The ‘profit margin’ defence in cartel damages cases
10 February 2026
In this article, we discuss the key concerns arising from the ‘profit margin’ defence in cartel damages cases, and caution against using observed profit margins as an upper bound when assessing the plausibility of a cartel overcharge estimate.
In cartel damages cases, defendants sometimes rely on observed profit margins during the cartel to challenge claimants’ overcharge estimates. For instance, if profit margins were small or zero, defendants may argue that the overcharge must be small or zero. Anything higher is considered implausible. This line of reasoning assumes that overcharges are reflected in observed profitability.
We highlight that a key concern with this approach is that in many circumstances observed profit margins may not reflect the overcharge:
When there is entry into the cartelised market and the cartel accommodates it, cartel profits can be eroded even when prices remain at the collusive level.
Cartels may be formed to prevent prices from decreasing or collapsing and avoid losses. So-called ‘crisis cartels’ are one example. In such cases, the cartel just wants to ‘keep afloat’.
Cartels suppress healthy rivalry, creating productive and dynamic inefficiencies and leading to higher costs. Higher costs from the cartel would tend to counterbalance the impact of the overcharge on profit margins.
Cartel profits may be shared with workers with bargaining power, reducing margins.
Shocks to supply and demand may also compress margins.
In all these circumstances, observed profit margins could be low or zero even if the overcharge were high. As a result, profit margins would fail to capture the overcharge.
We conclude that observed profit margins provide limited guidance when assessing the plausibility of overcharge estimates. We recommend not relying on them as an upper bound when sense checking such estimates.