Comments on Easterbrook and Snyder

Abstract

FRANK EASTERBROOK'S paper has three main points: (a) a rationale for compensating direct purchasers, and hence implicitly ruling in favor of private suits, (b) a proposal to compensate damaged rivals by an uncertain multiple, but only as residual claimants, and finally, (c) a proposal for a minimum multiplier of 1.5. I discuss them in order. a) Easterbrook maintains that compensation to buyers can be calculated so as to avoid their taking excessive precautions. Because the social cost of monopoly is the substitution away from the monopolized good, compensation to buyers may reduce the cost of monopolization. Because in most cases the buyer is not sure of receiving the appropriate compensation, Easterbrook proposes a multiplier equal to the inverse of the probability that the case will be filed and decided in the buyer's favor. Thus, if the probability of a plaintiff's receiving compensation is 0.33, then the multiplier should be 3. This proposal will work only in some special circumstances. In most cases a buyer sees a price increase. Its extent of substitution will depend on whether it believes the price change to be permanent or transitory. If it is transitory the extent of substitution away from the good will be very limited. A purchaser may try to find out whether the price increase was the result of the formation of a cartel. Since cartels do not form randomly but respond to some exogenous shocks, the purchaser will usually not be able to disentangle the price effect of the exogenous shock from that of the cartel formation. Thus, observing a price increase, the purchaser will assess a low probability that it was the result of a cartel. If, however, the purchaser knows for sure that the price increase is the result of a cartel, it may either sue or not. If it files suit, it thinks it will get with certainty three times the overcharge. It is with certainty that it will receive the compensation because the purchaser is sure that the price increase is the result of the formation of the cartel. If the purchaser does