forensic economics in competition law enforcement · forensic tools have become important in the...

FORENSIC ECONOMICS IN COMPETITION LAW

ENFORCEMENT

Maarten Pieter Schinkel�

ABSTRACT

This paper delineates the specialty field of forensic industrial organization (IO) as

the application of theoretical and empirical industrial organization economics in

the legal process of competition law enforcement. Four stages of that process

that can benefit from forensic IO techniques are distinguished: detection and

investigation; case development; decision-making and litigation; and remedies,

sanctions, and damages. We survey the use of economics in such aspects as

identifying potential forms of anticompetitive behavior, screening markets for

competition law violations, determining causality, advising on appropriate

remedies, and assessing antitrust damages. The paper discusses the role of

expert economic witnesses in competition cases. It calls for an organization of

forensic IO within the context of existing forensic institutes.

1. INTRODUCTION

Forensic science is the application of scientific disciplines to the legal process.1

Scientific methods and tools have found productive and popular application in

criminal law enforcement. Techniques such as DNA-profiling, blood spatter

projection, and handwriting analysis are used to establish suspects, methods,

and motives in homicide cases. They feature in television and documentary

series, such as Forensic Detectives, which graphically describe the pivotal role

� Department of Economics and ACLE, Universiteit van Amsterdam and CEPR. Roetersstraat 11,

1018WB Amsterdam, The Netherlands. E-mail: [email protected]. The papers in this special

issue were selected from contributions to the ACLE workshop Forensic Economics in Competition

Law Enforcement, held March 17, 2006 at the Universiteit van Amsterdam. John Connor,

Andrew I. Gavil, and Franklin M. Fisher made outstanding keynote contributions to the event.

I am indebted to them, as well as to other participants at the workshop, for stimulating discussions.

I thank the editors of the Journal of Competition Law and Economics, Damien Geradin and Gregory

Sidak, and more than twenty anonymous referees for their assistance in the editorial process. Iwan

Bos, John Connor, Kati Cseres, Franklin M. Fisher, Andy Gavil, Vivek Ghosal, Martijn Han, Jon

McNally, Jakob Ruggeberg, Francesco Russo, Daniel Slottje, Jan Tuinstra and Gregory Werden

gave constructive comments to an earlier version of this paper. Norman Bremer and Marie

Goppelsroeder provided excellent research assistance. Opinions and errors remain mine.1 Lyle (2004), p. 8. The Forensic Science Society defines forensic science similarly as: “the appli-

cation of science to the law.” See http://www.forensic-science-society.org.uk.

Journal of Competition Law and Economics, 1–30doi:10.1093/joclec/nhm033

# The Author (2007). Published by Oxford University Press. All rights reserved.

For Permissions, please email: [email protected]

of forensic techniques in police investigations and criminal law proceedings.

Forensic tools have become important in the discovery of crimes, their inves-

tigation and presentation in court, and in establishing causality and damages.

The field has its own professional journals, university curricula, respected

national forensic laboratories, and institutes.

There exists a wide variety of applied forensic methods. Saukko and

Knupfer’s (2000) 3 volume Encyclopaedia of Forensic Sciences contains more

than 200 different alphabetically ordered entries, ranging from Airbag

Related Injuries and Deaths to Wood Analysis. Most methods derive from the

natural sciences. They include biomedics—to determine skeletal trauma,

make time-since-death analysis, or conduct morphological age estimation—

chemistry and toxicology—including ink analysis in document forgery and

counterfeits—as well as physics—informing enforcers with ballistics, blood-

stain analysis, image processing, and forensic IT—and engineering—under-

standing fire-scene patterns in buildings and motor vehicle accidents. The

three volumes of the encyclopedia also describe applications from psychol-

ogy—such as criminal profiling, eyewitness reliability, and methods to detect

lies and deception. In addition, it has some entries on white-collar crime

and forensic computing.

Economics is a science that has methods and tools to offer for application in

legal processes. Insights from the discipline of industrial organization (IO) in

particular are extensively used in the interpretation and the enforcement of

the competition laws. Expert IO economists have made contributions to

both the challenge and defense of mergers that raised competition concerns

and alleged antitrust violations. They have assisted in assessing antitrust

effects and damages, as well as the identification of new types of behavior

that could potentially be anticompetitive. Their economic justifications have

been taken into consideration in the judgments of the Supreme Court of the

United States, as well as the European Court of Justice.2

The aim of this special issue on Forensic Economics in Competition Law

Enforcement is to delineate the speciality area of industrial organization econ-

omics applied in various aspects of the legal process of antitrust cases. It is

an exciting area of work, in which a great many industrial economists are

active. It generates a considerable turnover as well as large likely deterrence

benefits.3 The area has an active international conference circuit and its own

society journal, the Global Competition Law Review.

The area nevertheless lacks a systematic description as a discipline. Saukko

and Knupfer’s Encyclopaedia does not contain a single entry related to

2 See Adams and Brock (1991) and Kaplow and Shapiro (2007).3 See Baker (2003a) and Neven (2006) for attempts to quantify the effects of competition law

enforcement in the United States and Europe respectively. Both authors stress the difficulties

in such an exercise, but conclude that the gains are likely to outweigh the costs in the respective

regimes greatly.

of 30 Journal of Competition Law and Economics

economics—not even on forensic accounting, which is the analysis of financial

and economic transactions for the purpose of assessing their legality. Likewise,

there is no mention of topics related to economics in the description of forensic

science that the Forensic Science Society gave.4

There does exist an American specialists society, the National Association

of Forensic Economics (NAFE). The association and its journal, the Journal

of Forensic Economics (JFE ), has had a strong business orientation since its cre-

ation in 1986. In their inaugurating contribution to the JFE, John Ward and

Gerald Olson set the research agenda for the field:

The primary focus of the research of the forensic economists is the measurement of market

loss (damages) arising from market failures, contract disputes or torts. (Ward and Olson,

1987, p.2)

Antitrust is mentioned as a specialization of damage calculation in public

interest disputes, but considered an area of minor importance compared to

business valuation.5 Indeed, the vast majority of the papers published in the

volumes of the JFE are on the quantification of damages in individual tort

cases. Topics include the appropriate discount rate, expected employment

duration, and the effects of progressive taxes in present value calculations of

lost earning as a result of personal injury and wrongful death. Typically,

more standard methods establish causality in these accident cases and has

nothing to do with economics. Only a handfull of papers discuss applications

of economics to competition cases.6

In a further methodological paper in the Journal of Legal Economics, Ireland

(1997a) recognizes the application of “econometric tests of causality” in anti-

trust, but keeps it outside the scope of forensic economics as “this element

involves only a minority of forensic economists” (ibid., p. 7). Emphasis

remains on damages assessments. Finally, Kaufman et al. (2005) define foren-

sic economics as “the application of economics to litigation” (ibid., p. xv). The

volume of seminal contributions to the field claims to offer coverage of “all the

major topics in this sub-field” (ibid.) but contains not a single paper on

antitrust.

We define the specialty field of “forensic IO” as the application of theoreti-

cal and empirical industrial organization economics in one or more of the

4 See http://www.forensic-science-society.org.uk. The society publishes the journal Science &

Justice.5 This research focus on damages assessments is also maintained in Thornton and Ward (1999).6 An interesting early example is Einhorn (1989). There even appears to be some hostility towards

antitrust applications. Slottje (1999), a collection of essays by leading economists that were

active in high-profile antitrust cases, was received in the JFE as a “view from Mt. Olympus”

(Vernarelli, 2002, p.101). According to this review, the volume had little insight to offer for

the “mainstream forensic economist.” Instead, the reviewer suggested that “if, heaven forbid,

Professor Slottje were to suffer serious injuries when the car he is driving is hit by a tractor

trailer which runs a red light, then he would really learn what forensic economics is all about”

(p. 103). Slottje (1999) is drawn upon in Section IV.

