Tailoring Critical Loss to the Competitive Process
53 Pages Posted: 6 May 2020 Last revised: 27 Nov 2020
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: Suggested Citation