even engage in selective price wars (perhaps with respect to particular customers) so as to induce them to exit. In that case, a firm that suspects some of its competitors are coordinating to act anti-competitively against it has plenty of incentive to report its suspicions to the antitrust authority in which case there is no need for a policy to promote such behavior.

## 6 A More Activist Detection Policy for an Antitrust Authority: Screening for Cartels

One of the exciting features of a corporate leniency program is that it introduces the antitrust authority as an active player in the detection of cartels. Historically, antitrust authorities were passive in this regard as they responded to complaints rather than searching for suspected cases of collusion. Now that the antitrust authority is beginning to play a role in the discovery of cartels, I would like to propose broadening this role.

It is useful to partition the discovery process into three stages. First, there is the screening of industries; the purpose of which is to identify markets where collusion is suspected and thus are worthy of scrutiny. Second, there is the verification of collusion which entails systematically trying to exclude competition as an explanation for observed behavior and to provide evidence in support of collusion. In terms of
data requirements and econometric modelling, verification is a much more demanding process than screening as it requires controlling for demand and cost factors and any other variables necessary to distinguish collusion from competition. Third, the prosecution of collusion is the development of economic evidence that is sufficient to persuade a court or some other administrative body that there has been a violation of the law. One may interpret this exercise as the same as verification though with a different set of standards.

In considering an expanded role for the antitrust authority in this process, my plan is to focus the discussion on the screening of industries for collusion. One is then thinking of a situation in which there is no prior knowledge of collusion. Screening methods are then intended to identify industries for which collusion is sufficiently likely that they warrant closer inspection using verification methods. There are two general methods for engaging in screening: structural and behavioral. $ ^{15} $ A structural approach is based on identifying markets with traits thought to be conducive to the formation of a cartel. $ ^{16} $ The theoretical literature and, to some extent, the empirical literature finds that collusion is more likely or more extensive with fewer firms, more homogeneous products, more excess capacity, and more stable demand. $ ^{17} $ A structural approach involves measuring industries in terms of these traits and then, in principle, investigating those that score high with the hope of finding evidence of collusion.

The weakness to a structural approach is that, in most economies, there is a high chance of false positives - the indicators suggest collusion is relatively likely but in fact there is no cartel. To see why this would be the case, imagine the "ideal" market for collusion: two firms, homogeneous products, stable demand, no large buyers, excess capacity, and so forth. Even though such a market would surely be flagged by a structural investigative tool, my own prior belief is that a very high fraction of those markets are not cartelized. Based on what we know (which, admittedly,
is only discovered cartels), the frequency of collusion in most economies is rather low. Hence, given a low prior probability of collusion, the posterior probability - conditional on all those structural variables taking values conducive to collusion - is still probably quite low. In other words, I think the likelihood of false positives with a structural approach is high. At the heart of this problem is omitted variables. There are multiple equilibria - some involving collusion, some not - and non-observed variables can influence whether firms settle upon a collusive equilibrium.

The structural approach is based on data about the industry which makes it more likely that a cartel will form. This is to be contrasted with the behavioral approach which uses data that is itself evidence that a cartel has formed. Within the behavioral approach, one looks for evidence either of the means by which firms coordinate or of the end result of that coordination. The means of coordination is some form of direct communication and, indeed, many cartels have been detected by virtue of evidence of that communication. This could entail a person party to the cartel coming forward (perhaps under a leniency program) or an uninvolved employee who stumbles across evidence or the discovery of documents associated with a tentative merger. Leniency programs encourage discovery through the means of coordination.

Alternatively, a behavioral approach can focus on the market impact of that coordination; suspicions may emanate from the pattern of firms' prices or quantities or some other aspect of market behavior. I've mentioned buyers becoming suspicious because of an inexplicable increase in prices. Though, historically, the U.S. government has not played an active role in screening industries, there have been some recent attempts. At the Bureau of Economics of the U.S. Federal Trade Commission, former Director Jonathan Baker used price increases after an industry-specific trough in demand to identify the exercise of market power (FTC History, 2003, pp. 108-110), while former Director Luke Froeb made progress in developing a screen in terms of the price variance (Abrantes-Metz, Froeb, Geweke, and Taylor, 2005). I think more can be done along these lines and that, as argued later, the development of a leniency program provides more of a reason - not less of one - to engage in screening. My ensuing remarks are speculative and tentative but then their purpose is to ignite
a discussion of screening that would take place among economists in government, consulting, and academia.

