Private Damage Claims and the Passing-On Defense in Horizontal Price-Fixing Cases: An Economist's Perspective

Abstract

The paper studies the assessment of private damages that the cartelization of a market imposes on buyers in that market and, possibly, on the buyers’ own customers in further market downstream. Abstracting from procedural problems and focussing on conceptual issues, the paper argues that damages comprise not just the overcharge on the actual quantity purchased, but also foregone profits on the units that are not purchased because the cartel price is higher than the competitive price. The paper also argues that the passing-on defense against claims by direct buyers is flawed because it neglects the business loss effect that is associated with a direct buyer’s raising his own price to pass the higher cartel price on to his own customers. If direct buyers are not in competition with each other, a revealed-preference argument shows that the business loss effect on the direct buyer’s profits is necessarily greater than the effect of the increase in revenues per unit that is sold. The overcharge on the actual quantity purchased again is a lower bound for actual damages. The assessment of damages suffered by indirect buyers is independent of this refutation of the passing-on defense. If direct buyers are in competition with each other, there is an additional business gain effect because the cartelization upstream raises rivals’ costs and thereby affects the competition between the direct buyers. In this case, the assessment of damages depends on the treatment of causation i.e., to what extent a direct buyer’s competitors’ price increases are ascribed to the cartelization upstream. Consistency requires that, for claims raised at the level of direct and indirect buyers alike, the same treatment of causation should be used. Either the cartel members should be held responsible for the entire shift in the equilibrium of the strategic game between direct buyers in suits involving indirect buyers, as well as direct buyers, or a ceteris paribus assumption should be applied to the actions of a direct buyer’s competitors, which eliminates the business gain effect resulting from their price increases. In the latter treatment, which seems conceptually and procedurally the simplest, the overcharge on the actual quantity purchased is again a lower bound for actual damages.