Market Definition Under Price Discrimination

Abstract

The 1992 Horizontal Merger Guidelines, issued by the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC), suggest that relevant markets for merger analysis may be defined for classes of customers on whom a hypothetical monopolist of the merging firms’ products would likely impose a discriminatory price increase. Although the DOJ and FTC had attempted to define markets based on the feasibility of price discrimination prior to 1992, the explicit endorsement by the 1992 Guidelines has led to an increased use of this practice by these agencies. We question whether market definition based on the feasibility of price discrimination is appropriate for many of the merger situations where its use has been proposed. Since application of price discrimination typically leads to narrower market definitions, inappropriate application may result in the DOJ and FTC allocating resources to challenge precompetitive or competition-neutral mergers.

In this article we enumerate the difficulties associated with defining markets through price discrimination and describe the conditions under which it may be appropriate. To illustrate the principles involved we present two case studies and conclude with a discussion of the formidable supply-side obstacles to coordinated price discrimination.

Keywords: Market Definition, Price Discrimination

JEL Classification: L1