Forensic Economics in Competition Law Enforcement of 30

various stages of the legal process of competition law enforcement.7 It is close

to antitrust economics, which is concerned with the economics underlying the

competition laws generally. Forensic IO focuses on the study of techniques and

tools for the enforcement of the competition rules by institutions and courts.

Apart from antitrust economics, the area overlaps with law and economics,

and the economics of law enforcement. Note that forensic IO is much nar-

rower than IO itself, which is only in part applied to antitrust.

In his introductory contribution to this special issue, John Connor traces the

use of forensic economics back to the first written record of an antitrust proceed-

ing in the Roman Forum, more than 300 years BC. Connor discusses its sub-

sequent role in modern cartel law enforcement in both the United States and

Europe. He establishes a considerably longer modern tradition of applied foren-

sic IO in the U.S. courts, but also sees an emerging field in Europe resulting

from the European appellate courts’ increasingly requesting sound economic

argumentation and emerging private antitrust suits before the national courts.

The paper focuses on cartels and surveys a number of methods for the construc-

tion of “but for” worlds and the determination of cartel overcharges.

Forensic IO is not limited, however, to the assessment of damages in anti-

trust litigation. It makes some of its more fundamental contributions to com-

petition cases by assisting to establish causality. Economic analysis can help to

determine, for example, the relationship between a collusive agreement

between incumbents to restrict entry and low product quality due to a result-

ing lack of effort. Economics can be applied to identify market power and how

it was abused. Its tools can also be used to value claims of merger-specific effi-

ciencies, as well as to determine the extent to which the anticompetitively

raised prices of their suppliers damaged intermediaries and final consumers.

To determine likely causalities requires a complex process of building a rel-

evant economic theory, deriving testable hypotheses, and corroborating them

with the help of econometric tests. Precisely this is the scientific method for

which academic experts are consulted to produce objective and reliable

truths.8 As a result, it is on issues of causality that many of the more interesting

differences of opinion exist between experts applying industrial economics to

antitrust. In fact, the Daubert qualification of admissible scientific expertise—

discussed in Section V—is essentially concerned with the question whether

causation has been shown satisfactorily and by means of accepted scientific

methods.

The relevant elements of the legal processes that forensic IO can assist

should also be interpreted broadly. To begin with, forensic IO is not restricted

to (criminal) cartel litigation and per se monopolization or abuse cases, the

7 One of the first references to the term “forensic economics” may be Boudin’s 1984 book review

of Fisher et al. (1983), based on the authors’ experience as consultants to IBM in the American

IBM case, on which more in Section IV. See also Fisher (2000).8 On methodology generally, see Chalmers (2004). On economics as a science, see Hands (2001).


latter of which are few. In fact, the application of IO economics is often most

powerful in investigations that come under the rule of reason. The same is true

for merger investigations, in which the legality of acts under the antitrust laws

is assessed ex ante. It is in these cases that the causality of economic effects

often is an important part of the analysis.9

Forensic IO is also not limited to litigation. Instead, its tools find application

in investigation, litigation and adjudication, as well as the enforcement of

remedies. In the United States, Federal and State courts decide on cases

that the antitrust agencies prosecute. Appeals can reach the U.S. Supreme

Court. In Europe, competition law enforcement is mostly an administrative

process in which the agencies take formal decisions. These decisions can be

appealed with the national tribunals and appellate courts, or, in cases affecting

trade between Member States, with the Court of First Instance and European

Court of Justice. Actual legal proceedings are a mixture of the elements of the

court-based and administration-based models.10 The U.S. antitrust auth-

orities have considerable discretionary powers in deciding to sue or settle

cases, for example. Also, several parts of the European decision-making pro-

cesses involve litigation-style events, such as oral hearings. Furthermore, the

emerging private antitrust damage actions in Europe are primarily before

national courts. Forensic IO finds application in all of these aspects of compe-

tition law enforcement.

Forensic IO is an academic discipline that contributes to the advancement

of economics as a science. The debate over important competition cases often

spreads from competition agencies and the courts to academia. Frequently,

the stakes of the parties in competition policy matters are high and they are

willing to invest in a good representation of their case. Likewise, the forensic

experts testifying to the case in court have valuable reputations to protect

and know that the opposing side will publicly scrutinize their contributions.

As a result, the debates are often of high quality. Economic reasoning

between theory and empirical evidence helps to support and sharpen the

legal analysis of the facts and circumstances in the case. In return, the involve-

ment in actual cases provides access to internal corporate documents that nor-

mally would be confidential and unavailable to the academic economist. The

economic principles of landmark cases can so be an inspiration for academic

contributions in the abstract that can be developed beyond the litigation dead-

lines and budgets.

As a result of this, in a growing number of competition policy regimes

around the world, IO economics and the interpretation of the competition

9 See Coate and Kleit (1996) for a discussion of the use of economics in U.S. merger enforcement,

and Bergeijk and Kloosterhuis (2005) on EU merger control. The contributions on antitrust in a

special issue of the Journal of Econometrics on “Statistics and Econometrics in Litigation

Support,” edited by Robert Basmann and published March 2003, are also largely concerned

with estimation techniques for merger control. See Basmann (2003).10 See Fingleton (2005), Neven (2006), Section IV, and Borrell (2006).


laws work and develop in a productive symbiosis. Novel business strategies

cast up anticompetitive concerns that subsequently inspire fundamental aca-

demic research. The recent software and credit card cases, for example, stimu-

lated the research area of network economics and two-sided market theory.11

At the same time, new economic insights and techniques are being translated

into revisions of guidelines and priorities in enforcement. The adoption of the

efficiency defense in the 2004 EU horizontal merger regulation was likely influ-

enced by the seminal work of Oliver Williamson.12 Similarly, leniency pro-

grams have been revised on the basis of a game-theoretical understanding of

the problem of internal cartel stability. Finally, courts have become increas-

ingly open to considering economic justifications in their rulings.

It is possible to distinguish four (related) stages of the process of compe-

tition law enforcement in which forensic IO has a role: first, detection and

investigation; second, case development; third, decision-making and litigation;

and fourth, remedies, sanctions, and damages. In the following four sections,

each of these roles is discussed in some depth. Section VI offers some conclud-

ing remarks on forensic IO as a discipline.

II. DETECTION AND INVESTIGATION

Competition law violations are different from more traditional crimes, such as

murder or burglary, in the sense that anticompetitive acts often leave no

obvious traces. There is not necessarily a body, signs of a break-in, or a

crime scene. The fact that a cartel has raised prices, for example, can be diffi-

cult to prove with only time-series on prices and no data on costs. Often cartel

damages to society are more indirect; for example, when reduced competition

leads to lower quality of goods and services, less innovation effort, or the sup-

pression of new technologies. Even people who are close to the cartel conspira-

tors, including in-house counsel and in some cases higher management, may

not know about the illegal practices that are going on in their organizations.

Forensic IO therefore has an important role to play in the discovery of the

very fact that a violation of law was committed, essentially in two ways.

First, economics can uncover anticompetitive aspects of behavior pre-

viously not understood as restrictive of competition. In this sense, economics

informs the interpretation—or even the choice—of competition law rules and

standards of conduct. A business practice is only anticompetitive if it is shown

to be restrictive of competition by some plausible economic argumentation.

Sometimes, a new type of antitrust violation is discovered through indepen-

dent theoretical and empirical academic research. An example of this may

be the insight that Steve Salop pointed out that price-matching clauses,

11 See Evans et al. (2000), Fisher and Rubinfeld (2001), Shy (2001), and Rochet and Tirole

(2006).12 Williamson (1968). See also the introductory chapter in Ghosal and Stennek (2007).


although they appear competitive, can in fact sustain collusion.13 Another

example is the more or less accidental discovery of a suspicious lack of

odd-eight quotes for actively traded NASDAQ securities by William Christie

and Paul Schulz. Their research uncovered the market-makers’ conspiracy,

which led to an antitrust class action that was eventually settled in the late

1990s.14

Also, the understanding of possible anticompetitive strategies often grows

over the course of an antitrust investigation, or a history of related cases. A pro-

minent example is the U.S. Microsoft case, in which the insight was developed,

in particular in the testimony of Franklin M. Fisher, that Microsoft had

attempted to levy existing monopoly power from the market for operating

systems to that of internet browsers by means of a predatory tie between the

two products.15 This type of forensic assistance in antitrust cases is highly

innovative, drawing on theoretical and applied developments such as game

theory, computer simulation techniques, and experimental economics, thus

advancing both competition law enforcement and academic research.

