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Cartel damages claims and the passing-on defense

Author

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  • Frank Verboven
  • Theon Van Dijk

Abstract

We develop a general economic framework for computing cartel damages claims by purchaser plaintiffs. We decompose the lost profits from the cartel in three parts: the direct cost effect (or anticompetitive price overcharge), the pass-on effect and the usually neglected output effect. The pass-on effect is the extent to which the plaintiff passes on the price overcharge by raising its own price, and the output effect is the lost business resulting from this passing-on. We subsequently introduce various models of imperfect competition for the plaintiffs industry. This enables us to evaluate the relative importance of the cost, pass-on and output effects. We show that an adjusted passing-on defense (i.e. accounting for the output effect) is justified under a wide variety of circumstances, provided that sufficiently many .firms in the plaintiff’s market are affected by the cartel. We derive exact discounts to the direct cost effect, which depend on relatively easy-to-observe variables, such as the pass-on rate, the number of firms, the number of firms affected by the cartel, and/or the market shares. We finally extend our framework to assess the cartel’s total harm, further demonstrating the crucial importance of the output effect. Our results are particularly relevant in light of the recent developments by U.S. and European antitrust authorities to make cartel damages claims more in line with actually lost profits.

Suggested Citation

  • Frank Verboven & Theon Van Dijk, 2007. "Cartel damages claims and the passing-on defense," Working Papers of Department of Economics, Leuven ces0715, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
  • Handle: RePEc:ete:ceswps:ces0715
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    Cited by:

    1. Sander Heinsalu, 2023. "Bounds on the damages from a price overcharge," Economics Bulletin, AccessEcon, vol. 43(3), pages 1265-1270.
    2. F. Maier-Rigaud & R. Inderst & U. Schwalbe, 2013. "Quantifizierung von Schäden durch Wettbewerbsverstöße," Post-Print hal-00845779, HAL.
    3. Boone, Jan & Müller, Wieland, 2012. "The distribution of harm in price-fixing cases," International Journal of Industrial Organization, Elsevier, vol. 30(2), pages 265-276.
    4. Basso, Leonardo J. & Ross, Thomas W., 2019. "On the harm from mergers in input markets," Economics Letters, Elsevier, vol. 178(C), pages 70-76.
    5. Li, Yumin, 2018. "Incentive pass-through in the California Solar Initiative – An analysis based on third-party contracts," Energy Policy, Elsevier, vol. 121(C), pages 534-541.
    6. Gordon Jochem Klein & Ralph Bernd Siebert & Ralph Siebert, 2024. "Why Do Prices Differ Across Stores? Differential Competition Environments and Their Price Impacts," CESifo Working Paper Series 11344, CESifo.
    7. Dagoumas, Athanasios S. & Polemis, Michael L., 2020. "Carbon pass-through in the electricity sector: An econometric analysis," Energy Economics, Elsevier, vol. 86(C).
    8. Bertram Neurohr, 2016. "A tractable cost pass-through benchmark," Economics Bulletin, AccessEcon, vol. 36(3), pages 1603-1608.
    9. Ulrich Laitenberger & Florian Smuda, 2015. "Estimating Consumer Damages In Cartel Cases," Journal of Competition Law and Economics, Oxford University Press, vol. 11(4), pages 955-973.
    10. Philip G. Gayle & Ying Lin, 2021. "Cost Pass‐Through In Commercial Aviation: Theory And Evidence," Economic Inquiry, Western Economic Association International, vol. 59(2), pages 803-828, April.
    11. Frank P. Maier-Rigaud, 2014. "Toward A European Directive On Damages Actions," Journal of Competition Law and Economics, Oxford University Press, vol. 10(2), pages 341-360.
    12. Garrod, Luke & Han, Tien-Der Jerry & Harvey, James & Olczak, Matthew, 2023. "Cartel Damages Claims, Passing-On and Passing-Back," MPRA Paper 116471, University Library of Munich, Germany.
    13. Willem H. Boshoff, 2015. "Illegal Cartel Overcharges in Markets with a Legal Cartel History: Bitumen Prices in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 83(2), pages 220-239, June.
    14. Robert A Ritz, 2024. "Does competition increase pass‐through?," RAND Journal of Economics, RAND Corporation, vol. 55(1), pages 140-165, March.
    15. Moresi, Serge & Zenger, Hans, 2018. "Recapture ratios in merger analysis," Economics Letters, Elsevier, vol. 170(C), pages 136-138.
    16. Leonardo J. Basso, 2013. "On input market surplus and its relation to the downstream market game," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 46(1), pages 266-281, February.
    17. Neurohr, Bertram, 2018. "A merger approach to cartel overcharge analysis," Economics Letters, Elsevier, vol. 168(C), pages 28-30.
    18. Duran-Micco, Elisa & Perloff, Jeffrey M., 2022. "How large are double markups?," International Journal of Industrial Organization, Elsevier, vol. 85(C).
    19. Beschorner, Patrick Frank Ernst & Hüschelrath, Kai, 2009. "Ökonomische Aspekte der privaten Durchsetzung des Kartellrechts," ZEW Discussion Papers 09-075, ZEW - Leibniz Centre for European Economic Research.
    20. Holler, Emanuel & Rickert, Dennis, 2022. "How resale price maintenance and loss leading affect upstream cartel stability: Anatomy of a coffee cartel," International Journal of Industrial Organization, Elsevier, vol. 85(C).
    21. Damien Neven & Hans Zenger, 2008. "Ex Post Evaluation of Enforcement: A Principal-Agent Perspective," De Economist, Springer, vol. 156(4), pages 477-490, December.
    22. Bet, Germán & Cui, Shana & Sappington, David E.M., 2021. "The impact of vertical integration on losses from collusion," International Journal of Industrial Organization, Elsevier, vol. 77(C).
    23. Sovinsky, Michelle & Helland, Eric, 2019. "Do Research Joint Ventures Serve a Collusive Function?," CEPR Discussion Papers 13533, C.E.P.R. Discussion Papers.
    24. Doose, Anna Maria, 2013. "Methods for calculating cartel damages: A survey," Ilmenau Economics Discussion Papers 83, Ilmenau University of Technology, Institute of Economics.

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    Keywords

    cartel damage claims;

    JEL classification:

    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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