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.