Growing economic insight also leads to the necessary differentiations in the

application of the law. A recent example is the ruling of the U.S. Supreme

Court in Leegin.16 In this ruling, a long-standing ban on resale-price mainten-

ance was overturned. In this case, a number of leading U.S. economists,

including Paul Milgrom and Carl Shapiro, addressed the question of

whether the courts should continue to deem it per se illegal for a manufacturer

to enter into a vertical agreement with resellers of their products to set

minimum resale prices. They pressed upon the Supreme Court that economic

research has robustly established that resale-price maintenance can have pro-

competitive and welfare-enhancing effects, and that the complexity of these

effects calls for a case-by-case analysis under the rule of reason.

Second, forensic IO can help find recognized types of antitrust violations by

systematically screening industries and firms. Some kind of irregular market

behavior will typically arouse suspicion of an anticompetitive act.17 A purcha-

ser, for example, may be alerted to the presence of a wholesale cartel by a

sudden increase in prices, or, if the cartel has divided the market geographi-

cally, by a refusal to supply by all but its local dealer. More sophisticated

“tell-tale signs” of complicated abuses of dominance or collusion may

only be detectable by specialized detectives who monitor markets to find

13 See Salop (1986). Corts (1997) challenges the view that price-matching clauses are

anticompetitive.14 See Christie and Schultz (1994) and In Re NASDAQ Market-Makers Antitrust Litigation, MDL

No. 1023, (S.D.N.Y.) (R.W.S. 94 CIV 3996).15 See Evans et al. (2000).16 Leegin Creative Leather Products, Inc. v. PSKS, Inc., No. 06-480, June 28, 2007.17 See the flyer by the U.S. Department of Justice, Price Fixing, Bid Rigging, and Market

Allocation Schemes: What They Are and What to Look For: An Antitrust Primer; available

at: http://www.usdoj.gov/atr/public/guidelines/211578.htm.


violations.18 Examples may be sudden atypical changes in sales conditions or

product quality captured by the data, a decrease in price volatility over time,

odd bidding behavior in an auction, or correlated capacity investments.19

Monitoring markets for behavioral patterns indicative of collusion can help

target further inspections of companies that display suspicious behavior. An

emerging literature develops such “live forensics” methods to systematically

screen markets for antitrust violations, in particular, cartels. Practitioners as

well as academic economists contribute to the development of sophisticated

antitrust screens.20 They typically apply a combination of two types of indi-

cators of cartel likelihood: structural and behavioral indicators.

The first type of indicator is based on structural characteristics of industries

and markets in which theories of collusion predict cartels to be particularly

sustainable and in which cartels were found in the past.21 These characteristics

include relatively stable demand for a low-tech homogenous product sold in

large volumes by a relatively small group of more or less identical suppliers

that frequently interact in a transparent market. Likewise, the absence of

buyer power, or common cross-ownership may be reason to zoom in on

certain industries rather than others. The second type of indicator uses

behavioral screens of the kind discussed above.22 It is applied to preidentified

high-risk industries to identify potential antitrust concerns systematically.

Forensic IO can assist the antitrust agencies to discover and assess the illeg-

ality of certain business strategies. The U.S. Department of Justice Antitrust

Division, for example, has developed “cartel profiling” techniques based on

its experience that cartel activity may take place in markets adjacent to indus-

tries under investigation for collusion, or to merger inquiries.23 The division

preemptively monitors industries in which convicted price-fixers are active

as “mentors” in “cartel trees,” or that are vulnerable to cartelization because

they have the kind of market structure characteristics discussed above.

Academic research can provide insights into uncovering such patterns. The

paper by Vivek Ghosal, who worked for the Antitrust Division for several

18 Contextual and detailed cartel studies such as Simpson (1993), Griffin (2000), Connor (2001,

2007), Eichenwald (2001), and Mason (2004) suggest effective collusive markers. See also

Joshua and Harding (2002), and Levenstein and Salant (2007).19 See, for example, Porter and Zona (1993) and Bajari and Summers (2002). The U.S.

Department of Justice publishes a leaflet on its website that advises the public on how to identify

collusive schemes.20 See Porter (2005) Abrantes-Metz et al. (2006), and Harrington (2007a, b). The distinction

between “live” and “dead” forensics stems from forensic IT. Live forensics takes place in real

time and analyzes running IT systems in use, whereas dead forensics analyzes a conserved snap-

shot of the system. Live forensics is more complicated, but less invasive and allows for monitor-

ing industries without the market parties being aware of it. See Volonino (2003) and Adelstein

(2006).21 See Grout and Sonderegger (2007).22 See Harrington (2007b).23 See Barnett (2007).


years, focuses on the genesis and taxonomy of cartel investigations. Ghosal

examines the dynamic interrelationships between civil and criminal investi-

gations. His empirical findings suggest that prior criminal prosecution of

firms and individuals, as well as information gleaned from merger and monop-

olization investigations, provide useful leads for future cartel prosecutions.

Ghosal also finds that cartel prosecutions rise following economic downturns,

which he relates to the stability and breakdown of cartels.

Independent and active detection of antitrust violations is important for an

effective enforcement regime. It allows for an efficient allocation of limited

enforcement budgets over various antitrust priorities. This helps to create a

sufficiently high probability of discovery by the authorities, which in turn is

essential to destabilize active cartels through the leniency programs.24 In

their paper in the issue, Hans Friederiszick and Frank Maier-Rigaud argue

that ex officio inspections remain crucial in an era where many cartels apply

for leniency. Their contribution reflects a high-level strategy debate in the

European Commission’s Directory General Competition. Friederiszick and

Maier-Rigaud make a strong case for a mixed instruments methodology in

which complementarities in enforcement are exploited.

Peter van Bergeijk offered another perspective from inside the agencies. In

his contribution, he revisits the Dutch construction cartel, which was a

complex and wide ranging case of collusion that involved the majority, in

terms of market share, of construction companies in the Netherlands and

lasted for at least ten years. Van Bergeijk is one of the people responsible for

the Dutch “Cartel Paradise” lost. He worked for the Netherlands

Competition Authority (NMa) as an economic expert on the construction

cartel case. His cartel post mortem offers intriguing insight into this Dutch

case, as well as useful suggestions for tell-tale signs of collusion with wider

application.

Companies take a keen interest in forensic IO methods to detect antitrust

violations as well. To know what kind of collusive markers can trigger an inves-

tigation by the agencies is obviously useful for hard core repeat cartel offenders

of the type that the U.S. DOJ profiles. In particular, it can help them to hinder,

or even avoid, detection. It has been documented how specialized cartel con-

sulting firms organize secretive meetings, making sure no physical evidence

leaves the smoke-filled room.25 Just like a sophisticated thief makes sure to

wear gloves to avoid leaving fingerprints, so will white collar crime constantly

professionalize. To make avoidance difficult, it is crucial that the antitrust

agencies make sure that they continue to update their use of the latest detec-

tion methods in their struggle to stay ahead of this game of hide-and-seek.

