Why (Ever) Define Markets?

Abstract

The market definition/market share paradigm, under which a relevant market is defined and pertinent market shares therein examined in order to make inferences about market power, dominates competition law. This Article advances the immodest claim that the market definition process is incoherent as a matter of basic economic principles and hence should be abandoned entirely. This conclusion is based on the inability to make meaningful inferences of market power in redefined markets; the reliance on an unarticulated notion of a standard reference market, whose necessity and prior omission signal a serious gap; the impossibility of determining what market definition is best in a sensible manner without first formulating a best estimate of market power, rendering further analysis pointless and possibly leading to erroneous outcomes; and the mistaken focus on cross-elasticities of demand for particular substitutes rather than on the market elasticity of demand, which error results from the need to define markets. Although the inquiry is conceptual, brief remarks on legal doctrine suggest that creating conformity may not be unduly difficult.

JEL Classification: D42, K21, L11, L40