Chapter 3. Market Definition and Measurement

• Pages: 35-106

35

CHAPTER 3

MARKET DEFINITION AND MEASUREMENT

A. Defining the Relevant Market

Under Section 7 of the Clayton Act, a plaintiff must show the

challenged acquisition will result in a substantial lessening of

competition “in any line of commerce or . . . in any section of the

country.”1 The statutory phrases “in any line of commerce” and “in any

section of the country” require a determination of both the relevant

product and geographic markets.2 Indeed, some courts hold that the

1.15 U.S.C. § 18; see United States v. Pabst Brewing Co., 384 U.S. 546,

549 (1966) (“When the government brings an action under Section 7, it

must . . . prove no more than that there has been a merger between two

competitors engaged in commerce and that the effect of the merger may

be substantially to lessen competition or tend to create a monopoly in any

line of commerce in any section of the country”).

2.See Brown Shoe Co. v. United States, 370 U.S. 294, 324 (1962) (“the

‘area of effective competition’ must be determined by reference to a

product market (the ‘line of commerce’) and a geographic market (the

‘section of the country’)”); United States v. E.I. du Pont de Nemours &

Co., 353 U.S. 586, 593 (1957) (determination of the market is the

necessary predicate to a Section 7 case); accord United States v. Marine

Bancorp., 418 U.S. 602 (1974); United States v. General Dynamics

Corp., 415 U.S. 486 (1974); United States v. Continental Can Co., 378

U.S. 441 (1964); Olin Corp. v. FTC, 986 F.2d 1295, 1297 (9th Cir. 1993);

Crown Zellerbach Corp. v. FTC, 296 F.2d 800, 804 (9th Cir. 1961);

United States v. Atlantic Richfield Co., 297 F. Supp. 1061, 1066

(S.D.N.Y. 1969), aff’d sub nom. Bartlett v. United States, 401 U.S. 986

(1971).

The relevant market as defined in cases under Sections 1 and 2 of the

Sherman Act, 15 U.S.C. §§ 1, 2, may have relevance to cases decided

under Section 7 of the Clayton Act. See United States v. Grinnell Corp.,

384 U.S. 563, 573 (1966) (“we see no reason to differentiate between

‘line’ of commerce in the context of the Clayton Act and ‘part’ of

commerce for purposes of the Sherman Act”); United States v. Syufy

Enters., 712 F. Supp. 1386, 1396 (N.D. Cal. 1989) (“The relevant market

is generally the same for cases brought under either Section 2 of the

Sherman Act or Section 7 of the Clayton Act.”), aff’d , 903 F.2d 659 (9th

Cir. 1990); Kellam Energy, Inc. v. Duncan, 616 F. Supp. 215, 218 n.3 (D.

Del. 1985) (geographic market definition standards are the same under

36 MERGERS AND ACQUISITIONS

“substantiality” of the effect of the merger on competition can only be

gauged in terms of a defined product and geographic market.3

Some commentators have suggested that the importance of market

definition can be overstated.4 Central to much of the critical legal and

the Sherman and Clayton Acts). But see United States v. Bethlehem Steel

Corp., 168 F. Supp. 576, 588 (S.D.N.Y. 1958) (suggesting that the

purpose of a given antitrust law should guide the market definition

process for that law).

3.See E.I. du Pont de Nemours & Co., 353 U.S. at 593 (“[s]ubstantiality can

be determined only in terms of the market affected”); see also United

States v. Marine Bancorp., 418 U.S. 602 (1974); General Dynamics

Corp., 415 U.S. at 486; Continental Can Co., 378 U.S. at 441; Brown

Shoe Co., 370 U.S. at 324-25; Atlantic Richfield Co., 297 F. Supp. at

1066.

4.See, e.g., Anthony E. DiResta, Enforcement by the Federal Trade

Commission in the Bureau of Competition, 1117 PLI/Cor. 1085 (May-June

1999) (“When the Commission finds unique relationships among

products made by the merging firms, as evidenced by how the firms

behave in the marketplace and by quantitative analysis of past pricing

behavior, the Commission has a merger that poses problems. And the

issue of the precise market definition becomes and should become

secondary”); Note, Analyzing Differentiated-Product Mergers: The

Relevance of Structural Analysis, 111 HARV. L. REV. 2420 (June 1998)

(“The traditional structural approach to merger analysis, which begins

with market definition, is now well-recognized as better suited for

analyzing coordinated interaction than for predicting unilateral effects.

