1. Introduction
Competition law has evolved significantly over the past decades. While its primary objective remains the protection of effective competition and consumer welfare, the assessment of competition cases has become increasingly dependent on economic analysis. Modern markets are characterised by rapid technological change, evolving business models, digitalisation, and complex competitive interactions. Consequently, determining whether an agreement, business practice, merger, or State intervention has distorted competition often requires more than the application of legal principles alone. It requires an understanding of how markets function, and crucially, how they would have developed in the absence of the conduct under investigation.
This shift has placed economists at the centre of competition law enforcement. Their role extends beyond analysing prices or calculating market shares. Economists assist competition authorities and courts in identifying the competitive process, evaluating theories of harm, interpreting market evidence, and distinguishing between outcomes caused by the conduct under assessment and those resulting from normal market developments. In doing so, they provide the analytical framework that enables legal tests to be applied to increasingly complex economic environments.
The contribution of economists has become indispensable. Since the relevant counterfactual can rarely be observed directly, economists develop evidence-based alternative scenarios using economic theory, quantitative techniques, market data, financial analysis, and commercial evidence. Their objective is not to replace the legal assessment but to support it by ensuring that conclusions regarding competitive effects are based on robust economic reasoning rather than assumption or speculation.
This paper examines the role of counterfactual analysis in competition law. It explores the contribution of economists to constructing, evaluating, and applying counterfactual scenarios across merger control, antitrust, and State aid cases. It also considers the principal analytical techniques used in practice, the limitations associated with counterfactual reasoning and the growing importance of economic expertise in an increasingly complex competitive landscape.
Before assessing whether competition has been harmed, it is necessary to recognise that markets are constantly evolving. Prices fluctuate, firms enter and exit, consumer preferences change, technologies develop, and regulatory frameworks adapt over time. Consequently, observing a particular market outcome does not, in itself, establish that the conduct under investigation caused that outcome. Similar effects may arise from entirely legitimate market forces operating independently of the conduct in question. The central challenge for competition authorities is therefore to distinguish between outcomes attributable to the conduct and those that would have occurred in any event. Counterfactual analysis provides the framework for making this distinction, and in doing so, forms the basis of modern effects-based competition assessment.
2. Counterfactual Analysis
2.1 Why counterfactual analysis matters
Competition law seeks to protect the competitive process rather than competitors themselves. Achieving this objective requires competition authorities to determine whether an agreement, business practice, merger, or State intervention has genuinely altered market outcomes in a manner that harms competition. This assessment, however, is rarely straightforward. Markets are dynamic environments influenced by numerous factors, including changes in consumer demand, production costs, technological innovation, regulatory developments and the strategic behaviour of competing firms. Consequently, an observed market outcome cannot automatically be attributed to the conduct under investigation.
This creates one of the central challenges in competition economics. The same market outcome may be consistent with multiple explanations. For example, an increase in prices may result from collusive behaviour, but it may also reflect rising input costs, inflationary pressures, supply shortages, or increased consumer demand. Similarly, a competitor’s exit from the market may indicate exclusionary conduct, but it may equally be the consequence of inefficient management, financial distress, or changing market conditions. Distinguishing between these competing explanations is essential if competition authorities are to establish whether competition has actually been harmed.
Counterfactual analysis addresses this challenge by providing a structured framework for comparing observed market outcomes with the most plausible alternative scenario. Rather than asking only what occurred, competition authorities also examine what would likely have happened if the agreement, conduct, transaction, or State measure had not taken place. The comparison between these two scenarios enables authorities to isolate the effects attributable to the conduct itself while excluding changes that would have occurred irrespective of the conduct under investigation.
2.2 What is a Counterfactual?
Competition law examines both actual market events and the likely outcomes that would have occurred in the absence of the conduct. This comparative methodology is fundamental to counterfactual analysis.
A counterfactual represents a plausible alternative scenario against which actual market outcomes are assessed. It seeks to answer a fundamental question: in the absence of the agreement, conduct, transaction, or State measure, how would the market most likely have evolved? Would prices have been lower? Would output, quality or innovation have been greater? Would competitors have remained active in the market? Would an undertaking have obtained the same commercial advantage under normal market conditions?
The purpose of this comparison is not to speculate about hypothetical possibilities but to identify the most credible alternative explanation supported by economic evidence. The counterfactual therefore serves as the benchmark against which competitive effects are evaluated throughout competition law.
