Product Differentiation through Space and Time: Some Antitrust Policy Issues

• Published date: 01 March 1997
• Date: 01 March 1997
• DOI: http://doi.org/10.1177/0003603X9704200112
• Subject Matter: Economic

The Antitrust Bulletin/Spring 1997

Product

differentiation through

space and time: some

antitrust

policy

issues

BY JONATHAN B. BAKER*

177

After

a

century

of

interpreting

the

Sherman

Act,

antitrust

has

learned how to do some things quite well, We understand

what

is wrong with naked horizontal price fixing and market division,

and we have developed strong tools to-deal with those problems.

We can generally prevent mergers to monopoly and we are pretty

good

at

preventing

other

mergers

that

increase

market

power.

At least, we can do so in the kinds

of

industries that antitrust grew

up with, in which firms make and sell substantially similar prod-

ucts and compete in terms

of

current production and prices, rather

than innovation.

But

antitrust has been less successful in other areas. This arti-

cle explores the problems antitrust confronts when products are

* Director, Bureau of Economics, Federal Trade Commission.

AUTHOR'S NOTE: The views expressed are not necessarily those

of

the

Federal Trade Commission or any individual Commissioner. This article

expands upon remarks delivered

to

The Antitrust

and

Trade Regulation

Committee

of

the Association

of

the Bar

of

the City

of

New York, February

6, 1996. The author is grateful to Timothy Bresnahan, Stephen Calkins,

Steven Salop, Gary Roberts, and Michael Wise.

©1997 by Federal Legal Publications. Inc.

178 The antitrust bulletin

differentiated. It focuses on two types of differentiation in particu-

lar.

The

first appears most commonly in consumer products indus-

tries, in which alarge number

of

brands are available and the

products vary in physical attributes and images. Products like soft

drinks and automobiles provide examples. Here the differentiation

is "spatial," to use the economist's metaphor of products located

at various positions in an abstract characteristics space. The sec-

ond type of differentiation emphasizes that firms in these indus-

tries often introduce new products over time. There was a time,

after all, when Coke and Pepsi did not sell sugar-free or caffeine-

free colas, and when General Motors and Ford did not sell sub-

compact

cars. Product innovation can be thought

of

as creating

goods differentiated over time.

In

differentiated

product

settings,

this

article

explains,

antitrust has had trouble isolating anticompetitive harm and devis-

ing a procompetitive remedy within the conventional rule-of-rea-

son, market-definition paradigm. The problems

appear

in legal

doctrine,

but their roots, and

their

possible resolutions, rest in

economic analysis. Accordingly, this article begins, in section I,

with the economics

of

spatial product differentiation. Section II

considers merger analysis in differentiated product industries, and

section

III

examines

the

problems

antitrust

faces in

identify-

ing

anticompetitive conduct arising from

the

development and

marketing of new products.

I. Economics of product differentiation

Product differentiation across space is of particular interest in

merger analysis. The 1992 Merger Guidelines contain asection

devoted to analyzing the unilateral competitive effects of mergers

when products are differentiated.' Although spatial product differ-

entiation appears in multiple forms, this article will focus primar-

ily

on

the

common

situation

in

which

producers

respond

to

different

consumer

tastes by offering different sets

of

product

u.s.

Dept. of Justice and Federal Trade Commission, 1992 Hori-

zontal Merger Guidelines, §

2.21,4

Trade Reg. Rep. (CCH)

'1]13,104.