Appendix II. Critical Loss Calculation Testing Whether Tin Mill Products Sold in the Eastern United States is an Antitrust Market

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APPENDIX II

CRITICAL LOSS CALCULATION TESTING

WHETHER TIN MILL PRODUCTS SOLD IN THE

EASTERN UNITED STATES IS AN ANTITRUST

MARKET

The critical sales loss approach, which is discussed in detail in

Chapter I, can be used to assess whether tin mill products (TMP) sold in

the eastern United States constitute an antitrust market. The basic idea is

to test whether a modest (typically five percent) price increase would be

profitable for a hypothetical monopolist. Because determination of the

critical sales loss requires knowledge of the markup above avoidable cost

for the hypothetical monopolist, one needs information about costs of

production of Mittal and U.S. Steel, the other major North American

producer of TMP. Because this information is highly confidential (and is

not publicly available), this example of critical loss analysis assumes a

range of possible markups for purposes of illustration. The arbitrarily

assumed range of markups is 20-50 percent.

Given those assumed markups, one can compute the critical sales

loss that the hypothetical monopolist could face and still not experience a

net reduction in profit.1 That loss can be calculated as:

Critical sales loss = X/(X + m)2,

1. Instead of simply testing whether the proposed price increase—say 5%—

increases profits, it is possible to start the critical loss exercise by asking

what t he hypothetical monop olist’s profit maximizing output levels are.

See Gregory Werden, Beyond Critical Loss: Tailor ing Applica tions of the

Hypothetical Monopolist Para digm 2 (U.S. Dept. of Justice, Antitrust

Div., Econ. Analysis Grp. Discussion Paper No. EAG 02-9, 2002),

availa ble at http://ssrn.com/abstract=327281. The approach used in the

text, sometimes called breakeven critical loss, has the advantage of

yielding the same result for two common assumptions (linear or constant

elasticity) about the shape of the demand curve. See the discussion of

critical loss in Chapter I.

2. See Werden, supr a note 1, at 3; Daniel O’Brien & Abraham Wickelgren,

A Critical Analysis of Critical Loss Analysis, 71 ANTITRUST L.J. 161, 167

(2003); James Langenfeld & Wenqing Li, Cr itical Loss Analysis in

Evaluating Merger s, 46 ANTITRUST BULL. 299, 305 (2001) .