Differentiated Consumer Product Markets

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CHAPTER III

DIFFERENTIATED CONSUMER PRODUCT

MARKETS

A. Introduction

Consumer products are products sold for use directly by individual

final consumers. Examples include items found in supermarkets,

department stores, mass merchants, electronics stores, and other retail

outlets, as well as items sold directly to consumers (or through sales

agents), such as cars, cruises, hotels, and financial services. Some

consumer products can only be used once (e.g., food products), while

others are durable and allow for multiple uses (e.g., appliances, cars, or

electronics).

Many consumer products that have very similar functions are highly

differentiated from one another in the attributes they offer to consumers

and in how consumers perceive them. In some cases, different types of

products might offer similar basic functionality but achieve that function

in different ways. For example, there are many different ways of taking

a vacation. One can take a cruise, go to an all-inclusive resort, rent a

condominium or house, or pick a resort or other hotel and choose food

and other services on one’s own. In addition, within a particular type of

product, there can be substantial variation in the types of products

offered by different suppliers. For example, Caribbean resorts could

vary substantially in price, amenities offered, quality of the

accommodations, and location.

This chapter discusses the market definition issues in the evaluation

of mergers and acquisitions involving firms making similar consumer

products. It also describes the different types of evidence that can be

developed in these circumstances, including qualitative evidence, non-

econometric empirical analyses, and econometric analyses, such as

demand estimation with scanner data. In addition, the chapter discusses

a number of cases that illustrate the role of market definition and the

different types of evidence that have been used.

Defining relevant markets requires first estimating the extent to

which consumers will switch from the product or products in the

proposed market to other products and then determining whether that

Market Definition in Antitrust

100

extent of switching would be enough to make a price increase

unprofitable. This chapter focuses primarily on the first of these tasks,

estimating the extent of switching. Determining whether the degree of

switching is sufficient to make a price increase unprofitable may be

accomplished using techniques such as critical loss analysis or merger

simulation that are discussed at length in Chapter I.

B. Specific Issues in Market Definition

Products are said to be differentiated when each product sold is

somewhat different from the other products available to consumers.

Using the approach outlined in the Horizontal Merger Guidelines,1 the

question is whether there is a group of products that consumers view as

close substitutes, with products outside the group being considered

significantly more distant substitutes.2 The typical approach is to assess

whether there are substantial “breaks” in the chain of substitution across

different products such that few consumers would likely switch to

products outside the hypothetical market if prices of products within the

proposed market were raised by a small but significant amount.

Determining what constitutes a large enough break in the chain of

substitution to define a relevant product market can be challenging.3

Consumer preferences and consumer willingness to substitute are

generally the key elements of market definition analysis in consumer

products industries. Often, these products are sold through retailers or

other intermediaries (such as travel agents), rather than directly to

consumers by the manufacturers. Thus, one must consider whether these

intermediaries affect market definition analysis. For example, while

consumers might not view two types of products as close substitutes,

retailers may view them as good alternatives to carry on their shelves or

to put on promotion, and this retailer-perceived closeness of competition

might affect manufacturer pricing.

As in other industries, it is also important to analyze whether an

identifiable group of consumers could be subject to price discrimination

1. U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, HORIZONTAL MERGER

GUIDELINES § 4 (2010), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,100,

availa ble at http://www.justice.gov/atr/public/guidelines/hmg-2010.html

[hereinafter 2010 MERGER GUIDELINES]. For a ge neral introduction to

this approach, see Chapter I.

2. 2010 MERGER GUIDELINES, supra note 1, § 4.

3. See, e.g., James A. Keyte, Market Definition and Differentiated P roducts:

The Need for a Workable Standar d, 63 ANTITRUST L.J. 697, 698 (1995).