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i'm here at wharton professor Joe Harrington to talk about his paper what can a duration of discovered cartels
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tell us about the duration of all cartels welcome professor I'm glad to be here so tell us about your paper well it
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starts with the issue of collusion and the probably was best stated by recently deceased Justice Antonin Scalia who
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referred to collusion as the supreme evil of antitrust so collusion is all about the fact that firms which we count
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upon to compete for the business of customers and in doing so result in lower prices better products and the
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like in some industries they decide that that leads to profits that are too low and so what they do is they engage an
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unlawful coordination of their behavior they decide to set of driving prices down in order to get customers business
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a sigh well well how about we all set artificially high prices share the market and we'll all earn high profits
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and so collusion is a real challenge has become particularly so in the last several decades I would say 30 years ago
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if you asked an official the Antitrust Division the Department of Justice they whether there are any global cartels
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other than the type like OPEC they would have said no but the fact is we observed
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many global cartels as well as many domestic cartels in in the last couple decades so a challenge in terms of
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understanding cartels you know asking well how many unlawful cartels are there out there you know how bad are they how
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much do they raise prices how long do they last we face a challenge which is common to criminal behavior which is
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these criminals want to hide themselves so what we observe are just those cartels that are unfortunate enough to
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be discovered and convicted so a challenge gets to be which is well we know how many discover cartels are out
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there we know how long they last we know how high a price they said but is that representative of the actual latent
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population of all cartels so where this again kind of specifically for example manifest self in terms of a policy
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challenge is suppose the Antitrust Division puts in place a new program and they want to know is it kind of is it
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proving to be beneficial is it actually helping to reduce the presence of collusion well all we can
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observe is what's happening to the kind of population that of discover cartels
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so if for example we observe more discover cartels is that because the program maybe is working to make
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discovery more likely and that's good or maybe is counterproductive maybe what's
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doing is actually creating more cartels and that's why there's more discover
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cartels so that's kind of the starting point to this research which is trying
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to determine what is it what it is we can learn about the underlying latent you know Universal cartels from those
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that we actually discover and specifically what the research is concerned with is the issue of the
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duration of cartels so we can measure and there have been many studies that have measured how long discovered
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cartels last these studies if the average duration ranges from five to eight years depending on the study and
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the issue as well as that kind of a good proxy for the duration of all cartels and so what this research is designed to
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do is to try to provide a kind of a method to kind of getting at you know how much bias there might be in looking
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at discover cartels with regards to the universe of cartels so what are some key
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takeaways of the paper well the the paper kind of to answer that question they say that the paper kind of big stew
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contributions first what it does is it puts forth a theoretical framework that's kind of think through these
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issues and understand well when will bias occur in what direction and what in the way it does this it constructs a
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model of the birth death and discovery of cartels and and one of the things that it shows and this is in the context
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of if you read many papers and the literature some economists will say that well the measured duration of discover
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cartels is an over estimate of the actual true duration and some will say it's an underestimate and so what we
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want to do is put forth a theoretical framework where we can say precisely you know when is it an over under estimate
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what drives that and so what we find is that if cartels differ a lot in terms of
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their the likelihood that they'll collapse once again think about the death here of
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a cartel you know Cardinals born it could just internally collapse as we've observed with sometimes lawful cartels
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like OPEC which is right now now that you know not very functional of and so it could just die that way it could be
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discovered and its conviction would lead to its collapse so we can think about cartels is differing in these two key
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characteristics what's the likelihood of collapsing at say in a year what's
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likely to being discovered in a year if cartels tend to vary really largely in terms of the likelihood of collapse what
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we find is that the measured duration of discover cartels is an over estimate of
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the true duration and the reason the intuition is that if you have a cartel that's really very stable with a low
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chance to collapse it just hangs around for a long time and has plenty of opportunities to be discovered cartels
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that are short live will tend to die and avoid discovery so so the bias in that case will work towards saying that well
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if we measure for example the average duration discovered cartels to be lets say six years that that probably is an
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over estimate now there's other assumptions you can make whereby you give buys go in the other direction so
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but but one contribution and takeaways is to be able to kind of frame these issues so we can understand okay what
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drives bias the other contribution and more where I think the the key takeaway is is to then uses framework to get a
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measure about the extent of this bias how big is it so we take this framework and we use data on convicted cartels by
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the Antitrust Division from say 1961 to cartels that were born from 61 to 80 4 and we can use that data to get a map
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first of all if you just you could just measure the average duration of these convicted cartels and it's a five point
