Abstract
Passing-on can have a material impact on the damages suffered by direct and indirect claimants as a result of anti-competitive, cost-increasing conduct—notably cartel infringements—as recognised in EU Directive 2014/104. An appraisal of passing-on and the associated volume effects should, therefore, be a key part of damages assessment. In this article, we highlight some of the critical economic issues that need to be considered when evaluating the extent and impact of passing-on in practice, and offer an introduction to the empirical methods that can be utilised to address these issues and deliver robust damages estimates.
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Notes
Case C-453/99 Courage and Crehan [2001] ECR I-6297, and Joined Cases C-295-298/04 Manfredi [2006] ECR I-6619.
See the Commission website on actions for damages at http://ec.europa.eu/competition/antitrust/actionsdamages/directive_en.html.
Only rarely do Member States transpose a European directive on time, but the process of adopting the antitrust damages directive is well underway (at least six countries have transposed the directive at the time of writing) and is expected to be close to completion by mid-2017.
Commission Staff Working Document—Practical Guide—Quantifying Harm in actions for damages based on breaches of Article 101 or 102 of the Treaty of the Functioning of the European Union, 2013.
‘Study on the Passing-on of Overcharges’, written by RBB Economics and Cuatrecasas Gonçalves Pereira, which can be found on the Commission website at http://ec.europa.eu/competition/publications/reports/KD0216916ENN.pdf.
In highly competitive markets, this trade-off will collapse because a firm will lose all its sales to competitors if it deviates from the (competitive) market price.
Individual firms may, nonetheless, adopt specific pricing rules or practices which result in passing-on, even when there is no obvious economic incentive to do so. This must be a matter for factual evidence.
Specifically, if the output reduction brought about by a price increase would allow some categories of cost to be avoided, then any increase in those avoidable costs (e.g. arising from an input overcharge) will give rise to an additional incentive to make the price change.
Over the longer term, even fixed costs may become avoidable, as corresponding investments are renewed etc. Hence, the analysis of the distinction between costs types is liable to be time-sensitive.
Other relevant factors include the type of costs that are affected, and the relationship between price and the quantities demanded and supplied.
More precisely, this assumes that the unit costs of supply do not vary with the overall volume supplied. More generally, the extent of passing-on of industry-wide overcharges in the textbook perfectly competitive environment is predicted to depend on the relative price sensitivities (elasticities) of supply and demand, and can be less than 100%.
As noted, the extent of any effect on sales will depend on the pricing decisions of rivals too. In principle, if those rivals increase their prices by much more than the firm in question, then its sales volumes could increase.
While assuming linear demand is analytically convenient, there is no particular reason to suppose that demand is linear the real world. This has important implications for the evaluation of passing-on.
This is the margin that would be earned, in the absence of the infringement, without any overcharge or passing-on effect.
Economics indicates that the passing-on effect can more than outweigh the overcharge in some circumstances. However, in other circumstances, economic theory predicts that an overcharge could actually lead to an increase in the affected firm’s profits. This is because the overcharge serves to dilute competition between the firm and its rivals.
Passing-on will still reduce damages compared to the scenario in which the affected firm would maintain its original price in the face of the overcharge.
Indeed, in principle, if rivals increased their prices by more than the firm in question, then this firm’s sales might actually increase.
Demand for any individual firm’s products may, nevertheless, be elastic, in the sense that a unilateral increase in prices would cause a significant loss of demand to competitors within the market.
PETRUZZI’S IGA v. DARLING-DELAWARE, 998 F.2d 1224 (3d Cir. 1993).
IN RE ALUMINUM PHOSPHIDE ANTITRUST LITIG. (D. Kan. 1995), 893 F. Supp. 1497 (D. Kan. 1995).
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Durand, B., Williams, I. The importance of accounting for passing-on when calculating damages that result from infringement of competition law. ERA Forum 18, 79–94 (2017). https://doi.org/10.1007/s12027-017-0458-3
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DOI: https://doi.org/10.1007/s12027-017-0458-3