Frictions and Sticking Points: Applying the Textbook Model to the Analysis of Cost Pass-Through in Indirect Purchaser Class Actions

Posted by D. Daniel Sokol

John Johnson and Greg Leonard, Vice Presidents in NERA’s Washington, DC and San Francisco offices, respectively, take a close look at how firms set their prices and find that in the real world, changes in cost do not always lead to changes in price in their article Frictions and Sticking Points: Applying the Textbook Model to the Analysis of Cost Pass-Through in Indirect Purchaser Class Actions. They also explain why the firm and market factors that determine the amount of the cost pass-through, if there is one, is likely to depend on the nature of the product, the variety of end uses of the product, and the distribution channels that make up the supply chain. These observations are worth noting because they have important implications for the analysis that must be conducted in the class certification phase of an indirect purchaser class action. As Johnson and Leonard point out, whether common evidence can be used to demonstrate impact and to calculate damages for a proposed class is ultimately an empirical question, and not one that can be answered by a simple appeal to economic theory.

ABSTRACT: Indirect purchaser class actions are a prevalent avenue for the civil recovery of damages resulting from antitrust violations such as price fixing and monopolization. Although both direct purchaser and indirect purchaser actions are commonplace in antitrust, there are key differences between these types of cases, particularly with respect to the issue of pass-through, which is relevant when determining the appropriateness of class certification in indirect purchaser actions. In this paper, we explain how the generic textbook models that are often used and cited in indirect purchaser class actions to support the claim of pass-through to all or substantially all class members are based on highly restrictive assumptions. We also provide several examples that describe why the simple application of these restrictive models to real world situations can lead to mistaken inferences and conclusions.