Measuring the True Harm from Price-Fixing to Both Direct and Indirect Purchasers

Legal actions by direct and indirect purchasers to recover damages as a result of price-fixing by suppliers have been common in the United States for many years and are now beginning in a number of other countries including Australia and Canada. This paper argues that traditional measures of harm used in establishing damages as a result of price-fixing may be conceptually flawed and that they will often significantly understate the true harm suffered by downstream purchasers. The largest errors are associated with circumstances in which downstream markets are less than perfectly competitive. The paper provides measures of the degree of understatement of the true harm when traditional approaches are used and shows how the size of the error depends on various model parameters that relate to the degree of competitiveness of downstream markets, the number of competitors downstream and the degree of product homogeneity downstream. The paper also provides measures of distribution of the true harm between direct and indirect purchasers