§3.1 Overview

(46) The passing-on of overcharges and the associated price and volume effects arise because of a firm's incentives to respond to increases in its costs by raising prices (51). The initial overcharge may be understood as an increase in the input costs for the direct purchaser. To estimate the passing-on effects, the court would typically need to consider how such a cost increase would affect 1) prices set by the direct purchaser in the downstream market and 2) the value of the lost sales supplied by the direct purchaser. (47) National courts estimate passing-on based on the circumstances of the specific case. However, a general understanding of the economic theory of passing-on and the associated effects may be important for the court for several reasons. Firstly, predictions from economic theory may serve as one of several factors relevant for assessing whether the required standard of proof is met in a specific case. For instance, economic theory provides the court with a framework within which quantitative and qualitative evidence could be evaluated (52). Secondly, particularly at an early stage of the litigation, economic theory may assist judges when making decisions in relation to the disclosure of data or information by assessing its relevance. Finally, theoretical or conceptual considerations can also form a basis for discerning the credibility and reliability of different economic explanations underpinning the link between overcharge and passing-on put forward by the parties. (48) The Damages Directive does not distinguish between harm resulting from 1) increased prices (price effects) and the passing-on of overcharges including the volume effect and 2) other effects, such as reduced quality of products or hampered innovation (non-price effects) which may arise. These guidelines focus on the passing-on of price increases and the related volume effects (53). (49) According to economic theory, the existence and the magnitude of the passing-on effects, i.e. the associated price and volume effects, are determined by a range of factors (54). These factors affect the outcome of a passing-on scenario simultaneously, and their interdependency should be taken into account. (50) Further, the relative importance of each factor might vary from case to case. Thus, it may be relevant for the judge to understand which factors are likely to affect the degree of passing-on in a particular case. For this, depending on national law, the judge may refer to explanations from the parties' economic experts or its own court-appointed economic expert. Moreover, in practice, a firm may not always take pricing decisions that are entirely consistent with the predictions on the basis of economic theory. It is therefore important to also assess the insights from economic theory in the light of the factual evidence available in the case at hand. Such evidence may be of both qualitative and quantitative nature, such as internal documents describing the degree of passing-on and the quantitative methods explained in section 4 below. (51) As set out in further detail in Annex 1, according to economic theory, the most important factors affecting the existence and magnitude of the passing-on effects include: (i) the nature of input costs (55) subject to an overcharge (whether these costs are fixed or variable, whether the infringement leads to increases of these costs only to one customer or to all or the vast majority of customers on a given market); (ii) the nature of the product demand that the direct or indirect customers face (in particular, the link between the demand and price level); (iii) the strength and intensity of competition in the markets where the direct or indirect customers are active; and (iv) other elements, such as price adjustment costs, the proportion of a firm's costs affected by the overcharge, buyer power, vertical integration of direct and indirect customers, price regulation or the timing of the pricing decisions undertaken at the various levels of the supply chain. (52) Firstly, the nature of the input costs subject to an overcharge affects whether and to what extent this overcharge can be passed on. When the overcharge impacts the direct purchaser's costs which do not vary according to the input quantity (i.e. fixed costs), it is less likely to be passed on because such costs typically do not affect the direct purchaser's price setting, at least not in the short run. However, in the long run, fixed costs may affect a firm's strategic decision analysis, too, e.g. the production capacity, which, in turn, might impact the subsequent (short run) price formation mechanism. In such a scenario, fixed costs may also be passed on. By contrast, when the overcharge impacts the direct purchaser's costs which actually vary according to the input quantity (i.e. variable costs), it will generally be more likely to be passed on, at least to some extent. This is because marginal costs (a subcategory of variable costs that can be defined as the cost increment incurred when purchasing one additional input) (56) typically affect the direct purchaser's price-setting decisions (57). (53) Secondly, the product demand that the direct customer faces affects the