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Antitrust Law Journal

Volume 83, Issue 2

The Logic of Market Definition

David Glasner and Sean Patrick Sullivan

Summary

  • This article addresses the confusion surrounding the proper definition of relevant markets in antitrust law and attempts to explain the underlying logic of market definition.
  • There are three common errors in the way that courts and advocates approach the exercise: the natural market fallacy, the independent market fallacy, and and the single market fallacy.
  • In the course of identifying and debunking these fallacies, the article clarifies the appropriate framework for understanding and conducting market definition.
The Logic of Market Definition
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For more than a half century, antitrust trials have usually begun with the definition of a relevant market for the inquiry. Long experience has given this exercise an air of familiarity, but closer examination reveals market definition to be a confused exercise. Decades ago, Robert Pitofsky remarked that “no aspect of antitrust enforcement has been handled nearly as badly as market definition.” That sentiment remains frustratingly apt today. Despite its long tenure in antitrust analysis, and despite the crucial role it has played in many a case and investigation, the process of defining relevant markets remains both confused and uncertain.

Why do we define markets? How should we define them? One might think that such fundamental questions would have long been settled. But the sometimes unclear rationale for the exercise, and its inconsistent evolution in the courts and scholarship, have not produced a straightforward set of criteria by which to assess the validity of relevant markets in antitrust. Even the term, market definition, is more ambiguous than it first appears. Does it refer to the identification of popularly recognized lines of commerce or products with similar characteristics? Does it refer to products with high cross-elasticity of demand? Does it refer to things like the Hypothetical Monopolist Test (HMT) and efforts to identify groups of producers with potential market power? That, today, these are all potential answers, is both remarkable and unsettling.

In this article, we hope to cut through some of the ambiguity and confusion surrounding market definition. Our goal is to trace the internal logic of the exercise, identifying common errors and showing how the logic of market definition can focus and guide antitrust inquiries. While we are mainly concerned with how markets should be defined in antitrust, pragmatism requires us to pause to say why we should aim for proper market definition as well.

The need for pause is the sometimes-popular claim that market definition is unnecessary in antitrust law. While this argument is not new, Louis Kaplow has advanced the thesis with a particularly pointed argument that (1) market definition serves no role except to facilitate computing market shares, (2) market shares are poor measures of market power, and (3) antitrust goals would be better served by assessing market power from things like estimates of residual-demand curves than by computing market shares. This argument is not without its strengths, and there are cases in which the traditional market definition exercise can be skipped without adversely affecting the outcome of the investigation or trial.

But even if traditional market definition is not necessary in every antitrust case, we believe that courts and practitioners must still understand how to properly define and interpret antitrust relevant markets in practice. There are three reasons for this.

First, the claim that market definition can be entirely replaced by things like econometric estimates of residual demand curves is doubtful, to say the least.7 It is difficult, for example, to imagine courts and practitioners analyzing ease of entry without a market concept. What exactly would firms be entering? Similar difficulties beset efforts to assess the danger of anticompetitive coordination without some idea of which firms would need to cooperate for their coordinated action to be able to raise prices. And while estimates of residual demand elasticity may often suffice to establish current or historic market power, they are not generally sufficient to predict future competitive effects— as needed, for example, in cases involving unconsummated mergers or prospective acts of exclusion. In such situations, antitrust analysis is advanced by defining relevant markets.

Second, regardless of the academic debate, courts have long relied on market definition in antitrust cases,11 and the Supreme Court shows no indication that it will abandon this practice soon. On the contrary, the Court has recently reaffirmed its view that “courts usually cannot properly apply the rule of reason without an accurate definition of the relevant market.” So long as binding precedent continues to expect the definition of relevant markets in most applications, lower courts and practitioners need to understand the logic and proper execution of the market definition exercise.

