• Assessing Damages in Antitrust Litigation

    Assessing Damages in Antitrust Litigation

    Victims of antitrust violations can recover damages in court. Yet, the quanti cation of antitrust damages and to whom they accrue is often complex. An illegal price increase somewhere in the chain of production percolates through to the other layers in a ripple of partial pass-ons. The resulting reductions in sales and input demands lead to additional harm to both downstream (in)direct purchasers and upstream suppliers. Nevertheless, US civil antitrust litigation is almost exclusively concerned with direct purchaser claims for (treble) damages calculated on the basis of the overcharge. In this paper, we show that there is no structural relationship between the direct purchaser overcharge and the true harm inflicted by an antitrust violation on all direct and indirect purchasers and sellers in the chain of production.


    Anticompetitive acts to eliminate competition and prevent new entry can cause severe and widespread harm. In the US, under Section 4 of the Clayton Act: “Any person who will be injured in his business or property by reason of anything forbidden in the antitrust laws […] shall recover threefold the damages by him sustained.” The vast majority of civil actions for antitrust damages concerns cartels.

    The identification of antitrust harm can be complicated. In longer supply chains, in which one product is an input in the production of the next, an illegal price increase somewhere in the chain can percolate through to the other layers in a ripple of pass-ons. The resulting reductions in sales cause additional harm to direct and indirect customers and suppliers of the wrongdoer(s).

    In order to determine who is harmed by an antitrust violation and to what extent, in principle all actual trades need to be compared to what would have been the market allocation without the anticompetitive behavior — the so-called “but-for” world. In practice this is often difficult. At a minimum, it requires information about consumer demand and the structure of the market, such as the number of layers in the production chain, the type and level of competition amongst firms in each layer, their production technologies, and costs.

    In the US, some of these complexities have been reduced by case law. At least since Chattanooga Foundry (1906) have direct purchasers been entitled to recover damages on the basis of the overcharge they paid as a result of antitrust infringement. According with this prevailing method, basic damages — before trebling and interest, if applicable — are calculated as the difference between the anticompetitive price and the competitive but-for price multiplied by the amount actually purchased. The overcharge ignores lost profits on transactions that could have been made at lower prices, which courts have been reluctant to award.

    Indirect purchasers often do not have standing to sue. In Hanover Shoe (1968), the Supreme Court ruled against the use of the pass-on defense in Federal antitrust damage actions. In a pass-on defense, the defendant attempts to show that the plaintiff did not in fact suffer the amount of damages claimed on the argument that it was not able to pass on all of the overcharges on downstream to its customers. In addition, in Illinois Brick (1977) the Supreme Court established that only the direct purchasers have legal standing in Federal court to sue for antitrust damages. Later, in California v. ARC America Corp. 490 US 93 (1989) the Supreme Court left it to the discretion of individual states whether or not to allow indirect purchaser suits. As a result, the rules on antitrust standing vary across the states, with presently a small majority allowing indirect purchaser suits under state law.} Hanover Shoe and Illinois Brick together cemented the use of the overcharge, which indeed disregards pass through.

    Direct suppliers to a buyers’ cartel that colluded to depress input prices can in principle maintain a treble-damages action after Mandeville Island Farms (1948). Yet, Standing was denied by the Supreme Court to suppliers damaged by anticompetitively restricted demand for their produce in Associated Contractors (1983). Suppliers’ standing is discussed more extensively in Section 4. As a result of these legal constraints, in the vast majority of US antitrust damages actions, the plaintiffs are direct purchasers and their claim is based on the overcharge.

    In this paper, we consider the effects of anticompetitively raised prices somewhere in a chain of production with an arbitrary number of layers. We will mostly refer to cartels, but our results have wider antitrust application. Competition in each layer is specified between perfect competition and monopoly. This allows us to exactly characterize the effects of the cartel’s direct and indirect purchasers, as well as its direct and indirect suppliers. We assess the bias introduced by relying on the overcharge on the direct purchasers — which we refer to as the “direct purchaser overcharge” — for the estimation of the actual antitrust harm in the chain.

    We find that even in the most basic of settings — with unit pricing and input taking — the direct purchaser overcharge is a poor measure of the true antitrust harm. The overcharge can grossly underestimate the actual antitrust harm depending on such characteristics as the market shape of demand, the number of producers, the type of competition, and the location of the cartel in the chain of production. In particular, we show that lost profit harm ignored by the direct purchaser overcharge may increase without bound with the length of the production chain. Moreover, the method misses harm sustained upstream from the cartel, which can be substantial. The ratio of antitrust harm to the direct purchaser overcharge can be anything between one and infinity.

    The existing literature on cartel pass-on effects uses a model with only three layers: a top layer of input producers that form a cartel upstream, a layer of direct purchasers downstream who sell to a third layer of final consumers. Hellwig (2006) shows that the deadweight-loss of a direct purchaser overcharge is a good measure for the actual antitrust harm sustained by this group. Verboven and van Dijk (2007) use the mainstream model to analyze an infinitesimal cartel price increase to determine “discounts” to be given on the direct purchaser overcharge to correct for pass-ons to consumers and output effects locally. Basso and Ross (2007) extend the approach to differentiated products, so that there can be input substitution, to produce a numerical table of correction factors for a discrete cartel price increase. For all practical purposes, Boone and Muller (2008) express the share of (otherwise unspecified) total antitrust harm borne by consumers for an infinitesimal price increase as a function of common measures such as HHI and PCM.

    This paper is organized as follows. In Section 2, we decompose the various welfare effects caused by a cartel anywhere in a chain of production and relate aggregate and individual effects to the overcharge on direct purchasers. In Section 3, we evaluate the direct purchaser overcharge as an estimator of antitrust harm. Section 4 concludes. Appendix A illustrates our decomposition of harm. Appendix B presents an example of an upstream “undercharge” without collusive power. Appendix C contains the proofs.

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    Carlos A. Abadi

    Carlos is a 30-year veteran international investment banker who pioneered a number of financial products, such as the trading and swapping of emerging markets sovereign loans in the wake of the 1982 Mexican debt crisis, the trading market for derivatives on emerging markets bonds and loans, the first non-dilutive CET1 transaction compliant with Basel III rules, and the first Chapter 11 filing for a Latin American issuer.

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