On the effectiveness of Settlement Procedure in the presence of bilateral cross ownerships

Abstract According to the Settlement Procedure, a reduction on cartel fines is granted to firms admitting their participation in a cartel agreement. In this paper, we derive the required cartel fine reduction that fulfils the objective of competition authorities to induce all cartel firms to settle. Our results reveal that for any given cartel reduction fine, there is a particular level of cartel detection probability that makes each firm indifferent between staying in the cartel and settling with the competition authority. We show that such reduction is negatively correlated with the likelihood that the cartel would be detected. The presence of bilateral cross ownership provides each firm with higher incentives to enter the Settlement Procedure. The intuition behind this result is that bilateral cross ownerships soften competition, which, in turn, increases the preference of firms for settling. Therefore, the presence of bilateral cross ownerships among rival firms may enhance the effectiveness of the settlement procedure, as opposed to their negative impact on competition under a Leniency Program. Lastly, as firms become more asymmetric, the inefficient firm has more incentives to settle, as opposed to the efficient firm which prefers the cartel formation. JEL Classification: D43; K21; L13; L41