Estimating Damages From Price-fixing

AuthorJames A. Brander and Thomas W. Ross
James A. Brander and Thomas W. Ross*
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.
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
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.”

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