Market Definition

• Pages: 61-92

61

CHAPTER IV

MARKET DEFINITION

A. Introduction

Defining a relevant market is typically a critical issue in assessing

market power, since market definition identifies the relevant competitors

and provides the basis for estimating market shares.1

Courts have identified basic methodologies and factors to be

considered in defining a market, but applying these principles in

particular cases is often difficult. As the Supreme Court has noted:

For every product, substitutes exist. But a relevant market cannot

meaningfully encompass that infinite range. The circle must be drawn

narrowly to exclude any other product to which, within reasonable

variations in price, only a limited number of buyers will turn; in

technical terms, products whose “cross elasticities of demand” are

small.2

This identifies the key issue in market definition, i.e., would buyers

shift their purchases sufficiently in the face of an attempted exercise of

market power that the attempt would be thwarted. As the Ninth Circuit

explained:

1. “Because market power is often inferred from market share, market

definition generally determines the result of the case.” Eastman Kodak

Co. v. Image Tech. Servs., 504 U.S. 451, 469 n.15 (1992) (citation

omitted). The agencies recently have downplayed the importance of

market definition in assessing market power for differentiated products as

well as reliance on market shares to make inferences about likely

competitive effects. U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N,

HORIZONTAL MERGER GUIDELINES § 4 (2010), available at

http://www.justice.gov/atr/public/guidelines/hmg-2010.html [hereinafter

MERGER GUIDELINES]. Whether this approach will gain traction in the

courts remains to be seen. See FTC v. Lundbeck, 650 F.3d 1236, 1239

(8th Cir. 2011) (“To prevail, the FTC bears the burden of identifying a

relevant market.”); City of New York v. Group Health, No. 06 Civ.

13122, 2010 WL 2132246, at *3 (S.D.N.Y. 2010) (relying on market

definition and rejecting the upward pricing pressure (UPP) test).

2. Times-Picayune Publ’g v. United States, 345 U.S. 594, 612 n.31 (1953).

62 Market Power Handbook

A “market” is any grouping of sales whose sellers, if unified by a

monopolist or a hypothetical cartel, would have market power in

dealing with any group of buyers.3

Thus, broadly speaking, the objective in defining the relevant market is

to draw the boundary—which, of necessity, might be imprecise—

between those products and services that compete to some substantial

degree with the product being studied and those that do not.

A relevant market has two components, which reflect different

dimensions in which competition occurs: (i) the relevant product market,

which identifies the products or services that compete with the product of

interest; and (ii) the relevant geographic market, which identifies the

geographic area within which competition with the product of interest

takes place.4

B. Product Market Definition

The relevant product market includes all products that substantially

constrain the pricing of the product being studied. For example, in a case

involving alleged monopolization of “widgets,” product market analysis

assesses whether “gadgets,” which appear to be substitutes for purchasers

3. Rebel Oil v. Atl. Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995) (citing

PHILLIP AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 518.1b, at

534 (Supp. 1993)). Several other courts have cited the Areeda &

Hovenkamp definition of a relevant market (from various editions of their

treatise). See, e.g., AD/SAT v. Associated Press, 181 F.3d 216, 228 (2d

Cir. 1999); Levine v. Cent. Fla. Med. Affiliates, 72 F.3d 1538, 1552 (11th

Cir. 1996); H.J., Inc. v. ITT Corp., 867 F.2d 1531, 1537 (8th Cir. 1989);

Piazza v. MLB, 831 F. Supp. 420, 439 (E.D. Pa. 1993). The FTC has

used an almost identical definition, defining a market as “the smallest

grouping of products whose sellers, if unified by a hypothetical cartel or

merger, could profitably increase prices significantly above the

competitive level.” R.R. Donnelley & Sons Co., 120 F.T.C. 36, 153 (1995)

(citing H.J., Inc., 867 F.2d at 1537). Finally, the Merger Guidelines have

been cited in analyzing the relevant market. FTC v. Whole Foods Mkt.,

548 F.3d 1028, 1037-38 (D.C. Cir. 2008).

4. See, e.g., United States v. Marine Bancorp., 418 U.S. 602, 618 (1974);

Brown Shoe Co. v. United States, 370 U.S. 294, 324 (1962); Eichorn v.

AT&T, 248 F.3d 131, 147 (3d Cir. 2001); Bathke v. Casey’s Gen. Stores,

64 F.3d 340, 345 (8th Cir. 1995); Los Angeles Mem’l Coliseum Comm’n

v. NFL, 726 F.2d 1381, 1392 (9th Cir. 1984).

Market Definition 63

of widgets, are a sufficiently good substitute for widgets such that

competition from gadgets substantially constrains widget prices,

preventing the substantial exercise of market power.

Although courts have described the process of defining a relevant

product market in a variety of ways, the core of such analysis is an effort

to identify the products and the suppliers of those products that compete

to some substantial degree with the product in question. The Third

Circuit explained that “defining a relevant product market is a process of

describing those groups of producers which, because of the similarity of

their products, have the ability—actual or potential—to take significant

amounts of business away from each other.”5

Products may be included in the same market based on effective

demand-side substitution or, in some instances, effective supply-side

substitution. In defining the relevant market in which widgets compete,

the issue of demand-side substitution involves the extent to which current

buyers of widgets would switch to gadgets in response to a small

increase in the price of widgets. The issue of supply-side substitution

involves the extent to which producers of gadgets would switch to

producing widgets in response to a small increase in the price of widgets.

Thus, for example, cookies and cakes might be both demand-side and

supply-side substitutes. By contrast, men’s and women’s apparel are

usually not demand-side substitutes, although they may well be supply-

side substitutes if the two can be produced using the same production

facilities.

The case law does not provide a precise test for determining how

attractive a demand-side substitute must be to be included in the relevant

product market; rather, courts rely on numerous factors in making this

assessment. The use of supply-side considerations to define markets is

more rare, and a consensus on the appropriate standards has not yet

emerged.6

5. SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056, 1063 (3d Cir. 1978);

see also Harrison Aire, Inc. v. Aerostar Int’l, 423 F.3d 374, 383 (3d Cir.

2005); Spanish Broad. Sys. v. Clear Channel Commc’ns, 376 F.3d 1065,

1074 (11th Cir. 2004). Similarly, in the Merger Guidelines, the FTC and

DOJ explain that they seek to identify products that are in substantial

competition with one another by focusing on the consequences for pricing

behavior in the market if such competition were to cease. See MERGER

GUIDELINES, supra note 1, § 4.

6. Even if not considered as part of the relevant market analysis,

considerations of supply-side substitution are often taken into account in