Monopoly Overcharges, Pass-Through Pricing, and Economic Damages

30 May 2007
By Bryan Ray et al.

The US Supreme Court decisions in Hanover Shoe, Inc. v. United Shoe Machinery Corp. and Illinois Brick Co. v. Illinois are notable for framing the way damages are analyzed and argued in cases involving monopolization and cartelization. They also underscore the difficult legal and economic issues surrounding damages claims from direct and indirect purchasers. A central issue is the potential for a monopolist's or cartel's customers to mitigate their damages by passing along some portion of the monopoly overcharge to their customers. If there is pass-through pricing, the indirect purchasers paid higher prices than they would have but for the unlawful conduct, and the direct purchasers may have been harmed by less than the amount of the full monopoly overcharge. However, the Court in Hanover Shoe denied the defendant monopolist the ability to make a "pass-through" defense to reduce the amount of damages paid to direct purchasers, and the Court in Illinois Brick subsequently decided that indirect purchasers did not have standing to sue for overcharge damages.

In this chapter from Economics of Antitrust: Complex Issues In a Dynamic Economy, the authors discuss and clarify the concepts and issues that make pass-through pricing difficult to understand and analyze. Specifically, the authors explain why quantifying the amount of the pass-through is likely to require a full analysis of supply and demand in multiple interrelated markets such as the market served by the monopolist, the markets in which the direct purchasers compete, and the markets in which the indirect purchasers sell their products and services. The authors also highlight the fundamental questions that should be asked and answered, whether damages are computed based on an analysis of the monopoly overcharge or lost profits.