Market Definition—Achieving an Integrated Analysis
| Author | Henry J. Kahwaty,Cleve B. Tyler |
| DOI | 10.1177/0003603X1405900313 |
| Date | 01 September 2014 |
| Published date | 01 September 2014 |
| Subject Matter | Polypore: A Merger in a Producer Good—Article |
Market definition—
Achieving an integrated analysis
BY HENRY J. KAHWATY* AND CLEVE B. TYLER**
Economic analyses employed by economists to address market
definition are often performed in conjunction with additional
economic analyses focused on addressing other aspects of a merger.
Analyses used to evaluate a merger should work together as an
integrated unit, and any inconsistencies between them point to a
flawed set of analyses. We review lessons from two litigated merger
cases (one in Canada and one in the United States) in which the
enforcement agencies adopted inconsistent positions with regard to
market definition and other aspects of the case. In The Commissioner of
Competition v. CCS Corp., results stemming from the competitive
effects analyses were found by the Competition Tribunal in Canada
to be inconsistent with the claimed geographic market. In In re
Polypore International, Inc., the FTC staff sought divestiture of assets
located outside the claimed geographic market, raising serious
questions about the proposed geographic market, the proposed
remedy, or both.
KEY WORDS: merger analysis, market definition, geographic markets,
competitive ef ects, merger remedy
* Director, Berkeley Research Group, Washington, DC.
** Principal, Berkeley Research Group, Washington, DC.
AUTHORS’ NOTE: We were involved in both of the matters discussed in this article.
Dr. Kahwaty was a testifying expert in both matters for the acquiring firm. Dr. Tyler
was a consulting expert in both matters. The views expressed herein solely reflect our
views and not those of the parties or counsel involved in either of the cases. We wish
to thank Nicholas John and John Graybeal for their comments.
© 2014 by Federal Legal Publications, Inc.
668 : THE ANTITRUST BULLETIN: Vol. 59, No. 3/Fall 2014
I.
MARKET DEFINITION METHODOLOGY AND
INTEGRATED ANALYSES
Market definition analysis is a standard part of almost any merger
evaluation, both to help satisfy legal requirements and to allow for
market share measurement. There has been an emphasis in recent
years in merger guidelines, and longer than that in economic dis-
course, on the mutually reinforcing aspects of competitive effects
analysis and market definition. That is, the point is not necessarily to
march lockstep through market definition, then market shares, then
competitive effects, and then efficiencies. Instead, merger analysis
focuses on finding whether a merger is likely to lead to a substantial
lessening of competition, and market definition analysis is under-
taken in light of that objective.
The 2010 U.S. Horizontal Merger Guidelines reflect this perspec-
tive: “The [U.S. Department of Justice and Federal Trade Commis-
sion’s] analysis need not start with market definition. Some of the
analytical tools used by the [Department of Justice and Federal Trade
Commission] to assess competitive effects do not rely on market defi-
nition, although evaluation of competitive alternatives available to
customers is always necessary at some point in the analysis. Evidence
of competitive effects can inform market definition, just as market def-
inition can be informative regarding competitive effects.”1 The Cana-
dian Merger Enforcement Guidelines are even more explicit: “Market
definition, and the measurement of market share and concentration in
1
U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, HORIZONTAL MERGER
GUIDELINES § 4 (2010). In addition, “The purpose of merger analysis under the
Guidelines is to identify those mergers that are likely to create or enhance
market power in any market. The [Department of Justice and Federal Trade
Commission] therefore examine all plausible markets to determine whether
an adverse competitive effect is likely to occur in any of them. The market
definition process is not isolated from the other analytic components in the
Guidelines. The [Department of Justice and Federal Trade Commission] do
not settle on a relevant market definition before proceeding to address other
issues. Rather, market definition is part of the integrated process by which
the [Department of Justice and Federal Trade Commission] apply Guidelines
principles, iterated as new facts are learned, to reach an understanding of the
merger’s likely effect on competition.” U.S. DEP’T OF JUSTICE & FED. TRADE
COMM’N, COMMENTARY ON THE HORIZONTAL MERGER GUIDELINES 5 (2006).
