Measuring the pass-on effect is equivalent to measuring the increase in the price of the good sold by the downstream firm to the final consumer. The ability to pass-on the effect of a cartel depends on the ability of the firm to raise prices to its customers to compensate for the effect of the higher costs on profits. There are two main approaches to estimate the pass-on effect; a "reduced-form" approach and a "structural model" approach.
The "reduced-form" approach measures the effect of an increase in the cost of an input on the prices of the intermediate firm during the next cartel period. The specification of this model controls for all exogenous factors affecting demand and supply. The model identifies the effect of an increase in input prices caused by the cartel on the price of the claimant’s product. Successful implementation of this model yields results which indicate the magnitude of the pass-on effect that can be deducted to the per unit direct antitrust damage.
The "structural model" specifies a demand function and a pricing equation to model competition in the downstream market. The pass-on effect is determined by the new calculated equilibrium from the estimated supply and demand functions. The advantage of this model is that it allows the pass-on to be calculated for different competitive models including; perfect competition, symmetric Cournot duopoly and monopoly.