2.3 Counterfactual Analysis and Causation
Counterfactual analysis is inseparable from the concept of causation. The fact that a market outcome follows a particular agreement does not necessarily mean that the conduct caused it. Competition authorities must determine whether the same outcome would have occurred even in the absence of the conduct under investigation.
This assessment is challenging because multiple factors, including changes in demand, costs, technological developments and regulatory changes, influence market outcomes. The analysis addresses this challenge by comparing the observed market outcome with the most plausible alternative scenario. By doing so, it enables economists to distinguish between effects attributable to the conduct and those resulting from normal market developments.
For this reason, counterfactual analysis forms the basis of modern effects-based competition assessment. Whether examining a merger, restrictive agreement, abuse of dominance, or State aid measure, the central question remains the same: compared with what?
3. Counterfactual analysis across Competition Law
3.1 Merger Control
Counterfactual analysis is central to the control of concentrations. Competition authorities assess whether a proposed transaction is likely to significantly impede effective competition by comparing the expected market conditions following the merger with those that would have prevailed in the absence of the merger.
In many cases, the current market situation provides the appropriate benchmark. However, this is not always the case. The relevant counterfactual may instead reflect anticipated market developments, such as new entry, competitor expansions, financial distress, technological innovation, or changes in consumer demand. The objective is to identify the most plausible alternative scenario against which the competitive effects of the merger can be assessed.
This comparative assessment enables authorities to determine whether any reduction in competition is genuinely attributable to the merger rather than to broader market developments. This is particularly important in cases involving failing firms, rapidly changing technologies, or markets where entry or expansion was likely even without the transaction.
3.2 Antitrust
In antitrust cases, counterfactual analysis helps determine whether an agreement or unilateral conduct has restricted competition and whether any alleged harm can be attributed to the behaviour under investigation. This is particularly important in effects-based assessments under Article 101 and 102 TFEU.
Rather than focusing solely on whether the conduct occurred, competition authorities compare the observed market outcome with the likely outcome in the absence of the conduct. This allows them to assess whether the conduct altered the competitive process, excluded competitors, or reduced consumer welfare relative to normal market conditions.
In cartel damages cases, the counterfactual is also central to quantifying harm. The economist must estimate the price, output, or trading conditions that would likely have prevailed absent the infringement. This is often the most difficult part of the analysis, because the actual invoice shows what was paid, but not what would have been paid in a competitive market.
3.3 State Aid
Counterfactual analysis also plays an important role in State aid assessments. The key question is whether the beneficiary received an economic advantage that would not have been available under normal market conditions.
This assessment is commonly carried out using the Market Economy Operator Test (MEOT), which asks whether a private investor, lender, creditor or seller acting under comparable commercial conditions would have entered into the same transaction. If the answer is no, the measure may confer an economic advantage and constitute State aid.
The counterfactual is therefore essential in distinguishing between ordinary market transactions and measures that confer a selective economic advantage. In practice, this often requires careful financial modelling, assessment of expected returns, analysis of risk, and comparison with the conduct of comparable private operators.
4. The contribution of Economists
4.1 Constructing the Counterfactual
The primary contribution of economists is the construction of a credible counterfactual. Since an alternative scenario cannot be directly observed, economists use economic theory, market evidence and the facts of the case to determine how the market would most likely have evolved in the absence of the conduct under investigation. The objective is not to identify every possible alternative, but to establish the most plausible scenario against which competitive effects can be assessed.
This requires more than technical modelling. It requires judgment, market knowledge, and an understanding of the legal question that the analysis is intended to answer. A counterfactual that is theoretically possible but commercially unrealistic will rarely assist a court or authority. The relevant question is not what could have happened in abstract terms, but what would most likely have happened in the real market.
4.2 Assessing the Evidence
Counterfactual analysis is evidence-based. Economists assess a wide range of information, including market data, pricing patterns, internal business documents, customer behaviour and financial information. Rather than relying on a single source of evidence, they evaluate whether the available information supports the proposed counterfactual and the alleged theory of harm.
Internal documents may show how firms perceived competitive constraints. Customer evidence may indicate whether buyers had realistic alternatives. Financial data may reveal whether a firm would have exited the market in any event. Pricing data may help distinguish the effect of the conduct from broader cost or demand shocks. The economist’s role is to bring these different forms of evidence together into a coherent analytical framework.
4.3 Selecting the Appropriate Methodology
This choice of analytical method depends on the facts of each case and the evidence available. In some cases, a simple before-and-after benchmark may be sufficient, while others require more sophisticated empirical techniques. The role of the economist is to select the methodology that best addresses the legal question and provides reliable evidence of competitive effects.