Private-eye antitrust detection can also serve a legitimate demand. In larger

companies, it may well be the case that the owners or senior management

24 See Rey (2007).25 Case COMP/E-2/37.857, PO/Organic peroxides. Commission decision of 10 December 2003.


disapprove of anticompetitive practices, but have insufficient oversight over

their complex organizations to know of the existence of violations of the com-

petition laws. Lower managers in subdivisions or remote parts of the world

may use collusive schemes to fix the division targets to which their personal

bonuses are tied, thus leaving the firm with future liabilities.26 Higher manage-

ment that does not deal adequately with cartel problems may even risk crim-

inal prosecution. Those benefitting from the conspiracy often manage to hide

the cartel from in-house counsel, which has a duty to report irregular activity.27

Alternatively, in planned acquisitions or mergers, forensic IO detection

methods can support due diligence inspections by the prospective buyer.

Internal audits for corporate-risk analyses can find potential antitrust pro-

blems before the authorities do and clean them up.28 Leniency programs

offer companies a way to resolve their unwanted antitrust problems, if they

manage to discover a cartel in their organization before anybody else does.

Compliance programs can subsequently be put in place to help prevent

future violations.29 As the market for these forensic services develops, so do

the methods of detection available to public policy.

III. CASE DEVELOPMENT

A second role for forensic economics in competition law enforcement exists in

providing assistance in the development of cases before litigation, either on the

agency or prosecutor side, or on the defense side. Partially, this concerns for-

ensics issues such as collecting physical evidence of monopolization strategies

or cartel meetings, such as paper minutes, e-mail correspondence, or confer-

ence call records, which goes beyond initial detection.30 This type of investi-

gation aims to build a profile of individuals and their networks similar to the

traditional white collar crime forensics methods that the introduction men-

tioned. It can benefit from the analysis of information that is readily available

within the business environment through employment records, expense

claims, and network data. Forensic accounting and IT techniques can be

26 On corporate governance issues and corporate crime generally, see Alexander and Cohen

(1999), Paul (2000), and Green (2006). Jamieson (1994), Garoupa (2000), Spagnolo

(2005), Buccirossi and Spagnolo (2006) offer applications to antitrust.27 Sophisticated methods to hide cartels internally have been revealed in several of the cartel cases

recently documented, including the auction houses cartel. See Mason (2004).28 See Anastasi (2003) for an account of the role of forensics in corporate fraud detection. Internal

company data often allow for analysis of evidence of personal benefit, such as preferential treat-

ment or bribes, and on-the-job surveillance. The industry has developed highly sophisticated

tools, including packages such as ISYS, DTSearch, and Attenex that assist in extracting rel-

evant intelligence from background noise.29 See Beckenstein et al. (1983)30 In U.S. vs. Microsoft Corp., Civil Action No. 98-1232, for example, discovered internal emails on

the “jihad to win the browser war” played an important role in establishing the intent to

monopolize.


used to recover deleted files, for example.31 It may further involve covert sur-

veillance, handwriting analyses, and voice recognition to identify responsible

individuals and their network. Forensic IO can advise here on targeting inspec-

tions in “dawn raids” on the premises of companies by identifying the type of

suspected antitrust violation and the likely evidence that it leaves.

The main function of forensic IO, however, is in building the economic

logic of a case. The economics applied in this is closest to the material that

the IO textbooks cover, and so I confine myself here to only a brief discus-

sion.32 The extent to which industrial organization economics can be used

in a competition case depends very much on the nature of the case. In

merger investigations, structural models and econometric specification are

important in determining postmerger effects and matching divestitures. IO

theory and empirics also underlie monopolization cases in the United States

and abuse of dominance cases in Europe. Here economics can point out the

principles that may be at work to subvert competition, or the other way

around, show how behavior that appears anticompetitive is genuine compe-

tition. In per se cartel proceedings, the finding of an infringement will be

based on direct evidence. Nevertheless, economics can help determine

whether the market structure is conducive to collusion, whether there is an

incentive to collude, or if a cartel could be sustainable.33

In any case of substance, both sides are likely to benefit from employing

economic advisors and both sides typically decide to do so. The standard of

economic work in many antitrust investigations is high, often leading to

additional insights and a deeper understanding of economics. An advanced

form of economic consultancy has developed that applies cutting edge econ-

omic techniques, reasoning, and evidence. These competition practices

employ PhDs in economics and industry experts. They maintain international

and academic networks, which allows them to put together teams of experts

with a division of labor that is tailored to the case at hand.

A number of routine economic analyses, such as application of the SSNIP

test for the determination of the relevant market, HHI calculations for merger

assessments, or the Pivotal-Supply-index (PSI) have become standard pro-

cedure.34 Yet, diversity across industries ensures that many competition disputes

have one or the other fundamental issue of general economic interest. In some of

the landmark antitrust cases, such as Microsoft and Leegin, but also the VISA/

Mastercard private antitrust damages case, the contributions of economists

involved have been crucially innovative.35 They generated important positive

31 See Volonino (2003) on the admissibility of electronic evidence in computer forensics cases.32 Tirole (1988), Carlton and Perloff (2006), and Motta (2004).33 See Milne and Pace III (2003), Werden (2004), and Johnson (2007). An early contribution in

the JFE is Einhorn (1989).34 Bishop and Walker (2002) provides a useful overview of the economics toolkit for European

competition cases.35 In re Visa Check/Master Money Antitrust Litigation, Master File No. CV-96-5238 (E.D.N.Y.).


externalities for our general understanding of the workings of these special

markets and the potential monopolization, abuse, and cartel strategies to

which they are exposed.

The same is true for some of the larger merger investigations. In GE/

Honeywell, which was cleared in the United States after thorough investigation,

the European Commission blocked the merger on the basis of a rather adven-

turous conglomerate merger theory.36 It feared that postmerger product

bundles of GE and Honeywell would be so attractive to customers in compari-

son to the separate components that rivals offered that the competition would

be forced out of business. The decision caused considerable debate.37 It

further highlighted the uneasy relationship between law and economics in

European competition law enforcement when the Court of First Instance

rejected most of the Commission’s analysis while upholding its decision to

block the merger. Other merger inquiries where forensic IO made competition

law enforcement history are Staples/Office Depot in the United States and Volvo/

Scania in Europe.38 In both cases, sophisticated econometric analyses were

entered to predict post-merger market developments to support the challenge

of the proposed merger.39

In each case, the choice of modeling has to go with the structure and type of

competition in the industry and the particular competition concerns at hand.

The more interesting landmark antitrust cases center on questions about the

specification of the nature of competition. A theory of harm related to

margin squeeze, for example, requires a dominant wholesaler who is vertically

integrated in part of the retail market. An allegation of price predation would

need to be sustained by showing pricing below long-run average costs, as well

as the predator’s likely ability to recoup initial losses. Crude observations on

the industry should fit such model specifications.40 There is a danger in apply-

ing off-the-shelf instruments rather than bespoke models. In particular, this is

the case in the use of merger simulation models, some of which are readily

available as a user-friendly software package with an appearance of generality,

whereas outcomes are very much dependent on the details of structural and

empirical specifications. When the models remain undisclosed to opposing

sides, which often is the case when the algorithms are proprietary to the con-

sultants, they can obscure rather than enlighten the understanding of merger

effects.41

36 General Electric/Honeywell Commission decision 2004/134/EC [2004] OJ L 48/1.37 See Patterson and Shapiro (2001). See Vickers (2007) on the issue of transatlantic con- and

divergence in competition law and economics.38 Federal Trade Commission v. Staples, Inc., 970 F.Supp. 1066 [1997] and Volvo/Scania Commission

decision 2001/403/EC [2001] OJ L 143/74, Case COMP/M.1672.39 See Baker (1999) and Ivaldi and Verboven (2005).40 See Werden (2005) and Whish (2007).41 See Goppelsroeder and Schinkel (2005) and Walker (2005).


At regular intervals, Jonathan Baker has reviewed the use of empirical

methods in antitrust cases with various co-authors.42 Baker and Bresnahan

(2007) emphasize that difference among industries matters, although simi-

larities with related industries are an important source of learning. The

authors discuss a number of methods tested in past cases for the measurement

of the magnitude of economic relationships and effects. These include various

ways to identify buyer power substitution and market power, using different

types of tests that are related to structure, conduct, and performance. An

important concern in the use of econometric techniques is the quality of the

data. The interpretation of empirical findings is further relative to a proper

market specification. A high market concentration (few firms) in a bidding

market, for example, may not be so much of a concern, whereas it can

signal dominance in a regular production market.

