Digital Cluster Markets

30 Pages Posted: 6 Apr 2021 Last revised: 23 Aug 2021

See all articles by Herbert Hovenkamp

Herbert Hovenkamp

University of Pennsylvania Carey Law School; University of Pennsylvania - The Wharton School; University College London

Date Written: August 23, 2021

Abstract

This paper considers the role of “cluster” markets in antitrust litigation, the minimum requirements for recognizing such markets, and the relevance of network effects in identifying them.

One foundational requirement of markets in antitrust cases is that they consist of products that are very close substitutes for one another. Even though markets are nearly always porous, this principle is very robust in antitrust analysis and there are few deviations.

Nevertheless, clustering noncompeting products into a single market for purposes of antitrust analysis can be valuable, provided that its limitations are understood. Clustering contributes to market power when (1) many customers prefer the convenience of receiving the defendant’s grouping of products rather than any single one, or (2) economies of joint provision (economies of scope in production) make joint distribution of the cluster cheaper per good than distribution of each separately, and (3) entering into competition with the cluster is difficult.

When network effects are present, an important additional reason is what might be termed economies of scope in consumption, or increased value that accrues as a group of goods or services offered on the same platform becomes not only more numerous but also more diverse. Finally, often the best way to address the cluster market problem is to avoid market definition altogether. Here, digital markets are particularly susceptible to direct measurements of market power that do not depend on a market definition. One limitation on their use, however, is that many of the methodologies require estimating demand changes in response to price changes, but several digital platforms engage with consumers at a price of zero. Here, however, changes in product quality can operate as an adequate (inverse) surrogate for changes in price.

Finally, the logic of cluster markets carries an implicit warning about antitrust remedies. Clustering occurs when it creates value, and for consumers as well as producers. As a result antitrust enforcers should be wary about aggressive breakup remedies that serve to break apart components that were clustered for the very reason that clustering is valuable..

Keywords: antitrust, cluster markets, platforms, network effects, big data, substitutes, digital markets

Suggested Citation

Hovenkamp, Herbert, Digital Cluster Markets (August 23, 2021). Columbia Business Law Review, Forthcoming, U of Penn, Inst for Law & Econ Research Paper No. 21-18, Available at SSRN: https://ssrn.com/abstract=3820062 or http://dx.doi.org/10.2139/ssrn.3820062

Herbert Hovenkamp (Contact Author)

University of Pennsylvania Carey Law School ( email )

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University of Pennsylvania - The Wharton School ( email )

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University College London ( email )

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