The journal of industrial economics vol:57 issue:3 pages:457-491
We develop a general framework for computing cartel damages claims. We decompose a direct purchaser plaintiff’s lost profits in three parts: the price overcharge, the pass-on effect and the output effect. The output effect is usually neglected: it is the lost business resulting from passing on the price overcharge. To evaluate the relative importance of the three effects, we introduce various models of imperfect competition for the plaintiff’s industry. We show that the passing-on defense generally remains justified after accounting for the output effect, provided that the cartel affects a sufficient number of firms. We derive exact discounts to the price overcharge, and illustrate how to compute these in the European vitamin cartel. We finally extend our framework to measure the cartel’s total harm, i.e. the total damages to direct purchasers and their consumers.