In Defense of Market Definition

Abstract:     
Market definition, a concept that has long served to structure competitive analysis, is under assault from theoreticians who object to the inability of the standard analysis to define a market compatible with their models of unilateral effects. Although these unilateral models have not been shown to reliably predict competitive behavior in the real world, our paper raises other concerns associated with substituting unilateral effects models for market definition. We suggest that the criticisms of market definition are misplaced, because the theoretical analyses lack the benchmarks necessary to establish findings of monopoly power. Moreover, market analysis serves to build the foundation for a case-specific competitive analysis that reaches well beyond the confines of any one particular economic model.

Market definition, structured by the hypothetical monopolist test, and implemented with critical loss analysis, remains a valuable tool for antitrust analysis. As usually applied, the test accepts a proposed market definition as relevant for antitrust analysis whenever the predicted loss in volume (Actual Loss) from a small, but significant and non-transitory increase in price is less than the computed break-even loss in volume (Critical Loss). We discuss how markets can be defined in homogeneous goods, static differentiated goods, and dynamic differentiated goods structures, drawing examples from the case law. Within a relevant market, a case-specific analysis, structured by the concepts in the Merger Guidelines, is able to determine if the merger at issue is likely to substantially lessen competition. Comparable economic analyses can be defined to evaluate a range of other potentially anti-competitive behavior associated using the Rule-of-Reason as a guide.

Number of Pages in PDF File: 54

Keywords: market definition, merger policy, merger guidelines, critical loss

JEL Classification: K21, L40

working papers series