The Logic of Market Definition

• Author: David Glasner and Sean P. Sullivan
• Position: Economist at the Federal Trade Commission, Bureau of Economics/Associate professor of law at the University of Iowa College of Law and an Associate Editor of the Antitrust Law Journal
• Pages: 293-345

THE LOGIC OF MARKET DEFINITION

D

AVID

G

LASNER

S

EAN

P. S

ULLIVAN

*

For more than a half century, antitrust trials have usually begun with the

definition of a relevant market for the inquiry. Long experience has given this

exercise an air of familiarity, but closer examination reveals market definition

to be a confused exercise. Decades ago, Robert Pitofsky remarked that “no

aspect of antitrust enforcement has been handled nearly as badly as market

definition.”

1

That sentiment remains frustratingly apt today.

2

Despite its long

tenure in antitrust analysis, and despite the crucial role it has played in many a

case and investigation, the process of defining relevant markets remains both

confused and uncertain.

Why do we define markets? How should we define them? One might think

that such fundamental questions would have long been settled. But the some-

times unclear rationale for the exercise, and its inconsistent evolution in the

* David Glasner is an economist at the Federal Trade Commission, Bureau of Economics.

Sean Sullivan is associate professor of law at the University of Iowa College of Law and an

Associate Editor of the Antitrust Law Journal. This article reflects the personal views of the

authors. It does not necessarily represent the views of the U.S. Government or Federal Trade

Commission, which have neither approved nor disapproved its content. The authors thank Chris-

tine Bartholomew, William Bishop, Aaron Edlin, Joshua Goodman, John Kirkwood, Christopher

Leslie, Matt Ralph, Daniel Sokol, Spencer Weber Waller, Gregory Werden, and conference par-

ticipants at the 2019 meeting of the American Law and Economics Association for thoughtful

comments on earlier drafts of this article. Alexander Asawa, Kassandra DiPietro, Reid Shepard,

and Madison Tallant provided superlative research assistance.

1

Robert Pitofsky, New Definitions of Relevant Market and the Assault on Antitrust, 90

C

OLUM

. L. R

EV

. 1805, 1807 (1990); see also Donald F. Turner, The Role of the “Market Con-

cept” in Antitrust Law, 49 A

NTITRUST

L.J. 1145, 1150 (1980) (“Let me turn now to what some of

the current problems are with market definition. I have to say at the outset that as a general

matter this whole area is a bloody mess.”).

2

See, e.g., Louis Kaplow, Why (Ever) Define Markets?, 124 H

ARV

. L. R

EV

. 437, 466 (2010)

(“[T]here is no canonical, operational statement of the standard for determining what constitutes

a relevant market and, a fortiori, no developed underlying rationalization for whatever the princi-

ple might be.”); William Blumenthal, Why Bother?: On Market Definition Under the Merger

Guidelines, Statement before the FTC/DOJ Merger Enforcement Workshop 2 (Feb. 17, 2004),

www.justice.gov/sites/default/files/atr/legacy/2007/08/30/202600.pdf (“[T]he meaning of ‘rele-

vant market’ today . . . probably is not understood by more than 500 people on the planet.”).

293

294

A

NTITRUST

L

AW

J

OURNAL

[Vol. 83

courts and scholarship, have not produced a straightforward set of criteria by

which to assess the validity of relevant markets in antitrust. Even the term,

market definition, is more ambiguous than it first appears. Does it refer to the

identification of popularly recognized lines of commerce or products with

similar characteristics? Does it refer to products with high cross-elasticity of

demand? Does it refer to things like the Hypothetical Monopolist Test (HMT)

and efforts to identify groups of producers with potential market power?

3

That, today, these are all potential answers, is both remarkable and unsettling.

In this article, we hope to cut through some of the ambiguity and confusion

surrounding market definition. Our goal is to trace the internal logic of the

exercise, identifying common errors and showing how the logic of market

definition can focus and guide antitrust inquiries. While we are mainly con-

cerned with how markets should be defined in antitrust, pragmatism requires

us to pause to say why we should aim for proper market definition as well.

The need for pause is the sometimes-popular claim that market definition is

unnecessary in antitrust law. While this argument is not new,

4

Louis Kaplow

has advanced the thesis with a particularly pointed argument that (1) market

definition serves no role except to facilitate computing market shares, (2) mar-

ket shares are poor measures of market power, and (3) antitrust goals would

be better served by assessing market power from things like estimates of

residual-demand curves than by computing market shares.

5

This argument is

not without its strengths, and there are cases in which the traditional market

definition exercise can be skipped without adversely affecting the outcome of

the investigation or trial.

3

This list does not purport to exhaust the range of possibilities. See, e.g., Kenneth G. Elzinga

& Thomas F. Hogarty, The Problem of Geographical Market Delineation in Antimerger Suits, 18

A

NTITRUST

B

ULL

. 45 (1973) (defining markets based on consumer flow information); Mario

Forni, Using Stationarity Tests in Antitrust Market Definition, 6 A

M

. L. & E

CON

. R

EV

. 441

(2004) (defining markets based on price stationarity); Ira Horowitz, Market Definition in Anti-

trust Analysis: A Regression-Based Approach, 48 S. E

CON

. J. 1 (1981) (defining markets based

on price movements); George J. Stigler & Robert A. Sherwin, The Extent of the Market, 28 J.L.

