General Principles of Market Definition

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CHAPTER I

GENERAL PRINCIPLES OF MARKET DEFINITION

A. Introduction

The purpose of market definition is to provide a context within

which competitive effects can be analyzed, and it is frequently a critical

and extremely fact-intensive element of antitrust cases. Failures to plead

or prove an alleged market have led to defeats in major litigation

including dismissal of complaints.1 As a recent review of the subject

observed, “[t]hroughout the history of U.S. antitrust litigation, the

outcome of more cases has surely turned on market definition than on

any other substantive issue.”2 Indeed, the Supreme Court’s recent

decision applying the rule of reason to practices that for decades had

been per se violations of Section 1 of the Sherman Act makes an

understanding of the intricacies of market definition even more

essential.3

This chapter provides an overview of the role of market definition in

antitrust litigation. Section B reviews the legal and economic principles

upon which market definition rests, describes the theoretical and

practical issues involved in the use of market definition in merger

investigations, and briefly discusses alternative approaches. Section C

discusses empirical methods sometimes used to define relevant markets,

such as critical loss analysis. Appendix I discusses the role of elasticities

of demand in market definition and economic models of market power.

1. See, e.g., Christy Sports v. Deer Valley Resort Co., 555 F.3d 1188, 1193 -

94 (10th Cir. 2009); Campfield v. State Farm Mut. Auto. Ins., 532 F.3d

1111, 1119 (10th Cir. 2008); Ad/Sat v. Associated Press, 181 F.3d 216,

227-30 (2d Cir. 1999); United States v. Engelhard Corp., 126 F.3d 1302,

1307-08 (11th Cir. 19 97); United States v. Oracle Corp., 331 F. Supp. 2d

1098, 1158 (N.D. Cal. 2004).

2. Jonathan B. Baker, Mar ket Definition: An Analytical Overview, 74

ANTITRUST L.J. 129, 129 (2007) [hereinafter Baker, Market Definition].

3. See Leegin Creative Leather Prods. v. PSKS, Inc., 551 U.S. 877, 905-06

(2007).

2 Market Definition in Antitrust

B. Market Definition: Legal and Economic Principles

1. Overview

Market definition is typically an issue in claims under Sections 1 and

2 of the Sherman Act and Section 7 of the Clayton Act. Section 1 of the

Sherman Act prohibits agreements in “restraint of trade.”4 Section 2 of

the Sherman Act prohibits monopolization, attempted monopolization,

and conspiracies to monopolize.5 Section 7 of the Clayton Act prohibits

mergers and acquisitions that may substantially lessen competition.6

Except for violations that are per se illegal, each of these proscribed

offenses generally requires the plaintiff to plead and prove the relevant

market(s) that the defendant allegedly has restrained, monopolized, or

attempted or conspired to monopolize, or in which the defendant has

proposed an acquisition that would substantially lessen competition.7 As

discussed in Section B.2.c. of this chapter, some commentators have

suggested that an analysis of market effects might in some cases

eliminate the need for a market definition, and a recent Federal Trade

Commission (FTC) decision does discuss the possibility that in some

cases some restrictions might be found anticompetitive without a

“detailed market analysis.”8 But even that decision does define a

market.9

Relevant markets have two dimensions: product and geographic.

The Supreme Court long ago observed in the seminal case of Brown

Shoe Co. v. United States10 that “Congress neither adopted nor rejected

specifically any particular tests for measuring the relevant markets, either

as defined in terms of product or in terms of geographic locus of

competition.”11 While the Brown Shoe Court had no occasion to

determine the relevant geographic market, it set forth criteria for us in

defining the relevant product market.

According t o the Court, “the outer boundaries of a product market

are determined by the reasonable interchangeability of use or the cross-

4. 15 U.S.C. § 1.

5. 15 U.S.C. § 2.

6. 15 U.S.C. § 18.

7. See supra note 1 (listing cases that discuss market d efinition).

8. Realcomp II, Ltd., 2009 FTC LEXIS 250, at *43 (FTC 2009) (opinion ).

9. Id. at *28-29.

10. 370 U.S. 294 (1962).

11. Id. at 320-21.

General P rinciples of Market Definition 3

elasticity of demand between the product itself and substitutes for it.”12

Within the broader market, “well-defined submarkets may exist which,

in themselves, constitute product markets for antitrust purposes.”13 The

boundaries of any submarkets “may be determined by examining such

practical indicia as industry or public recognition of the submarket as a

separate economic entity, the product’s peculiar characteristics and uses,

unique production facilities, distinct customers, distinct prices, sensitivity

to price changes and specialized vendors.”14

12. Id. at 325. The cross-price elasticity (or “cross elasticity”) of demand

measures the sensitivity of the quantity of a product demanded by buyers

to a change in the price of another product, and it is defined as the

percentage change in t he demand for one product divided by the

percentage change in the price of another. The relationship between cross

elasticities and market power is discussed in Appendix I.

13. Id. at 325.

14. Id. The notion of submarkets has been criticized by some courts and

commentators as both superfluous and “confusing.” Allen-Myland, Inc.

v. IBM, 33 F.3d 194, 208 n.16 (3d Cir. 1994) (“The use of the term

‘submarket’ is so mewhat confusing, and tends to obscure the true

inquiry”); In re Air Passenger Computer Reservation S ys. Antitrust Litig.,

694 F. Supp. 1443, 1458 n.9 (C.D. Cal. 1 988) (“[T]he prefix ‘sub’ merely

creates confusion and is superfluous”); PepsiCo v. Coca-Cola Co., 19 98-2

Trade Cas. (CCH) ¶ 72,257, at 82,637 (S.D.N.Y. Aug. 27, 1998)

(“[S]peaking of submarkets is both superfluous and confusing in a n

antitrust case,” and “nothing would be lost by deleting the word

‘submarket’ from the antitrust lexicon”); see also Phillip Areeda, IIA

ANTITRUST LAW ¶ 533c, at 170, 173 (1995). Nevertheless, numerous

decisions have used the concept of submarkets. See, e.g., B ogan v.

Hodgkins, 166 F.3d 509 (2d Cir. 199 9) (explaining that “[w]hile a

submarket may function as the relevant market for antitrust purposes,

more is required than a showing that a product differs from others.

Submarkets do exist, notwithstanding t he empirical difficulty of

demonstrating them, but t he plaintiffs have not even made a n effort to do

so.”); Olin Corp. v. FTC, 986 F.2d 1295, 1304 (9th Cir. 1993) (holding

that even if there is a relevant market comprising all pool sanitizers, that

would not preclude identifying a relevant submarket comprising only dry

sanitizers); Rothery Storage & Van Co. v. Atlas Van Lines, Inc. , 792 F.2d

210, 218 (D.C. Cir. 1986) (“The industry or public recognition of the

submarket as a separate economic unit matters because we assume that

economic actors usually have accurate perceptions of economic

realities.”); see also In re Xidex Corp., 102 F.T.C. 1 (1983) (consent

decree resolving challenge to an acquisition based on an anticompetitive

effect in the nonsilver duplicate microfilm market and a submarket