Residual Demand Analysis of the Ready-to-Eat Breakfast Cereal Market

• DOI: 10.1177/0003603X9303800405
• Published date: 01 December 1993
• Date: 01 December 1993
• Author: Johannes Kohler,David R. Kamerschen
• Subject Matter: Article

The Antitrust Bulletin/Winter 1993

Residual demand analysis

of

the ready-to-eat

breakfast cereal market

BY DAVID R. KAMERSCHEN* and JOHANNES KOlll..ER**

I.

Introduction

903

A

market

encompasses

the

significant

actual

and

potential

demanders

and

suppliers

in

a

geographic

area

constraining

the

price

and

nonprice activities (actions and strategy)

of

firms

selling

commodities

highly

substitutable in

consumption

and/or

produc-

tion.'

Thus,

a

market

includes the

buyers

and

sellers in

the

inter-

*Distinguished

Professor

of

Economics at the

University

of

Georgia.

** Officer at JPMorgan in London, England.

AUTHORS' NOTE: We are indebted to David B. Robinson and anonymous

refereesfor helpful comments and suggestions.

1See Cartwright, Huang &Kamerschen, Price Correlation and

Granger Causality Tests for Market Definition, 4

REv.

INDUS.

ORG.

79

(1989). The most comprehensive review of the definition of markets is in

G. J. WERDEN,

THE

HISTORY OF ANTITRUST MARKET DELINEATION (U.S.

Dep't of Justice, Antitrust Division, Economic Analysis Policy Group,

Discussion Paper, EAG 92-8,1992)

(MARQ.

L.

REv.

forthcoming).

e1994 by

Federal.

Legal Publications,Inc.

904 : The antitrust bulletin

acting geographic area who significantly influence price, quality,

and quantity of specific commodities. Market definition involves

studying both the actions and perceptions

of

actual and po-

tential

buyers and sellers.s Because real-world

product

and

geographic markets are multidimensional and complex, any

empirically operational definition delineating the feasible range

of

product and supplier options is arbitrary and involves blurred or

shaded edges with close substitutes on the inside and varying

degrees of partial substitutes on the outside. Because

of

the

emphasis by some courts, antitrust enforcement agencies, and

industrial economists on market share as a reasonable and easily

quantifiable, but crude, method

of

assessing economic

power-.

i.e., the ability to control price and exclude competitors-proper

identification

of

the relevant product market (i.e., line of com-

2See. e.g., Note, The Market: A Concept in Antitrust, 54

COLUM.

L.

REV.

580 (1954); Bishop, Elasticities. Cross-Elasticities. and Market

Relationships. 42 AM.

ECON.

REv. 779 (1952); R. D.

BLAIR

&D. L.

KASERMAN,

ANrrrRUST

EcONOMICS

(1985); Edwards, Economic Concepts

and Antitrust Litigation: Evolving Complexities, 19

ANrrrRUST

BUlL. 293

(1974); Fisher, Horizontal Mergers: Triage and Treatment, 1 J.

ECON.

PERSPECTIVE

23 (1987); Froeb &

Werden,

The Reverse Cellophane Fal-

lacy in Market Definition, 7 REv.

IND.

ORG.

241 (1992); F. 1.

JOHNSON,

MARKET

DEFINITION

UNDER

TIlE

MERGER

GUIDELINES:

CRrnCAL

DEMAND

ELASTICITIES

(p.T.C., Bureau

of

Economics, Working Paper No. 142,

1986);

Kamerschen,

An Economic Approach to the Detection and Proof

of

Collusion, 17 AM. Bus. L.J. 193 (1979); Pittman &Werden, The

Divergence

of

SIC Industries from Antitrust Markets: Evidence from Jus-

tice Department Merger Cases, 33

ECON.

LETTERS

283 (1990); R. A.

ROOOWSKY

&W. F.

SHUGHART,

II,

MARKET

DEFINITION

IN

ANrrrRUST

ANAL-

YSIS:

COMMENT

(p.T.C.,

Bureau

of

Economics, Working

Paper,

1982);

I.

ROBINSON,

THE

ECONOMICS

OF

IMPERFECT

COMPETITION

(2d ed. 1969); K.

