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
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
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. DEPT OF JUSTICE & FED. TRADE COMMN,
HORIZONTAL MERGER GUIDELINES § 4 (2010), available at [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
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
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
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

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