Because government enforcement agencies and economists have come to

view unilateral effects as the primary danger in differentiated-product

mergers, they have increasingly relied on newly developed econometric

and empirical techniques that are designed to predict unilateral price

effects without the need for defining the market.”); James F. Rill,

Practicing What They Preach: One Lawyer’s View of Econometric

Models in Differentiated Products Mergers, 5 GEO. MASON L. REV. 393

(1997) (“Some proponents of econometric models suggest that . . . the

Guidelines’ structural analysis is not required for certain differentiated

products mergers. This notion possesses certain theoretical appeal: If

harm can be established even absent a formally defined market, why

should precise market definition be necessary? However, this reasoning

fails to take account of actual marketplace dynamics, which often

substantially affect the merged firm’s ability and incentive to raise price.

Moreover, it places unwarranted (and unnecessary) faith in the ability of

the models to accurately predict post-merger behavior.”); Jonathan Baker,

Director, Bureau of Economics, FTC, Contemporary Empirical Merger

Analysis, Remarks Before the George Mason University Law Review

Market Definition and Measurement 37

economic commentary has been the view that defining relevant markets

has become an end in itself, rather than a tool to use in analyzing

competitive impact. Indeed, non-merger cases, the U.S. Supreme Court

has shown that proof of actual detrimental effects can obviate the need

for an inquiry into market power.5 Moreover, some courts of appeals

have expressed a preference for actual proof of market power over

market definition analysis,6 although the Court of Appeals in Microsoft

explicitly rejected the argument that actual proof of market power was

required for a Section 2 monopolization claim.7 At the present time, the

only method endorsed by the courts to establish that a merger violates

antitrust laws is structural analysis, although sometimes a practical

alternative in the form of merger simulation may be available.8

Symposium, Antitrust in the Information Revolution: New Economic

Approaches for Analyzing Antitrust Issues, at 8 (Oct. 11, 1996), at

www.ftc.gov/speeches/other/gmu5.htm (“if a merger can be shown

directly to harm competition, antitrust should not need to spend much

effort on market definition”).

5.“Since the purpose of the inquiries into market definition and market

power is to determine whether an arrangement has the potential for

genuine adverse effects on competition, ‘proof of actual detrimental

effects, such as a reduction of output,’ can obviate the need for an inquiry

into market power, which is but a ‘surrogate for detrimental effects.’”

FTC v. Indiana Fed’n of Dentists, 476 U.S. 447, 460-61 (1986) (using

direct proof to show market power in a Sherman Act Section 1

unreasonable restraint of trade action) (quoting 7 PHILLIP E. AREEDA,

ANTITRUST LAW ¶ 1511, at 429 (1986)).

6.Three courts of appeals have concurred that “market share is just a way of

estimating market power, which is the ultimate consideration. When

there are better ways to estimate market power, the court should use

them.” Allen-Myland, Inc. v. IBM Corp., 33 F.3d 194, 209 (3d Cir.

1994); United States v. Baker Hughes, Inc., 908 F.2d 981, 992 (D.C. Cir.

1990) (Thomas, J., joined by Ginsburg, J.); Ball Mem’l Hosp., Inc. v.

Mutual Hosp. Ins., 784 F.2d 1325, 1336 (7th Cir. 1986).

7.See 253 F.3d 34, 56-57 (D.C. Cir. 2001) (finding that a structural market

power analysis was sufficient in the absence of direct proof of monopoly

power, even in a changing market).

8.Merger simulation employs standard oligopoly models to predict the

effects of mergers quantitatively. For a concise description of the

analysis, see Gregory J. Werden, Simulating Unilateral Competitive

Effects from Differentiated Products Mergers, ANTITRUST, Spring 1997,

at 27. For a more thorough explanation of the analysis, see Philip

Crooke, Luke M. Froeb, Steven Tschantz & Gregory J. Werden, The

Effects of Assumed Demand Form on Simulated Postmerger Equilibria,

15 REV. INDUS. ORG. 205 (1999); Jerry A. Hausman & Gregory K.