Appendix B. Additional Economic Concepts

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APPENDIX B

ADDITIONAL ECONOMIC CONCEPTS

A. Empirical Methods of Defining Markets and Assessing

Competitive Effects

1. Traditional Methods of Measuring Relevant Markets

There are two main empirical methods that have been traditionally

used to define the relevant market in non-telecommunications industries,

though neither perfectly captures the potential for a firm to exercise

market power. The first, which primarily has been used to address the

question of geographic market, is known as the Elzinga-Hogarty test.1

This test quantifies shipments of goods into and out of an area that is

being proposed as a relevant market. If relatively few shipments come

into, or leave from, the area in question, then the proposed area would be

considered a relevant market under this test. The problem with this

methodology is that shipment patterns do not necessarily indicate

anything about the elasticity of demand facing producers in a particular

region. In addition, since communications markets do not typically

involve shipments of goods, it is not clear this type of test would be very

helpful for defining communication markets.

The second type of test uses relative price movements to determine

whether two goods are in the same market.2 The basic logic behind this

test is that if prices of two goods or prices of a good in two geographic

areas generally move together, then the demand for the two goods is

sufficiently interrelated that consumers must view these goods as

relatively close substitutes for each other.3 The problem with this

approach is that changes in costs that affect both firms may also drive

1. See generally Kenneth G. Elzinga & Thomas F. Hogarty, The Problem of

Geographic Market Delineation in Antimerger Suits, 18 ANTITRUST

BULL. 45 (1973).

2. See generally George J. Stigler & Robert A. Sherwin, The Extent of the

Market, 28 J. L. & ECON. 555 (1985).

3. Id. at 558.