In light of the many degrees of freedom with regards to model specification

and data collection unfolds a discussion on “bright line tests.” Easterbrook

(1984), amongst others, called for example tests to help reduce enforcement

costs and create legal certainty. Baker and Bresnahan (2007) suggest that,

where such tests currently do not exist, economics should further categorize

generalizations and develop a standard toolkit that is sufficiently reliable for

antitrust enforcers to use.

In his contribution to this issue, Fisher is not so optimistic. Based on his

extensive experience in economic consulting and as an expert witness in

some of the definitive antitrust cases of our time, Fisher warns against the

dangers of giving in to the pressure from attorneys and judges to oversimplify

economics. To do so is likely to lead to mistakes in antitrust decisions and gen-

erally harms the discipline. In his paper, Fisher gives several examples that are

both entertaining and alarming.

One particular pitfall in measuring market power that Fisher addresses

here, as well as in his earlier work, is to use evidence on accounting profits.

Paul Grout and Anna Zalewska explore the boundaries for doing so in their

paper. Grout and Zalewska carefully qualify excessive rates of return to

confirm they have limited reliability, certainly for assessing standalone exces-

sive pricing cases. The authors argue, however, that case-specific rate of

return measurements, when handled with care, can help inform antitrust

decisions.

IV. DECISION-MAKING AND LITIGATION

The process of discovery and case development is obviously geared towards

final decision-making. Competition law is grounded in the economic insight

that a workable competitive process is socially beneficial. As a result,

42 See Baker and Bresnahan (1992, 2007) and Baker and Rubinfeld (1999). Bishop and Walker

(2002) offers several chapters on the use of empirical methods in European competition cases.


competition law enforcement is fundamentally based on economic reasoning

and evidence. The agencies apply economic analysis and interested parties

will go to great lengths to present their case in the best possible light, using

cutting-edge economic analyses, which reputable economic expert witnesses

often present.

Differences between the U.S. court-based system and the European admin-

istration-based approach, however, can have important implications for the

type and quality of forensic IO analyses that are applied to a case. In the

court-based model, parties present their case in a public arena before indepen-

dent judges. Administrative law processes, on the other hand, can be less trans-

parent.43 On the other hand specialized administrations can build expertise

over time in the cases that they deal with, which a general court may not.

High-quality economic reasoning and quantitative analyses have historically

played a more prominent role in U.S. antitrust than in European competition

law enforcement. European practice is converging towards American practice,

however, with the adoption and promotion of a “more economic approach” in

recent years.44 In addition, there is a call for establishing specialized national

courts in the European Member States to deal with competition cases.

The quality of forensic economic analyses submitted is best safeguarded

when the decision-making process is fully public. There appear to be at least

three reasons for this. First, an open process reduces the scope for factors

other than substantive arguments to influence decision-making. That is, favor-

itism, lobbying, political pressuring, and corruption are exposed more easily

and thereby partly deterred. Second, an open process allows for all parties

involved to learn as case law develops. Enforcers, firm management, attorneys,

judges, and commentators can improve their understanding of economics and

its application in antitrust. Third, the economists involved in competition

cases can build—and destroy—their reputations. When economic analyses

are available for critical examination by peers, sloppy or fabricated arguments

are exposed. Unscientific analyses are weeded out, and thorough economics is

supported by the possibility to establish a reputation for objective and high-

quality work.

The U.S. system of expert economic witnesses in court proceedings is one

of the most open forums of antitrust debate. Expert witnesses submit their tes-

timony, give it in court, and are subsequently cross-examined. In high-profile

cases, this creates a competitive arena for discussion, in which industrial

43 The process of decision-making in competition cases by the European Commission and many

of the Member States does involve elements of an open court system, such as oral hearings and

disclosure of submitted reports. The European appellate courts, in turn, are often restricted in

their freedom to consider economic arguments. See Neven (2006).44 See Vesterdorf (2005), Roeller and Stehmann (2006), and Vickers (2007). DG Competition,

and in its wake many national competition authorities in Europe, have created chief economist

positions, which teams of PhD economists support. The goal is to raise the quality of standard

of in-house economic analyses, as well as the ability to appraise outside experts’ reports.


organization economics is truly put to the test. This is to the benefit of both the

specific case at hand, and the field of industrial organization in general.

Posner (1999) summarizes the U.S. law governing the use of expert wit-

nesses. According to the original Federal Rules of Evidence (FRE), anyone

who has relevant expertise “by knowledge, skill, experience, training or edu-

cation” is permitted to be classified as an expert witness. The expert witness

should not in the first place be a consultant to the parties, but an independent

professional who testifies on the evidence to the courts.45 The expert has a

moral and professional obligation to testify honestly to his or her professional

opinion.46 Posner does note that testifying experts tend to polarize over time,

representing plaintiffs or defendants, but rarely both. This may reflect personal

dispositions, but to the extent that it is a separating equilibrium, it may com-

promise objectivity and make it difficult for courts to choose between duelling

experts.

A number of mechanisms, including professional rules of conduct, safe-

guarded the reliability and integrity of the expert’s testimony.47 Members of

the NAFE, for example, are held to work by The Statement of Ethical

Principles and Principles of Professional Practice. It specifies in its first article that:

1. Engagement

Practitioners of forensic economics should decline involvement in any litigation when they

are asked to assume invalid representations of facts or alter their methodologies without

foundation or compelling analytical reasons.

On diligence, it further requires in the third article that:

Practitioners of forensic economics should employ generally accepted and/or theoretically

sound economic methodologies based on reliable data. Practitioners of forensic

economics should attempt to provide accurate, fair and reasonable expert opinions.

In addition, the code contains several paragraphs that exist to ensure transpar-

ency of information, methods, and academic debate. The latter is also a legal

requirement, as the expert must make the facts or data that he or she relied

upon in forming opinions available for opposing counsel to cross-examine.

In case law, a higher standard for expert testimony to be admissible and suf-

ficient to show causation has developed seminally since the U.S. Supreme

Court decision in Daubert v. Merrell Dow Pharmaceuticals, Inc. in 1993.48 In

Daubert, the Supreme Court considered the question what are “reliable” scien-

tific principles and methods and who qualifies as a scientific expert. Criteria to

answer these fundamental questions on “the scientific method” were sought in

evidence based on falsifiability, replication, limitations, and potential rate of

error, peer review, publication, and general acceptance by consensus in the

45 See also MacKie-Mason and Pfau (1999).46 Posner (1999), p. 92.47 See Piette (1991).48 U.S. Supreme Court, Daubert v. Merrel Dow Pharmaceuticals Inc., 509 U.S. 579 (1993).


academic community. The case was much debated at the time—involving

several Nobel Prize laureates who in Amicus Briefs pointed out, amongst

other things, the limitations of the peer review system as an indicator of scien-

tific truth. The implications of the Daubert decision are still discussed today.49

This methodological debate led to a revision of rule 702 of the FRE in 2000,

which now specifies on expert witnesses qualifications:

If scientific, technical, or other specialized knowledge will assist the trier of fact to

understand the evidence or to determine a fact in issue, a witness qualified as an expert

by knowledge, skill, experience, training or education, may testify thereto in the form of

an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2)

the testimony is the product of reliable principles and methods, and (3) the witness has

applied the principles and methods reliably to the facts of the case.

A literature developed on expert economic testimony in antitrust cases. Beyond

the fundamental question whether there is sufficient consensus in the econ-

omics profession for it to satisfy the Daubert test, Slottje (1999) collects

expert witness accounts to provide insight into the “nuts and bolts of what for-

ensic economists actually do” (ibid., p. ix). In the same year, the Spring issue of

the Journal of Economic Perspectives appeared, including Posner (1999). Gavil

(2000) is an early detailed legal study. The Spring 2003 issue of Antitrust on

“Working with Economic Experts” contains various relevant contributions as

well, including Milne and Pace III (2003) on successful and unsuccessful

expert witness testimony in alleged cartel conspiracies.50 Werden et al.

