Wednesday, June 30, 2010

Estimating Pass-On

Posted by D. Daniel Sokol

Jan Peter van der Veer & Andrea Lofaro (RBB Economics) have a paper on Estimating Pass-On.

ABSTRACT: When assessing the damage incurred by customers of a cartel, it may (depending on the applicable legal framework) be relevant to consider the extent to which these downstream firms have passed on some or all of any price increase caused by the cartel to their own customers. Since passing on a price increase will always reduce the overall damage, reference is often made to the "passing-on defense." However, it is important to note that any attempt by downstream firms to pass on cartel overcharges will lower their sales, implying that downstream firms will suffer a damage even when the entire price overcharge has been passed on. In view of this, the analysis of pass-on should, at least from an economic point of view, also consider the value of lost sales caused by any price increase.

In this short article, we discuss the economic analysis of pass-on. Section 2 reviews a number of useful insights from the economic literature into the incentive of firms to pass-on cost increases under different circumstances. Section 3 discusses the estimation of pass-on in practice. Section 4 offers some concluding remarks.

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