Supply and Demand and Market Definition

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MARKET DEFINITION AND MARKET POWER IN COMPETITION ANALYSIS The Economic and Social Review, Vol. 31, No. 4, October, 2000, pp. 309-328

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Market Definition and Market Power in Competition Analysis: Some Practical Issues

PATRICK MASSEY* Competition Authority

Abstract: Market definition plays a key role in competition analysis and has often proved controversial. However, it is merely a means to an end, the real issue being to establish whether or not firms have significant market power, i.e. the power to increase prices. This objective is rather different to the traditional neo-classical economic view of a market. The introduction of the SSNIP test in the US Department of Justice 1982 Merger Guidelines resulted in the development of new methods for defining markets and for measuring market power directly, thus eliminating the need to define the market at all.

I INTRODUCTION

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arket definition has long been a controversial issue in competition and merger cases. The past twenty years has seen the development of new methods of defining markets more suited to the particular demands of competition analysis than those traditionally used by economists. Attention has also focused on methods of measuring market power directly thereby obviating the need to define markets in some instances. The current paper reviews developments in the methodologies of market definition and measuring market power. The paper is structured as follows. The case law on market definition in the Paper presented at the Fourteenth Annual Conference of the Irish Economic Association. *The author is a Member of the Competition Authority. I would like to thank Pat Kenny and two anonymous referees for their helpful comments on earlier drafts of this paper. Any views expressed are those of the author and do not purport to represent those of the Authority.

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United States, the European Union and Ireland is briefly outlined. The paper then reviews various economic approaches for defining markets. It argues that these are not suited to competition analysis. The SSNIP1 test is then outlined. Some practical aspects of applying this test are described in the following section. Methods of measuring market power directly are then considered. Some conclusions are offered in the final section. II CASE LAW ON MARKET DEFINITION In general, the more narrowly the market is defined the more likely a firm or firms will be found to have market power. Not surprisingly, firms tend to advocate wider market definitions than those adopted by competition authorities. Government antitrust enforcers have often been accused of arbitrarily defining markets broad enough to make merging firms competitors but narrow enough to make the market highly concentrated. (Morris and Mosteller, 1991, p. 599). Werden (1981) conceded that the methodology employed in US merger cases in the 1960s and 1970s deserved much of the criticism it was given. Similarly, Whish (1993, p. 200) criticised the EU Commission, arguing that because unilateral behaviour by a firm without market power cannot breach the competition rules, “in some cases fairly outlandish claims of dominance have been made.” Kauper (1996, p. 303) notes that in some abuse of dominance cases markets “seem to have been drawn more narrowly than a purely economic concern about adverse price and output effects would warrant.” (i) United States The US Supreme Court first accepted cross-price elasticities of demand in defining the relevant market in Times-Picayune.2 This approach was confirmed in the famous ‘Cellophane’ case3 where Mr. Justice Reed noted that, in order to define a market and ascertain whether du Pont had a monopoly, “what is called for is an appraisal of the “cross-elasticity” of demand in the trade”. In a dissenting judgment, Mr. Chief Justice Warren stated that: “In defining the market in which du Pont’s economic power is to be measured, the majority virtually...
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