Estimating damages from price-fixing
| Author | James A. Brander and Thomas W. Ross |
| Pages | 335-369 |
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,
JJ.
Camp,
John
Conner,
Joe
Fiorante, David Jones,
Michael Trebilcock,
and
Charles Wright.
William
H.
Page, ed.,
Proving
Antitrust
Damages:
Legal
and
Economic
Issues
(Chicago: American
Bar
Association, 1996).
Daniel
L.
Rubinfeld, "Econometrics
in the
Courtroom"
(1985)
85
Colum.
L.
Rev.
1048.
Daniel
L.
Rubinfeld
&
Peter
O.
Steiner, "Quantitative Methods
in
Antitrust
Litigation"
(1984)
46 Law &
Contemp. Probs.
69.
Jonathan
B.
Baker
&
Daniel
L.
Rubinfeld, "Empirical Methods
in
Antitrust
Litigation: Review
and
Critique"
(1999)
1 Am. L. &
Econ. Rev. 386.
335
*
1
2
3
4
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.3
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
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.
5
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
CASES
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
This
regime
was
largely
established
through
Hanover
Shoe,
Inc.
v.
United
Shoe
Machinery
Corp.,
(1968)
and
Illinois
Brick
Co. v.
Illinois,
720(1977)
[Illinois
Brick].
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.
Black's
Law
Dictionary,
6th
ed., s.v. "damages."
6
7
8
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