Free Download-California Antitrust & Unfair Competition Law-Offensive/Defensive Pass-On and the Economics of Pass-On

by Daniel A. Sasse and Chahira Solh

Harm occurs to indirect purchasers through what is called a ''pass-on'' - i.e., where the illegal overcharge is passed on down the chain of distribution to subsequent purchasers. The idea of injury to indirect purchasers derives from the common-sense perception that middlemen will try to pass on any increased costs to their own customers. As noted by Senator George during the debates on the Sherman Act; a ''middleman ... buys only for profit on a subsequent sale [s]o whatever he pays he receives when he sells, together with a profit on the same, from the person necessarily damnified or injured.'' Courts and commentators have come to the recognition as well that some pass-on is the normal rule. The extent to which an overcharge at one level of commerce is passed on to subsequent levels is determined by the interplay of supply and demand or, to be specific, by the elasticities of supply and demand. The elasticities of supply and demand can be defined as the ''ratio of the percentage change in quantity demanded (or supplied) to the percentage change in price.'' Courts have found that one-hundred percent or more of an illegal overcharge can be passed-on depending on the extent to which middlemen can add their own profits to the initial illegal overcharge. While various economic models are available to estimate pass-on damages, the application of such models can be very fact-specific.
 
The indirect-purchaser action sanctions the theory that illegal overcharges are in effect ''passed-on'' to the plaintiffs. Insofar as this ''offensive'' use of pass-on is concerned, simplifying assumptions can be used to reduce the difficulty and cost of determining the scope of pass-on to indirect or downstream purchases. Developments in technology, including increasing computer models and use, make it easier to access the kind of data necessary to calculate pass-on. Indeed, in the context of the Unfair Practices Act, state antitrust law presumes that pass-on amounts to 100% of a company's cost plus a 6% markup in determining whether a company has priced its products below-cost.

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