Tuesday, March 26, 2013
Quantification of Antitrust Damages
Posted by D. Daniel Sokol
Frank P. Maier-Rigaud, IESEG School of Management, Department of Economics and Quantitative Methods; Lille - Economics & Management (LEM) - Centre National de la Recherche Scientifique; Organisation for Economic Co-operation and Development (OECD) - Competition Division; European Commission, DG Competition; Laboratory for Experimental Economics, University of Bonn; Max Planck Institute for Research on Collective Goods and Ulrich Schwalbe, University of Hohenheim have an interesting new paper on Quantification of Antitrust Damages.
ABSTRACT: If a damage claim is presented in court and compensation of harm suffered is sought, quantifying the level of damage suffered becomes necessary. An economically founded quantification of the damages caused by competition law infringements has increased in importance in particular through the advancement of private competition law damage actions in the EU. Damage claims are increasingly brought, in particular as follow-on claims, and it is very likely that this trend will continue in the future. If a damage claim is presented in court and compensation of the harm suffered is sought, quantifying the level of the damage suffered becomes necessary. On the basis of these developments several theoretical and applied studies investigating the fundamental economic principles and empirical-econometric methods to determine damages have been presented in the last few years with the aim to provide guidance to the courts on how the quantification of damages should be approached and what aspects have to be taken into consideration.
Estimates of the magnitude of damages caused by competition law violations show that they are quite substantial. The empirical literature concerned with estimating aggregate damages has so far, however, exclusively focused on cartel cases. Empirically estimating the total damages caused by all cartels is, however, conceptually very difficult, as the total number of cartels is unknown and only discovered cartels can be analysed. The damages caused by European and national cartels have therefore been estimated using simplifying assumptions. Presuming a certain detection rate it is possible to estimate the number of existing cartels. By further assuming a relationship between fines and damages caused, the harm inflicted by cartels in Europe was estimated. The estimation led to a lower bound of the yearly damages of approximately 16.8 billion €. Measured as a percentage of European GDP, total cartel damages are 0.15%. An upper bound for the yearly cartel induced damages lies at 261.22 billion €. This corresponds to 2.3% of EU GDP. These numbers show that cartel induced damages are quite substantial.
In this paper, the main conceptual and methodological aspects that are of relevance for an economically sound quantification of damages in the context of competition law infringements are presented. The paper is structured as follows. Section two discusses the conceptual foundations for the quantification of damages. First, the types of damages caused by cartels and the economic actors affected by cartel activities are characterized in detail. A distinction is made between damages for the overall economy in the form of inefficiencies or welfare losses and the individual damages, that also include redistribution from the consumers to the cartel, for instance due to abnormally high prices, and that are therefore typically larger than the economic welfare losses. Second, the repercussions of cartel induced price increases on the value chain as well on neighboring markets are spelled out. Third, damages caused by abusive behavior of dominant firms and the affected actors are described.
Section 3 deals with the methods employed in the quantification of damages in cartel as well as abuse of dominance cases. To estimate the damage, it is necessary to compare the factual situation with a hypothetical counterfactual scenario. The problem of choosing the appropriate counterfactual scenario is discussed as this has a crucial impact on the damage to be calculated. Also, the available economic and econometric methods for the calculation of damages, giving prominence in particular to comparator-based methods and approaches (yardstick or benchmarking) either relying on actual or on simulated, artificial markets are introduced. The quantification of damages in cases of abusive behavior is illustrated by an example of an exclusionary abuse. In addition, further aspects of damage quantification as e.g. compounding and discounting damages and the consideration of after-effects are discussed. Also, the precision of the available statistical methods and problems of causality and the remoteness of damages with respect to the infringement are discussed. The final section concludes with a summary of the main results and an outlook.