Market Power Analysis: Extensions and Complexities

• Pages: 135-161

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CHAPTER VI

MARKET POWER ANALYSIS: EXTENSIONS

AND COMPLEXITIES

Many industries present special challenges for market definition and

market power analysis. This Chapter discusses four types of markets that

present special difficulties: differentiated product markets, which involve

products that are substitutes for one another but have distinct

characteristics; cluster markets, which include firms that compete based

on their ability to provide a range of products rather than a single

product; innovation markets, where firms compete to develop new

products; and markets with networks, in which the value of a product

depends in part on the number and nature of the other consumers.

A. Differentiated Product Markets

Antitrust issues often involve differentiated products, products that

can be distinguished from one another by price, physical differences or

brand name. 1 Differentiated products may be contrasted with

homogeneous products, products that have similar physical and

subjective attributes and thus are virtually perfect substitutes. Among the

differentiated products that have raised antitrust issues are superpremium

ice cream, ready to eat cereal, white bread, intense mints, ski resorts, and

cruise line services.2

The factors that distinguish differentiated products may not prevent

them from participating in the same market for antitrust purposes.3 It

may be difficult, however, to determine whether purchasers’ willingness

1. For a discussion of how products may be differentiated, see Richard E.

Caves & Peter J. Williamson, What Is Product Differentiation, Really?,

34 J. INDUS. ECON. 113 (1985).

2. The textual examples are taken from Caves & Williamson, supra note 1,

and also from U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N,

COMMENTARY ON THE HORIZONTAL MERG ER GUIDELINES 27-31 (2006),

available at http://www.justice.gov/atr/public/guidelines/215247.htm

[hereinafter MERGER GUIDELINES COMMENTARY].

3. See United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 394

(1956) (The Sherman Act does not “require that products be fungible to

be considered in the relevant market.”).

136 Market Power Handbook

and ability to substitute between two differentiated products is significant

enough to warrant including them in the same market, and the extent to

which competition from one differentiated product will affect the

conduct of a seller of another differentiated product. Thus, addressing

issues of market definition and market power in the case of differentiated

products often raises a number of difficult issues.

1.

Market Definition

Defining markets in the case of differentiated products generally is a

matter of drawing a line between products in a chain of potential

substitutes. For example, ice cream includes superpremium ice creams

like Ben & Jerry’s and Starbucks, premium ice creams like Edy’s and

Dreyer’s, and lower-priced store brand ice creams.4 Moreover, ice cream

may also compete with frozen yogurt and other desserts. Economists

have often suggested that this line drawing is essentially an arbitrary

procedure, particularly when the differences between the various

products may not appear significant. 5 Some argue that in such

circumstances, defining markets and measuring shares will tell an analyst

little about potential market power,6 and instead suggest using alternative

methods, such as estimation of diversion ratios and merger simulation to

understand market power.7 These alternatives to market definition, which

are given increased emphasis in the Merger Guidelines8 issued by the

FTC and DOJ, are briefly discussed below.

4. See Analysis of Proposed Consent Order to Aid Public Comment, In re

Nestle Holdings, Inc., available at http://www.ftc.gov/os/2003/06/-

dreyeranalysis.htm; see also MERGER GUIDELINES COMMENTARY, supra

note 2, at 6.

5. See, e.g., Jonathan B. Baker, Market Definition: An Analytical Overview,

74 ANTITRUST L.J. 129, 131 (2007); James A. Keyte, Market Definition

and Differentiated Products: The Need for a Workable Standard, 63

ANTITRUST L.J. 697 (1995); Gregory J. Werden & George A. Rozanski,

The Market Delineation Dilemma, ANTITRUST, Summer 1994, at 40.

6. See Franco Mariuzzo et al., Firm Size and Market Power in Carbonated

Soft Drinks, 23 REV. INDUS. ORG. 283, 283 (2003).

7. See in fra pt. A.2.

8. “The Agencies’ analysis need not start with market definition. Some of

the analytical tools used by the Agencies to assess competitive effects do

not rely on market definition . . . .” U.S. DEP’T OF JUSTICE & FED. TRADE

COMM’N, HORIZONTAL MERGER GUIDELINES § 4 (2010), available at