Economic Analysis in Indirect Purchaser Class Actions
By Michelle Burtis, Charles River Associates
As class actions become increasingly relevant to markets outside North America, a better understanding of the role of expert economic analysis, and types of economic evidence used to defend against a class action alleging price fixing and/or market allocation, is useful for antitrust practitioners.
For example, in October 2015, the UK’s Consumer Rights Act 2015 introduced a collective action regime for competition law claims. By 27 December 2016, all EU member states need to implement the EU’s Directive on Antitrust Damages Actions, which removes practical obstacles to compensation for all victims of infringements of EU antitrust law. The Directive applies to all damages actions, whether individual or collective, which are available in the member states. (See EU Directive on Antitrust Damages, European Commission, http://ec.europa.eu/competition/antitrust/actionsdamages/directive_en.html).
This article addresses the two separate exercises that must be undertaken to establish whether, and by what amount, an indirect purchaser has suffered antitrust injury and damages. Section II provides background; Section III discusses the direct overcharge and issues related to whether such an overcharge can be proved with common evidence; and Section IV addresses pass-through of the overcharge and the issues related to common proof of pass-through.
In a class action alleging prices were higher as a result of an antitrust conspiracy, plaintiffs must show numerosity, commonality, typicality and adequacy sufficient to certify the class and prove antitrust injury and damages. Economic evidence can be important to defend against such claims. As described below, issues of common impact and damages depend on the particular characteristics of the market in question, including the products, the buyers, prices, and pricing strategies. The nature of the allegations is also important. As a result, economic analyses tend to depend on empirical information about those characteristics related to the particular claims at issue.
Economic Evidence and Class Issues
Proof of impact often is the deciding issue in class certification and economic arguments and analysis are important for plaintiffs and defendants. The question of antitrust impact involves whether an individual buyer has been affected by the alleged conspiracy. Damage, on the other hand, is the measurement of impact. Plaintiffs must show that they can establish impact and calculate damages for all members of the proposed class with a common method. While courts allow plaintiffs to calculate damages with aggregate or average measures, the question of impact is directed at evidence about individual buyers.
In an indirect purchaser class action, proposed class members do not purchase directly from alleged conspirators, so they must demonstrate that not only was there a direct overcharge (the difference between the actual price paid by the direct purchasers and the price that would have been paid “but-for” the conspiracy by those direct purchasers) but also that the direct overcharge was passed through whatever distribution chain exists between the direct buyer and the plaintiff. The difference between the actual price and the “but-for” price is referred to as the “direct overcharge”. Indirect purchasers must prove both a direct overcharge and pass-through. As an example, consider a relatively simple case where defendants make and sell a component used in the manufacture of an electronics product (eg, a fan in a laptop) and sell the component to end-product manufacturers who then sell the electronics product to consumers who are the indirect purchaser plaintiffs. In this case, the indirect purchasers must prove that the alleged conspiracy led to a direct overcharge on the price of the component paid by the end-product manufacturers and that the end-product manufacturers passed the overcharge through to the end-product buyers, the indirect purchaser plaintiffs. This is shown in the diagram below.
Actual distribution chains tend to be more complex than the one illustrated above. For example, there may be more “levels” in the distribution chain between the defendant and the indirect purchaser, there may be many different types of firms involved at each level, and there may be many different firms of a given type, but with varying pricing strategies. For these reasons, empirically determining pass-through rates and drawing conclusions about impact can be complex.
In a class action, plaintiffs must be able to show that all indirect purchasers were impacted. This means that plaintiffs must establish that all direct purchasers paid an overcharge and passed the overcharge through the various distribution channels, ultimately causing the proposed class members to pay higher prices. Economic evidence is important to both of these issues, as described below.
The Direct Overcharge
In a class action conspiracy case, determining whether indirect purchasers were impacted begins with establishing whether defendants’ customers (the direct purchasers) were impacted. If plaintiffs cannot prove that all direct purchasers were impacted, then it cannot be the case that all indirect purchasers were impacted. Determining if direct purchasers were impacted requires economic analysis of whether the price actually paid by each direct purchaser was higher than the price that would have been paid but for the conspiracy. In a class action, the court will rely on economic evidence to determine, firstly, whether all direct purchasers were impacted (e.g., paid higher prices) and secondly, whether the antitrust impact can be proved with common evidence.
Economic factors that inform whether all buyers would plausibly suffer antitrust impact include:
- whether the alleged conspirators controlled a large share of the market;
- whether there are substitute products available to buyers; and
- whether the product at issue is a “commodity” or there are many different products sold at many different prices.
