Estimating Damages From Price-fixing

• Author: James A. Brander and Thomas W. Ross
• Pages: 335-369

335

ESTIMATING DAMAGES FROM

PRICE-FIXING

James A. Brander and Thomas W. Ross*

A. INTRODUCTION

The estimation of economic damages is an important task for economists

engaged in litigation support. Several sources including, for example,

articles by Page,1 Rubinfeld,2 Rubinfeld and Steiner,3 and Baker and

Rubinfeld4 provide very useful general discussions of damage estimation

and related topics. Damage estimation requires the application of eco-

nomic principles within a particular legal framework. Both the relevant

economic principles and the legal framework vary from one area of appli-

cation to another. Estimating damages arising from price-fixing differs in

important respects from, for example, estimation of damages arising from

breach of an employment contract. In addition, the legal environment

may vary across jurisdictions.

In this article we focus on estimating damages arising from price-fix-

ing in the Canadian legal environment. Our primary objective is to pro-

* The authors are professors at the Sauder School of Business, University of

British Columbia. They are also both Senior Consultants with the Delta

Economics Group Inc. They are grateful to the Phelps Centre for the Study

of Government and Business in the Sauder School of Business at UBC and to

the Social Sciences and Humanities Research Council of Canada for financial

support, and to Ann-Britt Everett and Jennifer Ng for excellent research assis-

tance. As part of their work on cases involving damage assessment and on this

research, they have also benefited significantly from discussions and commu-

nications with John Beyer, J.J. Camp, John Conner, Joe Fiorante, David Jones,

Michael Trebilcock, and Charles Wright.

1 William H. Page, ed., Proving Antitrust Damages: Legal and Economic Issues

(Chicago: American Bar Association, 1996).

2 Daniel L. Rubinfeld, “Econometrics in the Courtroom” (1985) 85 Colum. L.

Rev. 1048.

3 Daniel L. Rubinfeld & Peter O. Steiner, “Quantitative Methods in Antitrust

Litigation” (1984) 46 Law & Contemp. Probs. 69.

4 Jonathan B. Baker & Daniel L. Rubinfeld, “Empirical Methods in Antitrust

Litigation: Review and Critique” (1999) 1 Am. L. & Econ. Rev. 386.

336 LITIGATING CONSPIRACY: AN ANALYSIS OF COMPETITION CLASS ACTIONS

vide an overview of the major issues that arise when estimating damages

in these cases. We also suggest how economists might reasonably proceed

when undertaking such estimates. Our focus here will be exclusively on

economic issues related to the measurement of damages in these cases

and so we will not, for example, offer a comprehensive review of the use

of the various techniques in the many American and few Canadian cases

in which they have been applied.5

There are two issues of particular importance in price-fixing cases

that are somewhat less important (although not wholly absent) in other

contexts involving anti-competitive practices. One of these issues con -

cerns the implications of class actions for damage estimation. In price-

fixing cases, the damaged parties normally consist of a large number of

economic agents (individuals, firms, and/or other organizations) who

purchased goods at excessive prices. Such parties may seek redress

using a class action. If so, the class action environment imposes certain

constraints on damage estimation. In addition, the analysis of damages

may itself be important in determining whether the damaged parties as

a group, or some subset of the damaged parties, meets the legal test for

being viewed as a class for the purposes of class action litigation.

The second issue of particular importance in price-fixing cases,

especially in Canada, concerns the role of “pass-through.” Goods subject

to price-fixing may be used as inputs in the production of downstream

products. For example, several recent price-fixing cases have concerned

ingredients or additives used in the production of food products. The

purchasers of the good whose price is subject to price-fixing are referred

to as “direct purchasers.” The direct purchasers may pass through the

higher input prices in the form of higher prices for their own products.

Thus, for example, price overcharges for citric acid might be partially

passed on to consumers in the form of higher prices for fruit drinks and

juices. If pass-through occurs, the damage to the direct purchasers might

be mitigated and the “indirect” or “downstream” purchasers might suf-

fer economic loss. Drawing inferences about how economic damage is

shared between direct and indirect purchasers is a challenging problem

in economic analysis.

Because of the difficulty of estimating pass-through damages, the

legal regime in American federal court generally allows only direct

5 This is not to say that the discussion of the economic principles is not

informed by these cases. Indeed, the authors have provided advice related to

damage estimation and distribution for a number of class action cases related to

price-fixing in Canada.

estimating damages from price-fixing 337

purchasers to make damage claims for price-fixing, and allows direct

purchasers to claim the full damages associated with price-fixing, irre-

spective of whether those damages are passed on to indirect purchasers.6

In Canada (and under state law in many American states) the legal regime

does not eliminate indirect purchasers and therefore implicitly requires

consideration of pass-through.

In our discussion of damages we will be focusing on damages related

to, and flowing from, increased prices due to price-fixing. Beyond the

scope of this article, but an excellent topic for further research, is the

question of how to measure damages caused by cartel behaviour that

manifests itself in other ways. For example, retailer cartels may agree

to close some outlets (increasing travel times for customers) or to limit

operating hours of those outlets (also inconveniencing customers). In

addition, cartels in many types of industries may opt to allocate territo-

ries among members, with the effect that members withdraw from each

other’s territories, depriving customers of access to some products.7

B. DEFINING DAMAGES IN PRICE-FIXING

CA SES

A standard definition of legal damages is “[a] pecuniary compensation

or indemnity, which may be recovered in the courts by any person who

has suffered loss, detriment, or injury, whether to his person, prop-

erty, or rights, through the unlawful act or omission or negligence of

another.”8 The concept of “compensation” for a “loss” suggests what is

often referred to in economic analysis as “but-for” analysis. Damages are

calculated by estimating the difference between what the injured party

would have received “but for” the harmful event (that is, in the absence

of the harmful event), and what the injured party actually received. This

approach to damages is consistent with what is sometimes referred to as

the “restitution” principle in law. Under this principle we compare the

actual economic position of the plaintiff with the position the plaintiff

6 This regime was largely established through Hanover Shoe, Inc. v. United Shoe

Machinery Corp., 392 U.S. 481 (1968) and Illinois Brick Co. v. Illinois, 431 U.S.

720 (1977) [Illinois Brick].

7 Allocating markets or customers can result in higher prices as well, but the

inconvenience or reduced variety costs would be in addition to the damages

due to the higher prices.

8 Black’s Law Dictionary, 6th ed., s.v. “damages.”