Third, despite Kaplow’s insistence that market definition serves no purpose other than to facilitate the calculation of market shares, others perceive it to play additional roles. During investigational stages—in the review of merger notifications, for example—market definition is meant to clarify analysis by imposing analytic discipline on investigators, by providing a logical way to organize information, by helping to screen out implausible theories, and by focusing the scope of competitive effects analysis. During evidentiary stages—in court or before the agencies—market definition supports structural inferences about competitive effects, provides context for relevant evidentiary considerations such as the possibility of entry or exit, and again provides a conceptual framework to guide and discipline analysis. As we discuss below, market definition may currently play different roles within the agencies and the courts. But in both contexts the exercise is meant to serve the common goal of identifying conduct and structural conditions that raise concerns about anticompetitive injury, and that therefore require scrutiny.

We do not challenge the consensus that market definition serves broad purposes, but we suspect that this breadth of use may actually be a source of some confusion. Common platitudes only reinforce the problem: the Supreme Court does not mislead when it says that “the purpose of [market definition] is to determine whether an arrangement has the potential for genuine adverse effects on competition,” but neither does it take anything off the table. One reason the logic of market definition remains obscure is that so little effort has ever been devoted to specifying what should not factor into the exercise.

This article aims to fill that void. Our objective is to clarify the logic of antitrust market definition; our strategy is to illustrate this logic by way of exclusion. The explanation of what should factor into market definition is hardened by the explanation of what should not. The article therefore focuses on three common fallacies of antitrust market definition.

The first is what we call the natural market fallacy: the belief that relevant markets should conform to intuition, convention, or observation. The reason they should not is that markets are not real, observable, tangible things that can be perceived and identified by simple observation. Markets are analytical constructs without corporeal presence or tangible form. Recognition of this fallacy leads to the conclusion that many traditional market-definition criteria are inappropriate and also highlights that many common objections to market definition—for example, that markets are unrealistic or gerrymandered unless they conform to lay intuition or common description—are without merit.

The second is what we call the independent market fallacy: the belief that relevant antitrust markets exist independent of underlying theories of harm. The reason they do not lies in the prior fallacy. As purely analytical constructs, markets do not exist independent of a problem or inquiry but must be defined in terms of a problem or inquiry. Specifically, antitrust markets are defined in terms of specific theories of anticompetitive harm. Recognition of this fallacy leads to the conclusion that a relevant market cannot be defined without an anticompetitive theory of harm upon which the relevant market is conditioned. Enduring confusion around the base price in HMT markets, and even the infamous Cellophane fallacy itself, are illustrations of this error. The third is what we call the single market fallacy: the expectation that an antitrust case must involve a unique relevant market (or set of markets if there are multiple products). The reason not is implicit in the prior fallacies. Since a relevant market must be conditioned on a specific theory of harm, and since multiple theories of harm may be implicated by a given fact pattern, there may be multiple relevant markets to delineate in analyzing the competitive effects of the conduct in question. Recognition of this fallacy leads to the conclusion that the number of relevant markets in a given case or investigation may be as great as the number of theories of anticompetitive harm.

The remainder of this article explores each of these fallacies separately and then together in a discussion section that sketches some corollary implications for antitrust practice. Many of our suggestions about market definition can be extracted—to varying degrees of precision—from the text of the 2010 Horizontal Merger Guidelines and from various remarks, asides, and footnotes scattered throughout the literature on market definition. But the diffusion of insights through subtle implication and easily overlooked margin notes is an inefficient way to explain a concept as challenging as market definition. And the enduring confusion surrounding this exercise suggests that further exposition may be warranted.

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This article reflects the personal views of the authors. It does not necessarily represent the views of the U.S. Government or Federal Trade Commission, which have neither approved nor disapproved its content. The authors thank Christine Bartholomew, William Bishop, Aaron Edlin, Joshua Goodman, John Kirkwood, Christopher Leslie, Matt Ralph, Daniel Sokol, Spencer Weber Waller, Gregory Werden, and conference participants at the 2019 meeting of the American Law and Economics Association for thoughtful comments on earlier drafts of this article. Alexander Asawa, Kassandra DiPietro, Reid Shepard, and Madison Tallant provided superlative research assistance.

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