Comparing apples with oranges?
There has been much discussion recently of the potential impacts of the Covid-19 crisis on various aspects of competition law, such as merger control, business cooperation, and excessive pricing. Cartel damages litigation seems to have received relatively little attention in this discussion. However, the crisis may raise some interesting issues for lawyers and economic experts to grapple with on cartel damages litigation cases in the future. One of these issues relates to the impact of the crisis on the approach to estimating any price increases (or ‘overcharge’) faced by customers as a result of cartel infringements.
Overcharge estimation before Covid-19
The key aim of an overcharge analysis is to calculate the prices that would have been charged in the absence of a cartel infringement or, in other words, the prices ‘but-for’ the existence of the infringement. The difference between these but-for prices and the prices that were actually charged provides an estimate of any overcharge that was applied as a result of the infringement.
This all sounds relatively straightforward, except that the but-for prices relate to a hypothetical state of the world. Economic experts seeking to estimate an overcharge look to proxy for this state of the world using real-world data. Most accepted methodologies for achieving this employ a comparator approach, whereby estimates of the but-for prices are generated based on prices in comparable, but infringement-free, situations. There are three main types of comparator approach:
- the temporal comparator approach, in which prices during the infringement period are compared to prices before and/or after it;
- the geographic comparator approach, in which prices during the infringement period are compared to prices in countries or regions that were not affected by the infringement; and
- the product comparator approach, in which prices during the infringement period are compared to prices for products that were not affected by the infringement.
The key objective for economic experts when they are selecting which approach to follow is to ensure that the comparator is as similar as possible to the market in which the infringement occurred, other than for the existence of the infringement itself. If the comparator is not sufficiently similar, and any differences cannot be controlled for in a reliable manner, there is a risk that underlying price differences between the affected and comparator markets are incorrectly attributed to the existence of the infringement. To use a well-worn idiom, this would be like comparing apples with oranges.
Whilst the choice of comparator approach is ultimately based on data availability and the factual landscape of each particular case, in many instances the temporal comparator approach is selected as the preferred methodology. This is typically because in these cases the economic experts believe that underlying differences between the infringement period and the pre- and/or post-infringement periods would be expected to be smaller than, or easier to control for, than differences between the infringement period across geographies and products.
Potential effects of Covid-19 on overcharge estimation
The Covid-19 crisis has the potential to bring significant challenges for the comparator approach. In particular, it seems possible that the unprecedented nature of the crisis, and its potentially unique effects on the economy, could lead to greater debate around the comparability of the infringement and pre- and/or post-infringement periods under a temporal comparator approach. In other words, could the crisis lead to comparing apples with oranges under the most popular approach to overcharge estimation?
The answer to this question will depend on the nature of the crisis (potentially among other factors). To illustrate this, consider three alternative scenarios for how the crisis could play out for a particular market or sector of economic activity.
- If the crisis is a temporary shock followed by a return to normal economic conditions, it could potentially have a minimal effect on the attractiveness of the temporal comparator approach. If the effects of the crisis cannot effectively be controlled for within the analysis, it may be possible to exclude the crisis period from the overcharge analysis without impacting significantly on the amount of data available for the analysis (and therefore on the robustness of the analysis).
- If the crisis is a prolonged shock followed by a return to normal economic conditions, excluding the crisis period from a temporal comparator analysis altogether may require economic experts to consider whether the time period over which the overcharge analysis is conducted needs to be extended to ensure that sufficient data is available (and therefore that the analysis is sufficiently robust).
- If the crisis leads to significant and permanent behavioural or structural changes rather than a return to normal economic conditions, it could represent a more complex challenge from the perspective of an economic expert conducting a temporal comparator analysis (irrespective of whether the crisis itself is temporary or prolonged). In this case, economic experts may wish to assess whether it is possible adequately to control for the behavioural or structural effects of the crisis in the analysis through available measures of demand, supply, or other relevant data.
In addition to the potential for the crisis to make a temporal comparator approach look more like an orange than an apple, there is the question of whether it could have a similar effect on the geographic and product comparator approaches, in which case the decision dynamics for economic experts may remain unchanged. The answer to this question will depend on whether the crisis falls within or outside of the infringement period (potentially among other factors). This stands in contrast to the scenarios set out above for the temporal comparator approach, which are independent of the relative timing of the crisis and the infringement.
For example, if the crisis occurs in the pre- or post-infringement period, then it could have no effect on the feasibility of the geographic and product comparator approaches because they may not rely on data outside of the infringement period. In contrast, the effects of the crisis on these approaches could be less clear-cut if it occurs during the infringement period. Where this is the case, the impact of the crisis on the relative merits of the geographic and product comparator approaches would hinge on whether it would be expected to affect both the affected and comparator markets in a similar way.
Given that the eventual effects of the Covid-19 crisis and the characteristics of future cartel damages cases are not yet knowable, the impact of the crisis on the choice of different comparator approaches on these cases is unclear.
For cases in which a temporal comparator approach would have been viewed as significantly more robust than a geographic or product comparator approach absent the crisis, it is possible that the effects of the crisis could prove to be insufficient to change this decision. This may be most likely where, for example, the crisis occurs during the infringement period and/or is followed by a return to normal economic conditions.
However, to the extent that cases arise in which the choice of comparator approach would have been less clear-cut in the absence of the crisis, it will be interesting to observe whether, and to what extent, the crisis could play a role in the decision-making process – particularly if the crisis occurs outside of the infringement period and leads to significant and permanent behavioural or structural changes.