M A R K E T D E F I N I T I O N A N A LY S I S : 669
the relevant market, is not an end in itself . . . . The ultimate inquiry is
not about market definition, which is merely an analytical tool—one
that defies precision and can thus vary in its usefulness—to assist in
evaluating effects. Rather, the ultimate inquiry is about whether a
merger prevents or lessens competition substantial y.”2
Although market definition is not an end unto itself, the implica-
tions of the relevant market should not be ignored. In particular, the
results of a market definition analysis for a merger should be consis-
tent with the rest of the analysis of that merger. Reliable analyses are
reinforcing. If the results of the market definition exercise and some
other part of the analysis are inconsistent, then this is an indication
that there is a problem with either or both of the analyses. Inconsis-
tency between market definition and other analytical results likely
means that one (or both) of the results is not economically tenable. It
is not only desirable that analyses integrate, it is essential.
Merger analysis is generally forward-looking, but a consummated
merger provides the opportunity to analyze actual, post-transaction
effects. This can allow for a more precise merger analysis. In this arti-
cle, we discuss two litigated cases challenging consummated mergers.
In both of these cases, the prosecuting agency defined a market that
was not consistent with other aspects of the analysis offered by it at
trial. One of these litigated cases was in Canada, and one was in the
United States. In Commissioner of Competition v. CCS Corp. (CCS), the
Canadian Competition Tribunal found that inherent inconsistencies in
economic analyses with respect to market definition and competitive
effects undermined the alleged market definition.3 In In re Polypore
2
COMPETITION BUREAU CANADA, MERGER ENFORCEMENT GUIDELINES § 3.3
(Oct. 6, 2011).
3
The Comm’r of Competition v. CCS Corp., No. CT-2011-002, Reg. Doc.
No. 189, ¶ 103-112 (Competition Tribunal 2012). Despite these findings, the
“Tribunal has decided on a balance of probabilities that the Merger is likely to
prevent competition substantially in the market for the supply of secure land-
fill services for solid hazardous waste from oil and gas producers in a geo-
graphic market which, at a minimum, is the area identified by CCS’ expert,
Dr. Kahwaty, as the ‘Potentially Contestable Area.’” Id. ¶ 1. CCS is currently
on appeal to the Supreme Court of Canada. The issues being considered on
appeal relate to both the legal test for a substantial prevention of competition
and the analysis of efficiencies, as opposed to market definition.
670 : THE ANTITRUST BULLETIN: Vol. 59, No. 3/Fall 2014
International, Inc. (Polypore), the Federal Trade Commission staff at
trial asked for and an administrative law judge (ALJ) ordered—the
divestiture of a production facility located outside the geographic
market, even though the ALJ expressly found the facility not to be a
participant in the relevant geographic market.4
II.
CONSISTENCY BETWEEN MARKET DEFINITION
AND COMPETITIVE EFFECTS ANALYSES—
LESSONS FROM CCS
The CCS matter involved the purchase by CCS, a Canadian com-
pany active in the hazardous waste industry in Canada, of a site in
British Columbia known as Babkirk. The Babkirk property was owned
by a group of individuals who had been developing it to treat haz-
ardous waste through bioremediation, a process that uses natural
organisms and processes to treat and reduce the toxicity of hazardous
waste so that any remaining residual nonhazardous waste could be dis-
posed of in conventional landfills. The Babkirk location also had an
approved hazardous waste landfil permit, though no hazardous waste
landfil had been developed on the site at the time of the site’s acquisi-
tion by CCS. There were two existing hazardous waste landfills in
British Columbia. Silverberry is located about an hour and a half south
of Babkirk and Northern Rockies is located about four hours north of
Babkirk.5 Both of these hazardous waste landfil s were owned by CCS.
One other hazardous waste landfill site in British Columbia (Peejay)
was permitted but had not been constructed, and several hazardous
waste landfil s were operating in the neighboring Province of Alberta.6
4
See In re Polypore Int’l Inc., No. 9327 (FTC Initial Decision Mar. 1,
2010), available at http://www.ftc.gov/sites/default/files/documents/cases
/2010/03/100305polyporeincdecision.pdf and In re Polypore Int’l Inc., No.
9327 (FTC Dec. 13, 2010), available at http://www.ftc.gov/enforcement/cases-
proceedings/081-0131/polypore-international-inc-matter, af ’d, Polypore Int’l
Inc. v. FTC, 686 F.3d 1208, 1219 (11th Cir. 2012).
5
These are driving times for trucks used to haul hydrocarbon drilling
wastes.
6
The closest hazardous waste landfill in Alberta was located about four
hours away from Silverberry and eight hours from Northern Rockies, one-
way. A useful map for reference appears as...
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