(2004) discusses the use of economic models in assessing the competitive

effects of mergers in the context of the Daubert criteria. Werden (2007)

surveys the admissibility of expert economic testimony in antitrust cases.

In his critique to “bright-line tests” in this issue of the Journal of Competition

Law and Economics, Franklin M. Fisher draws on his extensive experience as an

expert witness in antitrust cases. In the process, Fisher gives various insights

into how to be an effective expert economic witness. Several other leading

economists had done so before in Slottje (1999), making for entertaining

reading. The first contribution to the volume is by Hendrik Houthakker and

largely about his involvement for the DOJ in the landmark United States

v. IBM, which was filed in 1969.51 In this case, Fisher was the opposing prin-

cipal economic witness to IBM. It ran for more than 10 years before the DoJ

withdrew it as “without merit.”

Houthakker describes how he was instrumental in advising the DOJ to “go

after” IBM, “with its 70% market share in computers,” as a top priority in

1967. In his later role as expert witness, IBM’s counsel failed to intimidate

49 See Solomon and Hackett (1996) for an insightful review of Daubert from the point of view of

philosophy of science. See Bernstein (1996) for a general critique. Ireland (1997b) introduces a

special issue of the JFE on the Daubert decision. Krimsky (2005) discusses the weight and the

strength of scientific evidence in the context of Daubert.50 See also Baker (2003b).51 United States v. IBM, 69 Civ. 200 (S.D.N.Y. 1969).


him, Houthakker writes, because the lawyer who cross-examined him paled in

comparison to the Gestapo tactics that he had faced in his youth as a prisoner

of war. Houthakker resigned as a witness when the DOJ scheduled him for tes-

timony during his fall classes in 1977. A few years later, the DOJ “threw in the

towel.” According to Houthakker, the government’s decision to stop pursuing

the case was political, and he criticizes the account of Fisher et al. (1983) that

the allegations against IBM had been a mistake from the start. Houthakker

experienced the adversarial element that litigation introduces into otherwise

“generally peaceful” academia as not necessarily productive, which was a

reason for him to select only a few cases to get involved in from that time.

William Baumol’s (1999) account is brief but no less insightful, with several

examples of how consulting experience contributed to his academic output,

including contestable market theory. Top-level consulting allowed him to

meet key players, Baumol says, and see things that he otherwise never would

have.

Frederic Scherer’s expert witness account is the most instructive and

amusing. He too acknowledged a cross-fertilization between research and liti-

gation consulting. To that end, he accepted cases with substantial “preceden-

tial interest” and avoided cases in which he would be “reluctant to submit my

testimony to critical judgement by my economist peers”(Scherer, 1999,

p.132). Scherer would further not testify on behalf of firms that were likely

to have committed per se law violations and only in cases that concerned a

limited number of industries that he knew well.

Scherer distills some valuable lessons from “surviving” roughly 40 years in

“a blood sport” (Scherer, 1999, p. 129). The first is: “Know thy subject matter

thoroughly.” This lesson, Scherer explains, he learned the hard way: being

cross-examined in the IBM case. Good preparations include reading every-

thing, but also visiting production facilities, talking to product users, and pre-

paring a chronology of key events. The second rule is: “Admit your mistakes

and get on with the show.” Third is not to try to deny the significant weak-

nesses in your client’s case, as it may discredit the entire testimony. Fourth,

“search one’s prior writings for statements that might be construed as conflict-

ing with impeding testimony.” Such potential contradictions should be

explainable and: “Altering views for specific testimony is not recommended.”

Finally, Scherer advises to: “always tell the truth, as best you know it” (ibid.).

A key concern with all of the contributing experts is to guarantee indepen-

dence and objectivity—or to avoid the “whose bread I eat, his song I sing”

attack, as Scher er calls it (Scherer, 1999, p. 130).52 The NAFE-code does

not allow forensic economists to accept contingency fees, or fees that relate

52 See also Meier (1986) and Mandel (1999). The latter discusses “the booming market for expert

testimony” and calls for ethical standards to regulate it which that include full disclosure by aca-

demic economists on the cases in which they are or have been involved, and a protocol to avoid

conflicts with academic objectivity.


to the size of the court award or settlement. The large amounts of work that

competition cases often are, are normally compensated on the basis of

hourly fees, which may in part be paid into faculty funds. MacKie-Mason

and Pfau (1999) offers an extensive discussion on advocacy issues, motives,

and pitfalls of the expert witness. The authors point out that, because expert

witnesses are repeat players, there is a market mechanism that induces pro-

fessionals to guard their reputation for professional honesty and integrity, as

these credentials—more so possibly than winning the case—generate future

work. Although professional interests and collegial reputation may further

help to encourage objectivity, experts should watch out for ego, obligation

to the client, a deceptive team spirit, and the risk of getting locked into

position.

In MacKie-Mason and Pfau (1999), various pieces of advice to steer clear of

these problems are given, including tips on how to choose a case and research

it wisely. The authors recommend providing lots of quantitative evidence,

tying testimony to a publication commitment, and being conservative in

drawing conclusions—in the sense of trying to “err on the low side” (ibid.,

p.218). In all of this, an open relationship with the attorneys is important to

be able to discuss reservations and doubts.

First and foremost, however, MacKie-Mason and Pfau advise due diligence

in deciding whether or not to accept a case. The authors developed a two-stage

approach to case selection for this, based on the difference between testifying

and nontestifying experts.53 In the first stage, it is agreed that initial research is

done as a consulting expert, and not yet as a testifying expert, at a separate fee.

Only on the outcome of that research does the expert decide to testify in the

case or not. This approach leaves an exit option and no up-front commitment.

The client benefits as well, in that the initial report and the materials shown to

the nontestifying expert are not discoverable by the other parties and can be

suppressed if they do not support the case.

For practicing lawyers, working with expert witnesses has become a special-

ity area in itself. Handbooks and consultants advise on trial techniques for how

to select and present expert witnesses and prepare them to explain economics

to jurors and judges. The expert can expect close scrutiny of his or her testi-

mony and needs special skills and training to prepare for intense cross-exam-

ination. For that purpose, court sessions are sometimes extensively rehearsed.

The detailed accounts in Slottje (1999) by Dennis Carlton and Hal Sider on

Toys R Us, and by Lawrence White on the FTC’s challenge of the 1986

merger between Coca-Cola and Dr. Pepper contain various details on their

53 See Posner (1999), p. 92. The requirements on discoverability of information shown to nontes-

tifying experts are lower than to testifying experts. As a result, a division of labor has developed

between testifying expert witnesses and their associates who help prepare the testimony. The

latter are sometimes given a great deal of independence to avoid irrelevant information or inter-

mediate draft reports being discoverable by the other party. This, in turn, has led to case law in

extreme cases on the question of who effectively is giving testimony. See also Keyte (2003).


preparation for trial and deposition. The aspiring expert witness can further-

more consult Bergman (1999), Nolo’s Deposition Handbook or Smith and

Bace’s 2002 Guide to Forensic Testimony: The Art and Practice of Presenting

Testimony as an Expert Technical Witness. The latter draws extensively on

U.S. v. Microsoft Corporation, and critically analyzes the video recordings of

the deposition of Bill Gates, which the government released in April 1999.54

This extensive industry of specialized and high-paid employment raises

questions on the economic efficiency of the system. Apart from the public

good of just law enforcement and fair compensation, a cost–benefit analysis

of the competition law enforcement process is essentially a comparison

between legal transaction costs and deterrence benefits. A key factor in

this is the quality of decision-making. In antitrust regimes that are open

to erroneous judgements in the form of either false positives or false

negatives, the incidence of competition law violations may be higher in

anticipation, as Schinkel and Tuinstra (2006) shows. An improved quality

of competition law decision-making therefore has an efficiency effect as well.

