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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.
Page 2 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 Page 3 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).
Page 4 of 30 Journal of Competition Law and Economics
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).
Forensic Economics in Competition Law Enforcement Page 5 of 30
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).
Page 6 of 30 Journal of Competition Law and Economics
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.
Forensic Economics in Competition Law Enforcement Page 7 of 30
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).
Page 8 of 30 Journal of Competition Law and Economics
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.
Forensic Economics in Competition Law Enforcement Page 9 of 30
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.
Page 10 of 30 Journal of Competition Law and Economics
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.).
Forensic Economics in Competition Law Enforcement Page 11 of 30
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).
Page 12 of 30 Journal of Competition Law and Economics
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.
Forensic Economics in Competition Law Enforcement Page 13 of 30
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.
Page 14 of 30 Journal of Competition Law and Economics
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).
Forensic Economics in Competition Law Enforcement Page 15 of 30
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).
Page 16 of 30 Journal of Competition Law and Economics
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.
Forensic Economics in Competition Law Enforcement Page 17 of 30
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).
Page 18 of 30 Journal of Competition Law and Economics
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.
Forensic Economics in Competition Law Enforcement Page 19 of 30
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).
Page 20 of 30 Journal of Competition Law and Economics
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).
Forensic Economics in Competition Law Enforcement Page 21 of 30
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).
Page 22 of 30 Journal of Competition Law and Economics
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.
Forensic Economics in Competition Law Enforcement Page 23 of 30
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).
Page 24 of 30 Journal of Competition Law and Economics
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.
Forensic Economics in Competition Law Enforcement Page 25 of 30
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