Market Definition

Abstract

Market definition is one of the most important analytical tools for competition authorities to examine and evaluate competition problems. By defining a relevant market, then calculating and assigning market shares, competition authorities seek to assess the market power of firms, which is of central importance to understand competition effects. In addition, the definition of the relevant market helps to identify the market participants, to delineate the boundaries of the market and to determine the area of effective competition.

The importance of market definition goes, however, beyond such a narrow instrumental function as the concept has permeated competition law and is, based on its underlying conceptual foundations, now deeply embedded into the law. Market definition has shaped the way practitioners think about competition issues beyond its narrow role in defining markets in any particular case as it is closely linked to the emergence of competition law as a public policy concern.

In the last few years, the relevance of market definition as an instrument in merger analysis and in cases of monopolisation and dominance is under discussion in the antitrust community. The 2010 US Horizontal Merger Guidelines, reflecting this debate, state for instance that market definition is not necessarily the first step in a merger analysis. This is a considerable change in light of previous practice and has spurred an intense discussion in the antitrust community about the role, the function and the importance of market definition as an instrument in analysing potential competition effects in any particular case.

This paper sets out the economic and legal principles of market definition in section 2, elaborates on the SSNIP or hypothetical monopolist test in section 3 and discusses the problems associated with market definition under certain specific market characteristics in section 4 before discussing new concepts such as UPP, UPP* and GUPPI together with meger simulation models in section 5. Section 6 deals with the legal and institutional aspects of market definition and the problem of legal certainty. Section 7 concludes.

Keywords: market definition, UPP, GUPPI, hypothetical monopolist, SSNIP, pricing pressure, dominance, market power, merger guidelines, unilaterla effects, efficiencies, merger simulation

JEL Classification: K21, L13, L40, D43, C51