Introduction to Econometric Techniques

• Pages: 1-27

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CHAPTER I

INTRODUCTION TO ECONOMETRIC TECHNIQUES

For the rational study of the law the blackletter man may be the man

of the present, but the man of the future is the man of statistics and

the master of economics.1

A. The Value of Econometric Evidence

Econometrics is the application of statistical techniques and

inferences to observed data in order to evaluate economic theories and

their predictions. Econometrics provides a means for determining

whether a correlation, which may reflect a parallel, reciprocal, or causal

relationship, may exist between various events that involve complex sets

of facts. The principal value of econometrics for antitrust analysis and

litigation lies in its use for developing an empirical foundation in order to

prove or disprove assertions that are based on a particular economic

theory. Private litigants, the Federal Trade Commission (FTC), and the

Antitrust Division of the U.S. Department of Justice (DOJ) have used

econometrics to provide evidence of the existence of a conspiracy, the

presence of market power, the nature of relevant markets, the likelihood

of anticompetitive effects, the fact of injury, and the quantification of

damages.2

Courts have used econometric evidence in antitrust cases for more

than twenty years.3 One court has recognized that, “[a]s a general rule, a

properly constructed regression analysis ‘can play a vital role in legal

proceedings. Used properly, [multiple regression] is an accurate and

reliable method of determining the relationships between two or more

1. Oliver Wendell Holmes, Jr., The Path of the Law, 10 Harv. L. Rev. 457

(1897).

2. Econometrics is also widely relied upon by factfinders in a number of

nonantitrust contexts such as sex and race discrimination. In antitrust

cases the courts may view nonantitrust cases as precedents on discovery,

evidentiary, or methodolgical issues.

3. E.g., Pearl Brewing Co. v. Jos. Schlitz Brewing Co, 415 F. Supp. 1122,

1134 (S.D. Tex. 1976).

2 Econometrics in Antitrust

variables, and it can be a valuable tool for resolving factual disputes.’”4

“The caveat, of course, is that the study must be performed correctly to

have any probative value.”5

The use of econometrics in litigated cases has expanded significantly

in recent years6 and econometrics has played an important role in several

significant antitrust cases. In Menasha Corp. v. News America In-Store

Marketing, Inc.,7 for example, a federal court of appeals rejected a

plaintiff’s definition of the relevant market in part because the plaintiff

failed to introduce any econometric evidence. Econometric evidence—

or the absence thereof—also played a critical role in United States v.

Oracle Corp., where the Court rejected the DOJ’s claim of unilateral

effects where the plaintiff’s proof was “devoid of any thorough

econometric analysis.”8

Econometric evidence has been used, along with other evidence, to

demonstrate the existence of an antitrust conspiracy.9 Courts have relied

on econometric evidence to determine the existence (or absence) of

market power,10 the likelihood of adverse unilateral effects in the context

4. In re Polypropylene Carpet Antitrust Litig., 996 F. Supp. 18, 26 (N.D. Ga.

1997) (quoting Franklin M. Fisher, Multiple Regression in Legal

Proceedings, 80 COLUM. L. REV. 702, 735 (1980)).

5. Id.

6. A Lexis search of “antitrust and (econometric or regression)” generated

43 hits for the years 1974-1983, 62 hits for the years 1984-1993, and 107

hits for the years of 1994-2003. For an overview of the use of

econometrics in antitrust, see Jonathan B. Baker & Daniel L. Rubinfeld,

Empirical Methods in Antitrust Litigation, 1 AM. L. & ECON. REV. 386

(1999).

7. 354 F.3d 661, 664 (7th Cir. 2004).

8. 331 F. Supp. 2d 1098, 1172 (N.D. Cal. 2004).

9. Petruzzi’s IGA Supermarkets v. Darling-Delaware Co., 998 F.2d 1224,

1241 (3d Cir. 1993). However, in Petruzzi’s, the Third Circuit held that

while regression analysis probably would not be sufficient to defeat

summary judgment by itself, regression evidence, coupled with evidence

that tended to exclude the possibility of unilateral conduct, would be

sufficient to defeat a motion for summary judgment. Id. See also Ohio ex

rel. Montgomery v. Louis Trauth Dairy, 925 F. Supp. 1247 (S.D. Ohio

1996).

10. E.g., United States v. Eastman Kodak Co., 853 F. Supp. 1454, 1473

(W.D.N.Y. 1994), aff’d, 63 F.3d 95 (2d Cir. 1995).