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eight years but we can use this framework then get a sense of how big is the bias with regards to the duration of
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action all the cartels those also those that are undiscovered and what we find is that and I think one of the
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surprising kind of results is that the bias is actually is not that large we find kind of a kind of high likelihood
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the duration average duration of all cartels probably ranges from about five point two to six
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point eight years right so what are some practical implications of your research
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I think probably the most subsidy one is regards to evaluating policy you know it's a I think there's been a lot of
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policy innovations by various competition authorities one of the big challenges is determining well are they
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helping in the fight against cartels you know are they resulting in fewer cartels
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reducing the overcharge resulting in lower duration and I said the challenge here is that we don't directly measure
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those things so it's not like with some types of crime where we can measure the
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crime rate because all the crimes are reported in case the cartels it is criminal but those who are harm don't
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necessarily know that they've been harmed they don't know that they paid
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excessively for this good so so that's a real policy challenge and they could be
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more concrete about this probably the biggest innovation in policy in fighting cartels in the last 30 years has been
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the revision of the corporate leniency programme by the Antitrust Division so this is kind of an age-old idea with
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conspiracies which is that if someone from the conspiracy comes forward cooperates with the authorities they'll
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be absolved the government penalties okay so this was a program that was in place starting in nineteen seventy eight
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but it had certain design flaws to it was rarely used 93 it was revised I was made kind of you know kind of
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structurally sound and immediately the leniency application started coming in so it's been certainly successful as
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measured by the number leniency applications it's been adopted by many other jurisdictions probably more than
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50 countries and unions have a leniency programme but still the question is well
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but is it affecting the actual population of cartels and that's a difficult question so one of the things
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we want to do here is with this kind of approach is it can provide a method to try to measure the impact of a program
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such as the leniency programme to specifically address the question of has it for example resulted in cartels be
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enough shorter duration that would be an immediate benefit from that and so so that's
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something we plan to do kind of in the next step of this research project we've
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looked at using this model to measure the underlying duration of cartels with data prior to the revision leniency
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programme and that was somewhat do to kind of data limitations but a new data set has recently become available and
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that will encompass cartels that were born and died after the advent of leniency programme and so we can redo
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the analysis and then see well what has happened to the duration of cartels kind
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of before and after the leniency programme this won't be able to tell a kind of causality story but I think it
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will provide some kind of kind of needed data to speak to the issue of well what
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impact are these programs having what conclusions of any surprised you I think the biggest one was that there wasn't as
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much bias as I would have expected I think that's been a a running concern of
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of economists and policymakers in this context but the bias is definitely there we definitely find evidence of it but
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it's not as large as one would have thought so so let's Viswa yup I think
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some of the conclusions drawn based upon what were known to be biased estimates probably most of them are robust because
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of the fact that we find the device isn't actually that large so what sets your research apart from prior work in
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this area well I think this is a topic which people kind of talked about and mentioned as they engage in the analysis
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saying well okay our data is probably biased because it's just discovered cartels and and those could be very
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different from the universe of cartels you could easily imagine that well we're
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just discovering the ones that are you know that very ineffective and that's
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why they're being discovered of or as I said before we could be discovering the
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ones that are really stable and effective and so they're around for a long time with lots of opportunities to
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be discovered that was kind of recognized and mentioned and then people just went forward and just kind of did
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their work as if the the data was not biased this is really the first study to say well let's see what we can actually
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say the extent to the bias and is it really that large and to what extent can we
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kind of compensate for it you know in our conclusions so how will you follow up this research well I think right now
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what we're going to be doing as I said it's going to be a follow-up empirical
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analysis kind of looking at date using data from the post leniency programme era so C would get some sort of
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assessment about whether duration has been impacted by Lindsay program I think where one can also make advances in
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terms of the theoretical framework right now the framework itself is kind of sparse in terms of how it models the
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birth death and discovery of cartels but there's kind of a developing literature
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in economics on how to how to model birth you know what determines whether or not a cartel is created you know what
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in kind of inspires managers to say well let's not compete anymore let's collude
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what causes cartels to collapse there's a kind of a rather large does body work
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on that and unless so in terms of what leads to discovery but I think trying to take it into account those those
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structures get a richer structure to embed that within our framework so we can tell kind of a richer story about
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the kind of the life cycle cartels from when they're born and when they die well
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thank you very much for joining us it's a pleasure been in being here you