Plaintiffs may argue that defendants control the entire market, that there are no substitutes for the product in question, and entry by new competitors is not possible and that those characteristics imply antitrust impact is more plausible. Economic evidence may be used to rebut those arguments and demonstrate that the relevant market is broader than plaintiffs contend, that substitute products exist, and more firms compete with the defendants. Competitive conditions such as entry by new competitors, competition from non-defendants, customer switching from one defendant to another or from a defendant to non-defendant, price changes over time, pricing practices (such as discounting), as well as non-price competition (such as offering services with the product) may show that the marketplace is more complex, that defendants must compete for sales, and collusion must be evaluated on a buyer-by-buyer basis.
Plaintiffs may argue that the product in question is a commodity and that the price of the product is the same or very similar across buyers. Once again, economic evidence may show that products have different characteristics, the products may be sold under different terms, and prices of products vary due to the characteristics and terms. Evidence regarding how prices are set and whether there are list prices, pricing formulas, or individualised negotiation are important considerations as to whether impact can be determined with common evidence or, alternatively requires individualised inquiry.
Generally, at the class certification stage of antitrust litigation, the debate between experts for plaintiffs and defendants centres on these economic questions. Plaintiffs’ experts often offer complicated statistical models of pricing and claim that such models can account for differences in demand across buyers, product differentiation, and differences in competition across products and for different buyers. Economists on the defendants’ side analyse the models to determine whether such claims are reasonable and offer statistical tests to determine if the models reliably explain the prices paid by individual buyers. These issues are increasingly important in antitrust class certification decisions, as evidenced by judges’ evaluation and conclusions related to the relevant economic characteristics and statistical models.
Pass-Through of The Direct Overcharge
Even if indirect purchasers establish that all direct purchasers were impacted and that such impact can be shown with common evidence, they must still show that the direct overcharge was passed through in higher prices to all members of the proposed class. If at any point an overcharge was not passed through but absorbed, then the indirect purchaser could not have been impacted. To show an overcharge was passed through to all indirect buyers, plaintiffs must address the following points:
- the distribution chains between the direct purchasers and indirect purchasers;
- the pricing practices of firms that operate within the distribution chains; and
- the relative size of the overcharge compared to the overall price paid by the indirect purchaser.
The economic analysis of distribution chains is important in evaluating whether an overcharge was passed through to indirect purchasers. When there are multiple layers of distribution between the allegedly price-fixed product and the indirect purchaser, rather than a single layer, there can be many different paths among these layers that potentially trace the path from the component to an indirect purchaser. If a buyer of an automobile, for example, is affected by an overcharge on a component of that automobile, this requires identification of the specific distribution channel relevant to that buyer’s purchase and tracing the overcharge from the defendants through the distribution paths to the indirect purchaser. In the case of an automobile component, this means evaluating whether an indirect purchaser was impacted due to a direct overcharge allegedly paid by an original equipment manufacturer (OEM) that was passed through by the OEM to the automobile dealer, and then whether that dealer passed through the overcharge to the buyer of the automobile. The market conditions, including the degree and extent of competition faced by the OEMs and by the dealers, must be taken into account. These conditions are relevant to determining whether a price increase is passed on from one level of distribution to another and whether any portion of the price increase will be passed on to the indirect purchaser.
Pricing practices of firms operating in the distribution chains are relevant to determine if common evidence can be used to evaluate pass-through. Plaintiffs may claim that prices paid by intermediaries in distribution chains are formulaic or have a common pricing structure. They may attempt to show this using statistical methods such as correlation or regression analysis. Evidence that prices are more complicated, are negotiated (rather than set through formulas) may indicate such claims are not true. Evidence that different firms rely on different types of pricing strategies, such as discount pricing, below-cost selling, and other strategies, is also important. In one case, evidence that certain firms relied on prices of products that ended in “9” (eg, US$999 or US$1,999) was important to rebut claims that an overcharge in the range of US$2 would not be passed through. A firm relying on such a strategy would not change that strategy to pass-through a US$2 overcharge.
Finally, the relative size of an overcharge is important in analysing pass-through. If the cost of a component is one small portion of the cost of an end-use product and accounts for a small percentage of the price paid by the indirect purchaser, then any overcharge associated with the price of the component will be even smaller relative to the price of the end-use product. The fact that the alleged price-fixed product may be a small portion of the cost of the product purchased by the indirect purchaser, makes it difficult to isolate the effect of an alleged overcharge. Also, economic evidence that it can be costly to change prices is relevant to pass-through. When an overcharge is relatively small but there are costs to changing prices, then the overcharge will not be passed through. The costs of a price change include more than changing marketing material. For example, a price change can be costly if it prompts a renegotiation with a customer. These renegotiations could lead to changes in other contract terms or the customer electing to look for competitive offers. When an overcharge is small relative to the price of the product, it may not be cost-effective for a firm to change price.
While there are differences in how rules are applied in the US and abroad, the ability to provide an analytical framework and empirical evidence used in defense of class certification is central to calculating damages, necessary to defend against pass-through arguments, and informs settlement valuation assessment and negotiations.
The views expressed herein are the views and opinions of the author and do not reflect or represent the views of Charles River Associates or any of the organisations with which the author is affiliated.