Competition and reputation help to sustain neutrality and a high quality of

work.55 To stimulate both, several reviewers of the expert economic witness

system have proposed further disclosure of expert witness assignments.

Posner (1999) suggested that the American Economic Association could main-

tain a public file of the involvements of its members in antitrust cases, includ-

ing electronic links to the testimony. Such improved transparency would help

to maintain high professional standards and thereby guard the reputation of

the profession as a whole. In addition, Posner and others have urged the

courts to make greater use of their ability to appoint their own independent

experts. They could help decide in cases in which reasonable economic

expert witnesses disagree in their findings.56

Most of the above accounts and best practice rules relate to the U.S. anti-

trust practice. As remarked already, the European process of competition

law enforcement can be less transparent than the U.S. court-based model.

In his contribution to the issue, Andrew Gavil relates the American experi-

ences with the use of economic expert witnesses and the Daubert rule to

lessons for European enforcement. Gavil practices U.S. antitrust law and

54 See also Lopatka and Page (2005).55 Interestingly enough, in the more traditional forensic disciplines, models of competition are

studied as a means to improve quality. Koppl (2005) discusses such competitive self-regulation

for police forensics and forensic laboratories.56 Scherer (1999) and Baker and Bresnahan (2007). In Australian courts, it is possible to have all

experts on the stand at once and questioning each other in the presence of the judge. A version

of this “hot-tub” model is a meeting of the expert witnesses of opposing sides before the trial, in

which they are to agree on their disagreements before giving testimony before the court. This

latter version was used, allegedly quite effectively, in court proceedings following claims by

Seven Network, an Australian television network, of anticompetitive conduct against a

number of competing networks. The Federal Court in Sydney dismissed these claims at the

end of July 2007.


teaches at Howard University School of Law. In his paper, he examines the

preference expressed in the European Commission’s Green Paper on

Damages Actions for court-appointed experts over party-retained testifying

experts.57 Gavil questions some of the assumptions that underlie that prefer-

ence and posits that reliance solely on court-appointed experts may be insuffi-

cient to realize the Green Paper’s principal objective of promoting private

enforcement of competition laws. He concludes that additional procedural

tools to facilitate the development and presentation of economic evidence,

including party-retained experts, may be necessary.

Currently, there does not seem to be an association or a common code of

ethics for expert economic witnesses to the European courts or agencies.

Nevertheless, the role of academic economists in the EU competition law is

growing, as the revolving-door position of Chief Competition Economist at

the European Commission exemplifies. Other functions, such as those of the

Economic Advisory Group on Competition Policy, also seem to have simi-

larities to nontestifying experts’ work. The members of this group are all

leading academics, who publish reports on competition issues in subgroups

that importantly influence European competition policy.58 The national com-

petition authorities in Europe increasingly add (part-time and/or temporary)

academic economists to their advisory boards and staff. In addition, there is

a large pool of competition consultants available to assist the parties.

Furthermore, various policy makers have argued for court-appointed

experts in recent contributions and an increasing number of judges specialize

in competition matters and receive economic training and advise.59 The role

and quality of forensic IO in Europe is therefore likely to increase in the

decades to come.

V. REMEDIES, SANCTIONS, AND DAMAGES

The fourth aspect of the process of competition law enforcement in which for-

ensic IO can assist is in determining appropriate remedies in cases in which an

antitrust concern or an infringement has been established. Parties found to

have breached the competition laws face a number of possible consequences,

including interventions in the structure of the firm, disciplinary actions against

management, and obligations to pay corporate fines and private damages. In

merger control, competition concerns with the agencies can be overcome

when the merging parties divest sufficiently large parts of their business to

competitors or new entrants in the market.

The principles that underlie punishment relate primarily to concepts such as

fairness, vindication, and compensation, which are in the domain of law, more

57 Commission of the European Communities (2005).58 See http://ec.europa.eu/dgs/competition/eagcp.htm.59 Fingleton (2005) and Neven (2006).


so than of economics. Yet in antitrust, the law and economics approach of sanc-

tioning to deter parties from stepping out of the boundaries of the law has had a

strong influence on the way in which competition authorities have designed

their merger control processes, sentencing guidelines, and other remedies. In

addition, economics can inform how to remediate harm and repair compe-

tition. Therefore, industrial organization economics plays an important role

in advising on effective remedies. The same kind of analyses that helped to

identify competition problems can assist in stopping and further avoiding

them. Forensic IO therefore has an important preventative role.

Economists play an essential role in devising strategies for restoring compe-

tition, especially in cases of exclusionary conduct. In some cases, the obstacle

to workable competition is structural and can be removed. An early case in

which this was believed to be possible is U.S. v. AT&T, which led to the

ordained break-up of the company in the early 1980s.60 The structural inter-

vention aimed at reducing the company’s ability to monopolize the telephone

industry by erecting artificial barriers to entry and fighting entrants out of the

market through predatory pricing.61 Many smaller and independent telephone

companies would compete more forcefully, reducing prices and stimulating

innovation.

Similarly and more recently, the power of Microsoft Corporation to monop-

olize the platform market has been argued to relate to the company’s exclusive

intellectual property right on its popular operating system and network soft-

ware, refusing to disclose essential elements of its application programming

interfaces (APIs) to competitors. This makes it difficult for rivals to produce

a viable alternative to Microsoft’s products, in particular, applications soft-

ware, which is compatible with Microsoft’s installed base and that can

induce its clients to switch. As a result, competition would be stifled and inno-

vation with it.62 The original proposals to split up Microsoft into a systems and

an application software company were in part inspired by the idea that this

would force the systems company to reveal more information on its APIs.

On the same logic, the European Commission has ordained Microsoft in its

official decision to untie some of its software bundles and make essential

parts of its API information available to other software writers.63

Structural remedy negotiations are more common in merger control.

As Section III noted, Phase II merger inquiries involve extensive economic

analyses. They are often cleared only with considerable structural remedies.

Large merger investigations include advanced simulation models

that combine oligopoly theory and econometric estimations. The models

help ex ante assessments of the likely effects of the proposed mergers. As a

60 United States v. American Telephone & Telegraph Co., 552 F.Supp. 131 [1982].61 See Evans (1983).62 See Fisher (2000).63 See Evans et al. (2000).


result—and with all of the caveats pointed out earlier—they can also advise on

structural remedies on which the merger can conditionally be cleared, in par-

ticular, the divestment of parts of the merging firms’ capacity. The detailed

numerical scenarios that these merger models allow for can support divestiture

negotiations between the agencies and the merging parties. The result is essen-

tially a design of a post-merger market structure in which the competition con-

cerns that the merger raises are reduced to a sufficient extent.

In the case of hard-core cartel violations or flagrant abuses of dominance,

the law specifies what should be the appropriate sanction. For corporate

fines, however, both U.S. and European agencies have in recent years com-

mitted themselves in guidelines to punishing antitrust fines.64 The calculation

methods that these guidelines imply relate the effective fine to the volume of

sales that was affected by the antitrust violation, which is further fine-tuned

on the basis of several multiplicative factors that relate to the gravity of the

infringement and mitigating circumstances. Although crude and imperfect,

this is a reasonable approach to setting fines with a bite—although more so

for cartels than for abuses of dominance.65 Forensic IO techniques can be

used to estimate the appropriate base amount of the fine, which is not

obvious in complex organizations.

