The Effect of Private Damage Claims on Cartel Activity

By Melinda Fremerey (Photo)

The past years have been very successful in terms of official antitrust law enforcement. This is mainly due to the leniency programmes introduced in the European Union in 1996 by Notice 96/C 207/04. A cartel member can become a leniency applicant if it is the first cartel member to report to the cartel authority and provides the authority with sufficient information about the cartel. In return, the fine imposed on the leniency applicant is either waived or reduced. Economic studies show that the leniency programme has a deterrent effect on the cartel formation and has a destabilising effect on existing cartels by sowing mistrust among the cartel members.

With the implementation of Directive 20/14/104/EU by the 9th Amendment to the ARC, private enforcement of antitrust damages was again significantly strengthened. If a cartel is uncovered by the cartel authority or a leniency applicant, customers of a cartel can sue the cartel members for compensation for the damage they have suffered as a result of the cartel.

In economic theory, this means first of all that private damages actions increase the expected costs of cartel formation and that cartels are therefore less profitable. While the fines of the leniency applicant are waived or reduced, the leniency applicant, on the other hand, receives no or only limited protection from private damages actions by third parties. Therefore, the private enforcement of claims for damages represents increased exit costs for companies: It is now more expensive to report the illegal activity of the cartel. Accordingly, private claims for damages can reduce the incentives to use the leniency programme and thus stabilise cartels.

This tension between the leniency programme and private claims for damages is illustrated by the example of the air cargo cartel: In 2006 Lufthansa reported the air cargo cartel and received full immunity from fines. Only a short time later, however, the airline was sued by Deutsche Bahn for damages amounting to 1.76 billion euros. These claims for damages far exceeded the cartel fines. The question arises whether Lufthansa would also have acted as a leniency applicant if the company had anticipated the damages payments. Do private claims for damages therefore weaken the leniency program?

In a current study, we are investigating these questions regarding the connection between cartel activity and private claims for damages in a controlled laboratory experiment. Test persons took on the role of companies in the laboratory. They operated in a group of three companies in a fictitious market. In the course of the experiment, the subjects continued to make decisions on whether to enter into a cartel and whether to continue the cartel or report the cartel to the cartel authorities. As in the reality where the companies faced the introduction of private damages actions, the subjects were also confronted with potential compensation payments halfway through the experiment. In the first rounds of the experiment without private damages actions, leniency witnesses did not have to fear fines or compensation payments. In later rounds, private damages actions were introduced in the experiment, and test persons potentially had to pay damages in case of a cartel discovery. As a result, each respondent had to make his or her decision to form, continue or uncover a cartel under two different conditions: First without and later with private damages actions. By dividing the experiment into phases with and without private damages claims, the study can analyse the effects of the existence of damages claims on the behaviour of the experiment participants.

Conclusion

The main findings of the study are that on the one hand, fewer cartels are formed after the introduction of private damages actions, but on the other hand, these cartels are more stable with the overall number of cartels falling.

If the test persons are in a situation where they have to expect possible compensation payments, significantly fewer test persons are willing to enter into a cartel. The deterrent effect of compensation payments significantly reduces the proportion of newly formed cartels in the group (from 22.5 to 3 per cent), see Figure 1.

As predicted by economic theory, the willingness to report the cartel to the antitrust authorities is also reduced in the case of private claims for damages. Figure 2 reflects this with significantly lower cartel detection rates by cartel members in private damages actions compared to the situation without private damages actions. The reduced incentive to act as a leniency witness in turn has an impact on cartel stability: Under the condition of private damages actions, cartels show almost twice as high stability in experiment than cartels in a world without compensation payments.

The first two results indicate an ambivalent effect of private damages actions on cartel activity: Fewer new cartels are formed, but the remaining cartels are more stable. To be able to conclusively classify the two opposing effects, the total number of cartel periods must be analysed. Figure 3 shows that the proportion of the period during which a stable cartel exists is significantly lower with private damages actions than without.

Accordingly, the overall conclusion is quite positive: Private damages actions can reduce cartel activity. Nevertheless, it must be noted that, in light of the results of the study, private damages actions have both beneficial and detrimental effects.

The main focus is on the negative effects of private damages actions on the leniency programme and thus on cartel stability. These negative effects suggest a careful examination of the instrument of private antitrust law enforcement. A possible adjustment would be a better protection of leniency applicants. An exception already applies to leniency applicants in private damages actions: In general, the leniency applicant is only obliged to pay damages to his own direct customers. Further protection for leniency could be discussed here.

This article is also published in the DICE Policy Brief.

DICE PUBLIKATION

Olivia Bodnar, Melinda Fremerey, Hans-Theo Normann & Jannika Schad (2019), Effects of Private Damage Claims on Cartel Stability, DICE Discussion Paper No. 315.