Economic methods to calculate damages

Atsuko Izumi
Japan Fair Trade Commission

Bali, Indonesia, July 6th 2018

Disclaimer: This presentation was prepared in my personal capacity. The opinions expresses in this presentation are the
author’s own and do not reflect the view of Japan Fair Trade Commission, or the government of Japan.

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 Roadmap

1. Damages concepts and applications

2. Damages for price fixing
i. Estimation methods
— Before and after
— Yardstick
— Regression
ii. Endogeneity bias
iii. Hypothesis test
3. Common issues

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 Damages concepts
Perfect competition Monopoly

Price Loss to
consumers
MC

CS
CS PM
P* P* DWL
PS PS

Demand=MR Demand
MR
Quantity Quantity
Q* QM Q*

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 Damages concepts

• When a limited number of firms play in market, firms may

collude to get monopoly rent
• However, cartel generates loss to society and customers

Compensatory damages : Money awarded to compensate for

actual loses

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 Damages concepts

• We should consider
1. What happened to victims during and after harmful
conduct? (“Actual world”)
2. What would have happened to victim if harmful conduct
didn’t happen? (“But-for world”)
3. How to monetize difference between 1 and 2?

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 Damages concepts

• Learn “actual world” and model “but-for world”

• But-for world could be estimated using economic model given
data availability
• Applications:
– Price-fixing, bid-rigging, exclusive transactions, pay-for-
delay, false advertising, and so forth
– Techniques and approaches vary across cases
• Introduce reduced form approach for price-fixing

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 Step zero: Learn your data
• Before jumping into analysis, plot price data at disaggregate level

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Alleged Products

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 Simple and informative:
Before and after analysis
• Damages are calculated by overcharge times VOC
• Compare (weighted) average prices of the alleged products in
alleged period and clean period.

Damages=(𝑃ത𝑎𝑙𝑙𝑒𝑔𝑒𝑑 𝑝𝑒𝑟𝑖𝑜𝑑 − 𝑃ത𝑐𝑙𝑒𝑎𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 ) × 𝑄𝑎𝑙𝑙𝑒𝑔𝑒𝑑 𝑝𝑒𝑟𝑖𝑜𝑑

• Critical assumptions
– Overcharge is constant across time
– No supply or demand shocks

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 Yardstick

• Compare (weighted) average price of alleged products with

counterpart of clean products
• Yardstick should be similar in terms of characteristics,
demand, costs, and market structure as alleged products

Damages=(𝑃ത𝑎𝑙𝑙𝑒𝑔𝑒𝑑 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 − 𝑃ത𝑐𝑙𝑒𝑎𝑛 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑠 ) × 𝑄𝑎𝑙𝑙𝑒𝑔𝑒𝑑 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑠

• Critical assumptions
– Price function and factors that affect prices are similar
between yardsticks and alleged products.

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 Regression

• Regression allows to control for factors that affect prices e.g.)

supply shock, demand shock, macroeconomic conditions,
product types, geographic variations, and so forth

ln 𝑝𝑟𝑖𝑐𝑒𝑖,𝑡 = 𝛼 + 𝛾𝐷𝑡 + 𝛽𝑋𝑖,𝑡 + 𝜖𝑖,𝑡

• Dt (Price-fixing dummy) takes a value of 1 in alleged period

• Xt includes variables that affect prices
• 𝛾 is a percentage change in price by harmful act

𝐷𝑎𝑚𝑎𝑔𝑒𝑠 = 𝛾ො × 𝑃𝑟𝑖𝑐𝑒𝑎𝑙𝑙𝑒𝑔𝑒𝑑 𝑝𝑒𝑟𝑖𝑜𝑑 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦𝑎𝑙𝑙𝑒𝑔𝑒𝑑 𝑝𝑒𝑟𝑖𝑜𝑑

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 Endogeneity bias

• Estimated coefficient on cartel dummy would be biased if

price fixing dummy is correlated with error term

Correlated

ln 𝑝𝑟𝑖𝑐𝑒𝑖,𝑡 = 𝛼 + 𝛾𝐷𝑡 + 𝛽𝑋𝑖,𝑡 + 𝜖𝑖,𝑡

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 Endogeneity bias

• Include control variables for demand factors (e.g. car sales)

and supply factors (e.g. labor costs and raw material costs) in
model
Macroeconomic
condition
Raw material Labor costs
costs
Product
characteristics

ln 𝑝𝑟𝑖𝑐𝑒𝑖,𝑡 = 𝛼 + 𝛾𝐷𝑡 + 𝛽𝑋𝑖,𝑡 + 𝜖𝑖,𝑡

Technological Other cost

advancement factors

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 Endogeneity bias

ln 𝑝𝑟𝑖𝑐𝑒𝑖,𝑡 = 𝛼 + 𝛾𝐷𝑡 + 𝛽𝑋𝑖,𝑡 + 𝜖𝑖,𝑡

Product mix changed in 2008

• If we do not control for product specific effects, shift in

product mix over time (e.g. silent motor cycles became more
popular) would generate bias on estimated 𝛾
• Solution=> Run fixed effects model

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 Fixed effects model
• Include fixed effects of each product group to control for
average price differences
• Dummy variable model allows an intercept to differ across
product groups
• Omit one group from fixed effects dummies, which will be a
benchmark for other product groups

ln 𝑝𝑟𝑖𝑐𝑒𝑖,𝑡 = 𝛼 + 𝛾𝐷𝑡 + 𝛽𝑋𝑖,𝑡 +

𝜃1 𝑀𝑜𝑑𝑒𝑙1 𝐷𝑢𝑚𝑚𝑦𝑖 + 𝜃2 𝑀𝑜𝑑𝑒𝑙2 𝐷𝑢𝑚𝑚𝑦𝑖 + 𝜃3 𝑀𝑜𝑑𝑒𝑙3 𝐷𝑢𝑚𝑚𝑦𝑖
Product fixed effects
+𝜖𝑖,𝑡

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 Hypothesis test

1. t-test
H0: 𝛾=0
H1: 𝛾 ≠ 0
e.g. ) Check whether cartel has statistically significant impacts
on prices.
2. F-test
H0: 𝜃1 = 𝜃2 = 𝜃3 = 0
H1: H0 is not true
e.g. ) Run F-test on coefficients of product fixed effects to check
model specification.

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 Common issues

• Data generation process

– If prices are determined through RFQ, price is flat for long
time even when cartel ends (in general when authority
detects harmful conduct)
• Data is sparse, changed, or not kept
• Potential limitations of how much you can learn about data
• Hard to identify when cartel started and ended.

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Terima kasih!
ありがとう!
THANK YOU!

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