level of passing-on. A standard price formation mechanism builds on the fact that the demand a firm faces (i.e. the quantity it sells) decreases when it raises its price. The extent to which a direct purchaser raises its own price when facing an overcharge depends on whether the demand reacts strongly to such a price change or not. For instance, if the direct purchaser is a monopolist and the demand that it faces is equally sensitive to a change in prices for all price levels and the direct purchaser is facing constant marginal costs, economic theory suggests that half of the overcharge will be passed on. If the demand the monopolist faces drops ‘more and more’ (i.e. at an increasing rate) when price increases, it is less likely that the overcharge will be passed on as compared to a situation in which the demand that such a monopolist faces drops ‘less and less’ (i.e. at a decreasing rate) as the price increases, all else being equal (58). (54) Thirdly, the nature and intensity of the competitive interaction between the firms on the market on which the direct purchasers are active also affects the level of passing-on. It is important to keep in mind that the effect that increased competition can have on the degree of passing-on depends on whether the initial overcharge affects only the direct customer (i.e. firm-specific overcharge) or also the competitors of the direct customer (i.e. industry-wide overcharge). If the overcharge affects only one direct purchaser, fiercely competing with other direct purchasers, passing-on is less likely compared to a situation where the only affected direct purchaser faces weak competition. However, if there is an industry-wide overcharge, a large number of fiercely competing direct purchasers will generally favour a higher passing-on of that overcharge compared to a situation where there is weaker competition among these direct purchasers (59). (55) A number of judgments from national courts in damages actions have underlined the importance of considering how demand reacts to changes in prices, the intensity of competition and whether or not the direct purchaser's competitors are affected by the overcharge (60). (56) Fourthly, as mentioned in paragraph 51 and in Annex 1, other elements may, under certain circumstances, play a crucial role in the direct purchaser's price formation mechanism, and, hence, for passing-on of the overcharge by the direct purchaser. For instance, one element which might be important in order to quantify passing-on is whether the input affected by the overcharge represents a large or small share of the direct purchaser's variable costs. A direct purchaser may face costs when changing its prices, so-called ‘price adjustment costs’. If the overcharge only represents a small share of the variable costs, the direct purchaser may not find it profitable to pass on such overcharge due to the price adjustment costs. Further, other aspects that may also affect the degree of passing-on are the degree of buyer power or the timing of the pricing decisions undertaken at the various levels of the supply chain, for instance. Some of the factors mentioned in paragraph 51 have also been considered by national courts in cases involving passing-on (61). (57) The existence and extent of passing-on are linked to the loss of sales that generally will accompany any increase in prices. As described above, this loss of sales may be characterised as the volume effect, which a purchaser may claim for as loss of profit. The volume effect arises because the purchaser usually faces a downward sloping demand curve. If the initial overcharge is passed on down the supply chain, a volume effect will arise at all levels of the vertical chain. Hence, when the claim includes damages for volume effects, courts may have to estimate such an effect as well. (58) As mentioned above, any victim of an infringement of EU competition law has the right to seek full compensation for the harm suffered causally linked to the infringement. When passing-on is invoked, an assessment of the volume effect may become important to quantify the overcharge harm in a damages action. In such a case, however, it should be noted that an estimation of the total harm by simply subtracting the passing-on related price effect from the overcharge effect would lead to an underestimation of the harm suffered by the direct or indirect customer if the volume effect is not taken into account. (59) The lost volume stemming from an overcharge is influenced by the sensitivity of demand that the purchaser faces and how the purchaser's competitors react to the overcharge. For example, if the purchaser faces an inelastic demand, i.e. its customers are only to a small extent sensitive to increases in price, the price increase leads to a relatively small decrease in the volume sold. This will, everything else being equal, lead to a smaller volume effect than in the case of a more elastic demand. At the same time, if the purchaser's competitors also increase their prices after an overcharge, this might also reduce the impact of the purchaser's own price increase on its sales (62).

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Source: EUR-Lex (Cellar) · retrieved 2026-09-07