In thinking about a workable policy of systematic and ubiquitous screening of industries for collusion, three criteria come to mind. First, evidence of collusion should be discernible by just looking at prices, market shares, or other easily available data. Second, the test should be routinizable so that it can be conducted with minimal human input. These two criteria indicate that one is imagining an empirical exercise far removed from the typical industry analysis involving data on price, quantity, and cost and demand shifters and then performing many modifications to a sophisticated econometric model. The third criterion is that the screen should be difficult or costly for the cartel to beat. Let me limit my attention here to the first two criteria; a discussion of the last one in provided in Harrington (2006).

The objective is to screen industries as a matter of course, even where there is no suspicion, clue, or hint of collusion. To be practical, screening must then rely on easily available data which, in many cases, will mean exclusively price data. However, in some instances, quantity and some cost or demand shifters may also be accessible at low cost. Consider a product with a primary input that trades on commodity markets. An example is raw sugar used in the production of refined sugar (Genesove and Mullin, 1998). If cartel members manufacture in one country and sell in another - such as with the vitamins cartel - then exchange rate fluctuations provide an easily available cost shifter.

Though high frequency price data is not often easily available, there is a growing number of possibilities. The government has access to price data from procurement. Online price data is another source. There is a growing amount of online retailing and many scholars have already "scraped" data off of web pages. Shopbots can perform some of this work. Furthermore, some web sites are beginning to collect price data from conventional retailers. Some markets - like financial markets, electric power, and many commodity markets - offer high-frequency data that, at a price, is available.

With this data, the empirical exercise must be simple enough to be largely automated. One possibility is looking for collusive markers such as low price variance,
low market share variance, high correlation in bids at an auction, negative correlation in market shares, negative correlation in price and quantity, and so forth. Relative to competition, under collusion: i) a firm’s market share is more negatively correlated over time; ii) market shares are more stable under collusion; iii) prices are more strongly positively correlated across firms; and iv) the variance of price is lower. $ ^{18} $

To elaborate by way of example, let us consider using the variance of price as a screen. There is some theoretical work to suggest that collusion results in a lower price variance. Harrington and Chen (2004) model the collusive price path and show that it has a transition phase - in which price rises largely irrespective of cost - and a stationary phase - in which price is responsive to cost. While price is sensitive to cost in the stationary phase, the impact of cost shocks on price is muted and takes a longer time to pass through, relative to non-collusive pricing. As a result, the variance of price is lower with collusion. There is also some empirical work in support of this prediction. Examining collusion at auctions of frozen perch, Abrantes-Metz et al (2005) find that the price variance was lower during the period of collusion compared to after the cartel collapsed (excluding the transition from collusion to non-collusion). $ ^{19} $ Figure 2 is reproduced from their paper and shows that the price-generating process is quite different in the post-cartel phase and, in particular, price is less sensitive to cost. A screen could then monitor the price variance and seek to determine whether it is low relative to some benchmark.
Figure 2: Collusion and the Variance of Price (Abrantes-Metz et al, 2005) Frozen Perch Prices and Costs: 1/6/87 - 9/26/89

A second screening approach is to identify structural breaks in the stochastic process producing prices or some other measure of firm behavior. Such a break could be associated with the formation of a cartel but also its demise (as in the case in Figure 2). Collusion necessarily entails a change in the price-generating process and possibly in the market share process and, furthermore, the change could be rather abrupt and detectable. Has average price changed? Has the relationship between a firm's price and cost changed? Has the relationship among firms' prices changed? Has the variance of price and market share changed? I suspect that this method is the most promising but it does require continual monitoring so that the transition from competition to collusion can be identified.

To see that the idea of screening by looking for a structural break is imple-mentable, consider the recent episode of collusion in some Nasdaq security markets. In those markets, collusion took the form of avoiding the quoting of odd-eighths so that a market maker would post a bid price of, say, $10 or 10 1/4 but not 10 1/8. This resulted in a minimum bid-ask spread of 1/4. Figure 3 (which is based on a figure from Christie and Schultz, 1999) shows that there is a sharp change in the dollar
spread - which effectively measures the price-cost margin - surrounding the switch from quoting all eighths to largely avoiding odd-eighths. Screening for a structural change in the spread-generating process would have probably picked it up.