In addition, enforcement regimes have increasing possibilities for criminal

sanctions against individuals responsible for anticompetitive acts.66 These

sanctions can be more effective than punishing the company when they are tar-

geted at the right decision-makers within the organizations. Organizational

economics in combination with more traditional forensic techniques discussed

above in the context of cartel audits can have a role in this, laying out the de

facto corporate governance structures. Similarly, economics can advise on

the design of incentive-compatible corporate compliance programs that can

help prevent antitrust violations. Such programs can only be credible if com-

bined with a managerial incentive scheme, such as bonuses and stock option

plans, that have safeguards against individuals seeking illegal profits. These

are largely unexplored areas of corporate governance theory, which are only

recently attracting attention as a result of several corporate fraud scandals.67

These issues have direct application in antitrust and, for example, in combi-

nation with private antitrust detection, hold a promise for increased

deterrence.

64 See, respectively, The United States Sentencing Guidelines, last amendments effective November

1, 2007 at http://www.ussc.gov/GUIDELIN.HTM., and Commission of the European

Communities, “Guidelines on the method of setting fines imposed pursuant to Article

23(2)(a) of Regulation No 1/2003,” Official Journal of the European Union, 1.9.2006, C 210/2.65 See Bos and Schinkel (2006) on the implied method for calculating fines of the European

Commission.66 See Cseres et al. (2006).67 See Denis et al. (2006).


Finally, forensic IO techniques are often used in the context of antitrust

damages actions. This is the area in which members of the NAFE are most

active, as discussed above. Part of the debate is on methods for quantifying

damages and the design of an effective private enforcement practice. The

latter includes questions such as whether or not class actions are possible and

in what form, whether the pass-on defense should be available, or whether puni-

tive damages are an appropriate mechanism.68 For the most part, however, the

quantification of antitrust damages is involved in practical work in preparing cal-

culations for court proceedings or to support settlement negotiations.69

An essential part of assessing antitrust damages is to determine what would

have been the market situation absent the competitive acts—sometimes referred

to as the “but-for” world. The most basic aspect of this question is what the

price level would have been if the industry had been competitive. More compli-

cated issues are what kind of industry dynamics—entry, exit, and acquisitions—

would have unfolded if not for the antitrust violation, what product quality and

safety improvements would have been generated, or what forms of innovation

flourished. To reconstruct a but-for world with a sufficient degree of reliability

requires an economic model of the market, in combination with a thorough

econometric analysis of the relevant data to fit the model and determine the

but-for price question with a reasonable degree of certainty, usually on the

basis of time-series of prices. With the qualification and quantification of the

but-for world based on economic reasoning, the subsequent determination of

the antitrust damage total is essentially an accounting exercise, albeit one that

can turn on complex issues of discounting and probability calculus.

In their contributions to this issue, Connor, Fisher, and Gavil cover several

aspects of private antitrust damages actions. Connor surveys various methods

to assess damages, including the before-and-after-method, the yardstick-

method, and cost-based approaches. He draws amongst other cases on the

Vitamins litigation. Fisher explains the case development and litigation

aspects of the Visa Check/MasterMoney class action, a private damage case in

which he also was responsible for assessing the damage total that led to a land-

mark out-of-court settlement award.70 Andrew Gavil discusses elements for

the design of an effective private enforcement regime in Europe, where the

practice is in its infancy and in need of further development.

VI. FORENSIC IO AS A DISCIPLINE: CONCLUDING REMARKS

The application of industrial organization economics to competition law

enforcement is sufficiently multifaceted to be a speciality discipline of its

own. The market for expert economic advice on competition issues and

68 See Ruggeberg and Schinkel (2006).69 See Hall and Lazear (1994).70 See http://www.inrevisacheckmastermoneyantitrustlitigation.com.


complementary forensic IO skills is highly specialized. Often the skills and

knowledge necessary to address all issues in even a single antitrust case

require the assistance of multiple experts. This necessitates considerable

coordination and specialized project management work.

The market for competition advice is large. The need to be able to assemble

tailor-made teams of specialists and analysts for projects that can go on for

years creates economies of scale and scope. On the other hand, do all interested

parties in a case require independent support, and can diverse client portfolios

create conflicts of interest. The market therefore sustains an oligopoly of just a

few advanced consulting firms. They employ economists trained in IO theory

and econometrics at the best schools, highly specialized industry expertise, and

a broad experience.

The various sides in competition law disputes, interested parties as well as

the antitrust agencies, rely on economic consulting firms for assistance. These

firms produce institutional reports, but importantly they also form a platform

for independent academic economists, who work with them on selected cases

and on a freelance basis.71 For reasons of identifiable reputation, the testifying

individual expert witness remains central—although still much more so in the

United States than in Europe—and the consulting firms often act as nontesti-

fying experts or support teams in the preparation of the experts’ eventual

testimony.

Universities can supply the discipline with graduates trained in the relevant

economic disciplines. Most universities offer theory and econometrics courses.

In addition, a few have specialized courses in forensic economics. Slesnick and

Tinari (2001), in the Journal of Forensic Economics, survey forensic economics

taught in university curricula. They report very few organized programs on the

topic—mainly their own—and just a few isolated individual courses, or

elements of forensic economics introduced in traditional economics classes.

The emphasis in the curriculum elements that the authors found in their

survey is firmly on damages assessment in tort litigation. An exception,

which their study did not include, is a semester course, “Forensic

Economics,” which John Connor teaches at Purdue University, which

focuses entirely on antitrust.72

Antitrust agencies have forensic IO skills available at various levels within

their organizations. Cartel and merger units each have their own specialists.

As said, competition authorities in Europe increasingly follow the U.S.

example of having a chief economist office and revolving-door positions for

distinguished economists, like the position of Deputy Assistant Attorney

General for Economic Analysis with the U.S. DOJ is. However, there presently

does not seem to be a public institution or other form of centralized organiz-

ation of forensic IO. At best, agencies have a forensic IT unit.

71 See Short and Sattler (1996).72 See Connor (2003).


The more traditional forensic sciences are organized in national institutes

for the forensic sciences.73 These governmental laboratories are typically

part of the national departments of justice. They maintain close relationships

with academia, having prominent scientific boards with renowned scientists

from various disciplines. University professors closely cooperate with the

institutes, are called upon to assist in particular investigations, and teach

in specialized masters programs on forensic science.74 The institutes

publish best-practice manuals, accredit independent experts and organize

conferences, expert working groups, and other platforms to advance the

discipline.

It appears that the practice of forensic IO could benefit from a similar

type of organization, preferably, it appears, on a European level. The

agencies and the courts could rely on such an independent institute or

society for expert advice in complex competition cases. It could further be

a reference source to reputable specialists. If such an entity were set up as

an economics division of existing forensic organization, such as the

European Academy of Forensic Science, there are obvious synergies across

the sciences. The ideal team of forensic skills, including forensic IT and

data analysts, could be put together around forensic IO specialists to help

solve complicated competition cases.

The traditional forensic sciences seemingly owe much of their popularity to

suspense novels, drama series, and television documentaries. Although it is

likely that capital crime will always remain more appealing to a broader audi-

ence, antitrust acts can be just as shocking and suspenseful. In fact, several

internal cartel cases have inspired best-selling courtroom/law suspense

novels.75 The footage of the Lysine cartel members meeting in hotel rooms,

which the FBI managed to obtain with cameras hidden in table lamps,

shows just how exciting white collar antitrust crimes are. Lysine, just like the

latest cartel decision of the European Commission in Dutch Beers, contains

enough thriller and script for several episodes of Forensic Detectives.76 The

same is true for the various Microsoft cases. Add to this the potential for inter-

national conflicts between the agencies and their respective governments and

you have the stuff that movies are made of. To attract the attention of the

public in that way would not only make for effective marketing of the specialty

discipline, but could also raise awareness of the serious harm that competition

law violations often cause.

73 Examples are the U.S. Federal Bureau of Investigation (FBI), the National Institute of Forensic

Science in Australia, and the Forensic Science Service in England.74 Key societies are the American Academy of Forensic Sciences (http://www.aafs.org) and the

European Academy of Forensic Science (http://www.enfsi.org).75 See Eichenwald (2001) and Mason (2004).76 See Griffin (2000) and Dutch beer market, Case No COMP/B/37.766, Commission Decision of

April 18, 2007.


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