Stegemann, Cross Elasticity and the Relevant Market, 94

ZEITSCHRIFT

WIRTSCHAFFS-UND

SOZIALWISSENSCHAFrEN

151

(1974); J. E.

STIGLITZ

&G.

F.

MATIlEWSON,

NEW

DEVELOPMENTS

IN

TIlE

ANALYSIS

OF

MARKET

STRUC-

TURE (1986); Stocking &Mueller, The Cellophane Case and the New

Competition, 45 AM.

EcoN.

REv.

29 (1955); Steiner, Markets and Indus-

tries,

INTERNATIONAL

ENCYCLOPEDIA

OF

TIlE

SOCIAL

SCIENCES

575 (1968);

Turner,

The

Rule

of

the

"Market

Concept"

in

Antitrust

Law,

49

ANTITRUST

L.J. 1145 (1980); and

Werden,

Four Suggestions on Market

Definition, 37

ANTITRUST

BULL.

107(1992).

Residual demand

analysis:

905

merce)> and the relevant geographic market (i.e., section

of

the

country)' has received considerable attention. However, in recent

years, some economists have suggested assessing economic power

more directly by residual demand analysis with market definition

a byproduct. Despite the shortcomings of this approach, it does go

to the real issue of whether the price will increase as the result of,

e.g., a proposed merger as it identifies the reasonable alternative

firms and products available to consumers that impose constraints

on the behavior of firms.

Scheffman and Spiller distinguish between economic markets

and antitrust markets.> The determination

of

the boundaries

of

an

economic market is based on the classical definition

of

markets

3Comprehensive legal treatments of the product (and geographic)

market are in E. W.

KINTNER,

FEDERAL

ANTrrRUST

LAW

(1984); J. O.

VON

KALINOWSKI,

ANTrrRUST

LAWS

AND

TRADE

REGULATION

(1991); P.

AREEDA

&D. R.

TuRNER,

ANTrrRUST

LAW

(1978); H.

HOVENKAMP,

ECONOMICS

AND

FEDERAL

ANTITRUST

LAW

(1985); R. A.

POSNER

&F. H.

EASTERBROOK,

ANTITRUST

(2d ed. 1981); L. A.

SULLIVAN,

HANDBOOK

OF

rna

LAW

OF

ANTrrRUST

(1977).

4See Elzinga, Defining Geographic Market Boundaries, 26

ANTI-

TRUST

BULL.

739 (1981); Elzinga &Hogarty, The Problem

of

Geographic

Market Delineation in Antimerger Suits. 18

ANTITRUST

BULL.

45 (1973);

Klein,

Rifkin

&

Uri,

A

Note

on

Defining

Geographic

Markets,

15

REGIONAL

SCI.

&

URB.

EeON.

109 (1985); Werden, The Divergence

of

SIC Industries

from

Antitrust Markets: Evidence

from

Price Fixing

Cases, 28

EeoN.

LETTERS

193 (1988); Shrieves, Geographic Market Areas

and Market Structure in the Bituminous Coal Industry, 23

ANTITRUST

BULL.

589 (1978); Slade, Exogeneity Tests

of

Market Boundaries Applied

to Petroleum Products, 34 J.

INDUS.

EeON.

291 (1986); Slade, Interfirm

Rivalry in a Repeated Game: An Empirical Test

of

Tacit Collusion, 35 J.

INDus.

Bcos, 449 (1987); Spiller &Huang, On the Extent

of

the Market:

Wholesale Gasoline in the Northeastern United States, 35 J.

INDUS.

BeON.

131 (1986); Uri, Howell &Rifkin, On Defining Geographic Markets, 17

APPLIED

Bcox. 959.(1985); Uri, Howell &Rifkin, Geographic Markets.

Causality and Railroad Deregulation, 67

REv.

Bcox, &

STAT.

422 (1985);

Werden, The Use and Misuse

of

Shipments Data in Defining Geographic

Markets, 26

ANTrrRUST

BULL.

719 (1981)•

.5 See Scheffman &Spiller, Geographic Market Definition Under

the U.S. Department

of

Justice Merger Guidelines, 30 J.L. &Ecox. 123

(1987).