Figure 3: Collusion and Bid-Ask Spreads

For skeptics who think that screening cannot work, I have two responses. First, screening is used for various other forms of illegal activity such as tax evasion, insider trading on security markets, and credit card fraud. It appears to be working there. Though the available data is much greater in those cases than it would generally be for someone screening for collusion, this leads me to my second point. We have never really tried to engage in cartel screening. Solutions to challenging problems are not found until we seriously apply ourselves to solving them. The skeptics may ultimately be right but their views reflect a pessimistic assessment based on the existing body of knowledge. Innovation is the creation of new knowledge and, by its definition, is not anticipated. Who knows what innovations in screening methods may arise once we apply ourselves. So, I intend to ignore the skeptics until after we’ve seriously tried to develop and implement methods for screening. At that point, we can evaluate whether or not this quest - while surely noble - is quixotic.
Another skeptical response could also be: Why bother with screening with leniency programs proving so effective? As discussed in Section 4, the "success" of a leniency program is not so easily evaluated and we should be cautious before drawing any conclusions. My "gut" tells me that the U.S. Corporate Leniency Program has indeed worked but I would feel much more confident with a systematic study that substantiated the feeling in my gut. Putting that point aside, an active and even mildly effective screening policy is highly complementary with having a leniency program. If an antitrust authority identifies an industry for further scrutiny through some form of screening and conveys these suspicions to the suspected firms, it could well induce one or more cartel members to come forward and apply leniency. In other words, screening can serve to shift the environment from the No Knowledge phase to the Pre-Investigation stage and thereby provide much stronger incentives to a firm to apply for leniency. Thus, the development of a leniency program makes the case for screening more, not less, compelling.

In closing, I have two suggestions in relation to screening for antitrust authorities and, in particular, the JFTC since they are starting down the path of a more aggressive policy against cartels. First, and following up on the previous discussion, to more actively monitor firm behavior towards discovering cartels. Second, to act not only as a detector, prosecutor, and punisher of cartels but also as a collector and disseminator of information about cartels.

On the topic of screening, an antitrust authority can, at a minimum, engage in this activity when it comes to government purchases. Presumably, such data ought to be accessible. $ ^{20} $ A second natural screening target is firms that have previously been found guilty of colluding. Recidivism is serious. Collusion may re-emerge in a market or a company involved in colluding in one market may be engaged in similar practices in other markets. This problem seems especially severe in Japan as, over 1993-2002, 10.2% of Japanese cases involved firms previously sanctioned which compares to only 3.2% for the E.U. (Suwazono, 2005). To aid in monitoring, behavioral remedies ought
to be considered. Specifically, I would recommend requiring the provision of price data by the convicted firms which can then be screened by the authorities. $ ^{21} $ This information can be periodically cross-checked with buyers to confirm its authenticity.

## 7 Concluding Remarks

Antitrust authorities act as a detector, prosecutor, and penalizer of cartels. I would encourage them to also serve as a collector and disseminator of information about cartels. The better that cartels are understood, the more effective we can be in designing policies against them. I would then encourage antitrust authorities to put as much data in the public domain as is feasible so that it can be used to build a library of cartels. In particular, it would be highly useful to learn a cartel's operating practices - how price is set, how market shares are allocated, how enforcement is conducted, what information is exchanged, how frequent are meetings, and so forth. On this point, the European Commission is more informative than the Antitrust Division of the U.S. Department of Justice which suggests to me the latter can do better. Furthermore, the availability of this information to the antitrust authority has noticeably increased with the introduction of a corporate leniency program as then the actual members of the cartel are cooperating in the provision of such information. Knowing exactly how a cartel operates is essential to developing better models of collusion and better policies. Here, the government and the academic community must work together.
## References

[1] Abrantes-Metz, Rosa M., Luke M. Froeb, John Geweke, and Christopher T. Taylor, “A Variance Screen for Collusion,” FTC Bureau of Economics Working Paper No. 275, March 2005 (International Journal of Industrial Organization, forthcoming).

[2] Bolotova, Yuliya, John M. Connor, and Douglas J. Miller, “The Impact of Collusion on Price Behavior: Empirical Results from Two Recent Cases,” Department of Agricultural Economics, Purdue University, pdf copy, April 2005.

[3] Brenner, Steffen, “An Empirical Study of the European Corporate Leniency Program,” Humboldt-University Berlin, pdf copy, March 2005.

[4] “Carbonless Paper,” Commission of the European Communities, COMP/E-1/36.212, December 20, 2001.

[5] Chen, Joe and Joseph E. Harrington, Jr., “The Impact of the Corporate Leniency Program on Cartel Formation and the Cartel Price Path,” in Political Economy of Antitrust, Vivek Ghosal and Johan Stenneck, editors, Elsevier, forthcoming (April 2005).

[6] Christie, William G. and Paul H. Schultz, “The Initiation and Withdrawal of Odd-Eighth Quotes Among Nasdaq Stocks: An Empirical Analysis,” Journal of Financial Economics, 52 (1999), 409-442.

[7] Connor, John M., “International Price Fixing: Resurgence and Deterrence,” First Workshop of the Research Training Network: Competition Policy in International Markets, Toulouse, France, October 2003.

[8] Connor, John M., “Effectiveness of Antitrust Sanctions on Modern International Cartels,” Purdue University, working paper, 2004.

[9] “Fine Art Auction Houses,” Commission of the European Communities, COMP/E-2/37.784, October 30, 2002.