Critical Loss vs. Diversion Analysis: Clearing Up the Confusion
The CPI Antitrust Chronicle, No. 1, December 2009
15 Pages Posted: 2 Mar 2010
Date Written: December 22, 2009
Critical Loss Analysis is an empirical implementation of the hypothetical monopolist test for market definition contained in the Department of Justice and Federal Trade Commission Horizontal Merger Guidelines. As such, it compares the breakeven Critical Loss with a prediction of the Actual Loss from the hypothetical price increase to identify relevant markets. Theorists have advanced a sophisticated methodology to compute the Actual Loss from market performance data instead of the traditional natural experiment and business-related information. We believe that this theoretical approach has serious drawbacks. The technique (1) almost guarantees narrow markets, thus effectively shifting the burden of proof to the defendant, (2) imposes strict linearity assumptions on the computations and (3) ignores the difficulty associated with actually estimating the required marginal cost statistic. We introduce a Retention Rate to address the first two problems and recommend the use of two marginal cost estimates to complete the analysis. While the theorists should be commended for introducing a special case generalization of the core Critical Loss methodology, empirical evidence on Actual Loss is still required to complete the test. Theory can not trump fact.
Keywords: Antitrust, Market Definition, Critical Loss, Merger Guidelines, Retention Rate, Variable SSNIP
JEL Classification: K21, L40
Suggested Citation: Suggested Citation