Tailoring Critical Loss to the Competitive Process

53 Pages Posted: 6 May 2020 Last revised: 27 Nov 2020

See all articles by Malcolm B. Coate

Malcolm B. Coate


Shawn W. Ulrick

U.S. Federal Trade Commission (FTC)

John M. Yun

George Mason University - Antonin Scalia Law School, Faculty

Date Written: May 4, 2020


In 1989, Barry Harris & Joseph Simons developed a quantitative method to implement the Horizontal Merger Guidelines’ hypothetical monopolist test with a market-level “critical loss” analysis. The appeal of Harris & Simons’ framework is that it created a simple, intuitive approach to delineating markets — with relatively parsimonious data requirements. After over a decade of use, however, economists began to propose alternative approaches to the classic critical loss analysis — using theory to impose structure on firm-level demand. This allowed researchers to reformulate the critical loss test in terms of diversion ratios. The purpose of this paper is to discuss when the classic, market-level approach to critical loss is more appropriate and when firm-level critical loss offers an important refinement. We illustrate, with a detailed example, that under certain plausible demand scenarios, a diversion-based firm-level analysis could easily reach the wrong answer on market definition. Thus, the analyst needs to carefully study the competitive environment before deciding on the appropriate analysis. As a bottom line, the choice between market-level and firm-level analysis depends on the specific factual situation.

Keywords: Barry Harris, Joseph Simons, Horizontal Merger Guidelines, Hypothetical Monopolist Test, critical loss analysis, market definition, merger analysis

JEL Classification: K20, K21, K29

Suggested Citation

Coate, Malcolm B. and Ulrick, Shawn W. and Yun, John M., Tailoring Critical Loss to the Competitive Process (May 4, 2020). International Review of Law and Economics, forthcoming; George Mason Law & Economics Research Paper No. 20-15, Available at SSRN: https://ssrn.com/abstract=3592873 or http://dx.doi.org/10.2139/ssrn.3592873

Malcolm B. Coate

Independent ( email )

Shawn W. Ulrick

U.S. Federal Trade Commission (FTC) ( email )

600 Pennsylvania Ave., NW
Washington, DC 20580
United States

John M. Yun (Contact Author)

George Mason University - Antonin Scalia Law School, Faculty ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States

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