4.4 Supporting Authorities and Courts
Economists support competition authorities and courts by explaining complex market dynamics and evaluating competing explanations for observed outcomes. Their role is not to determine the legal outcome, but to provide objective economic analysis to assist decision-makers in applying the relevant legal tests. In this way, economic expertise strengthens the quality and credibility of competition law enforcement.
This contribution is especially important where legal tests depend on economic concepts such as market power, foreclosure, consumer harm, efficiencies, pass-on, overcharge, economic advantage, or causation. In such cases, the economist helps translate market evidence into findings that can be assessed within the legal framework.
5. Analytical techniques used in Counterfactual Analysis
5.1 Before and After Analysis
Before-and-after analysis compares market conditions before and after the conduct, transaction, or State measure under investigation. It is particularly useful where there is a clear intervention point and sufficient historical data. However, changes in market outcomes may also reflect external factors, such as shifts in demand or costs, meaning the results must be interpreted with caution.
5.2 Difference in Differences
Difference-in-differences analysis compares changes in the affected market with those in a comparable market that was not exposed to the conduct. If the two markets would otherwise have followed similar trends, differences observed after the intervention may provide evidence of competitive effects. The reliability of the method depends on the suitability of the control group.
5.3 Benchmarking
Benchmarking assesses market outcomes by comparing prices, costs, profitability or other indicators across comparable firms, products, regions or periods. It is commonly used in State Aid, damages, and abuse of dominance cases. The effectiveness of the analysis depends on selecting an appropriate benchmark that reflects similar commercial conditions.
5.4 Merger Simulation
In merger cases, economists may use tools such as merger simulation, diversion ratios and upward pricing pressure analysis to predict how competition is likely to change following a transaction. These methods assist authorities in assessing whether the merger is expected to reduce competitive pressure compared with the relevant counterfactual.
5.5 Financial Modelling
Financial modelling is primarily used in State aid cases to assess whether a private market operator would have acted under similar commercial conditions. Economists may evaluate profitability, expected returns and investment risk to determine whether the measure confers an economic advantage.
Financial modelling may also be relevant in merger control and antitrust cases, particularly where the analysis concerns a failing firm, investment incentives, the profitability of exclusionary conduct, or the quantification of damages.
6. Challenges and Limitations
6.1 The unobservable Counterfactual
The principal limitation of counterfactual analysis is that the alternative scenario cannot be directly observed. Economists must therefore construct the most plausible counterfactual using economic theory, market evidence and reasonable assumptions. Different assumptions may lead to different conclusions, making the selection of the appropriate counterfactual a critical step in the analysis.
6.2 Data Limitations
Reliable counterfactual analysis depends on the availability and quality of data. In practice, economists may face incomplete, inconsistent or limited information, particularly in rapidly evolving markets. These limitations can reduce the precision of the analysis and require greater reliance on professional judgment.
6.3 Dynamic markets
Markets rarely remain static. Changes in technology, consumer preferences, regulation and competitive strategies may significantly influence market outcomes over time. As a result, the relevant counterfactual must reflect expected market developments rather than simply assuming that current market conditions would have continued unchanged.
6.4 No Single Method fits Every Case
There is no universally applicable methodology for constructing a counterfactual. The appropriate approach depends on the facts of the case, the available evidence and the legal question under consideration. For this reason, economists often combine several analytical techniques to produce a robust and reliable assessment.
The most persuasive analysis is usually not the one that appears most technical, but the one that explains clearly why the proposed counterfactual is economically credible, legally relevant, and supported by the evidence.
7. Conclusion
Counterfactual analysis has become a fundamental component of modern competition law. Comparing observed market outcomes with the most plausible alternative scenario enables competition authorities to distinguish between effects attributable to the conduct under investigation and those resulting from normal market developments. As a result, counterfactual analysis provides the foundation for assessing causation and competitive effects across merger control, antitrust and State aid cases.
The role of economists is central to this exercise. They do not replace the legal assessment. Rather, they give the legal assessment an empirical and analytical foundation. By constructing credible counterfactuals, testing alternative explanations, selecting appropriate methodologies, and presenting complex evidence clearly, economists help authorities, courts, and parties move from assertion to proof. In competition law, that movement is often decisive.
This article was prepared by Elefhteria Xenofontos during her summer 2026 internship at Trojan Economics.