& E

CON

. 555 (1985) (defining markets based on empirical similarity of price movements).

4

E.g., Blumenthal, supra note 2, at 1 (“Worse than unnecessary, any effort formally to define

markets would [be] unduly costly, time-consuming, and invasive, and it probably would [yield]

less reliable outcomes than more streamlined techniques.”); Frank H. Easterbrook, The Limits of

Antitrust, 63 T

EX

. L. R

EV

. 1, 22 (1984) (“Market definition is just a tool in the investigation of

market power; it is an output of antitrust inquiry rather than an input into decisions, and it should

be avoided whenever possible.”); id. (“An inquiry into power does not entail the definition of a

‘market,’ a subject that has bedeviled the law of mergers.”).

5

See generally Kaplow, supra note 2; Louis Kaplow, Market Definition and the Merger

Guidelines, 39 R

EV

. I

NDUS

. O

RG

. 107 (2011); Louis Kaplow, Market Definition Alchemy, 57

A

NTITRUST

B

ULL

. 915 (2012) [hereinafter Kaplow, Alchemy]; Louis Kaplow, Market Definition:

Impossible and Counterproductive, 79 A

NTITRUST

L.J. 361 (2013) [hereinafter Kaplow,

Impossible].

2020]

L

OGIC OF

M

ARKET

D

EFINITION

295

But even if traditional market definition is not necessary in every antitrust

case,

6

we believe that courts and practitioners must still understand how to

properly define and interpret antitrust relevant markets in practice. There are

three reasons for this.

First, the claim that market definition can be entirely replaced by things like

econometric estimates of residual demand curves is doubtful, to say the least.

7

It is difficult, for example, to imagine courts and practitioners analyzing ease

of entry without a market concept. What exactly would firms be entering?

8

Similar difficulties beset efforts to assess the danger of anticompetitive coor-

dination without some idea of which firms would need to cooperate for their

coordinated action to be able to raise prices.

9

And while estimates of residual

demand elasticity may often suffice to establish current or historic market

power, they are not generally sufficient to predict future competitive effects—

as needed, for example, in cases involving unconsummated mergers or pro-

spective acts of exclusion.

10

In such situations, antitrust analysis is advanced

by defining relevant markets.

6

See infra Part IV.A (discussing cases where market definition is not necessary).

7

See generally Duncan Cameron, Mark Glick, & David Mangum, Good Riddance to Market

Definition?, 57 A

NTITRUST

B

ULL

. 719 (2012); Malcolm B. Coate & Joseph J. Simons, In Defense

of Market Definition, 57 A

NTITRUST

B

ULL

. 667 (2012); Gregory Werden, The Relevant Market:

Possible and Productive, A

NTITRUST

L.J. O

NLINE

(Apr. 2014) [hereinafter Werden, Possible],

www.americanbar.org/content/dam/aba/publishing/antitrust_law_journal/online-archive/werden-

online-pdf.pdf; Gregory Werden, Why (Ever) Define Markets? An Answer to Professor Kaplow,

78 A

NTITRUST

L.J. 729 (2013) [hereinafter Werden, Answer].

8

See, e.g., Franklin M. Fisher, Economic Analysis and “Bright-Line” Tests, 4 J. C

OMPETI-

TION

L. & E

CON

. 129, 131 (2008) (“Ease of entry must also be considered, and one might reason-

ably say that such a consideration requires one to know what it is that is being entered.”);

Werden, Answer,supra note 7, at 729 (“Even if antitrust analysis never used market shares, the

relevant market would remain essential for examining entry prospects and the durability of mar-

ket power.”). But see Louis Kaplow & Carl Shapiro, Antitrust,in 2 H

ANDBOOK OF

L

AW AND

E

CONOMICS

1073, 1185–86 (A. Mitchell Polinsky & Steven Shavell eds., 2007) (suggesting

some ways to analyze exclusionary conduct in terms of elasticities); Kaplow, Impossible,supra

note 5, at 363 n.3 (suggesting that potential entry analysis is similar to exclusionary conduct

analysis).

9

See, e.g., Herbert Hovenkamp & Carl Shapiro, Horizontal Mergers, Market Structure, and

Burdens of Proof, 127 Y

ALE

L.J. 1996, 2000 (2018) (“In cases in which the government alleges

coordinated effects, the role of market definition and concentration measures such as the HHI is

much more fundamental.”); Werden, Answer,supra note 7, at 739 (“[Coordinated effects analy-

sis] uses the relevant market to determine how many, and which, competitors most likely would

be involved in the coordination.”).

10

See, e.g., 2B P

HILLIP

E. A

REEDA

& H

ERBERT

H

OVENKAMP

, A

NTITRUST

L

AW

¶ 531d (4th ed.

2014) (commenting that assessment of current market power is insufficient to address concerns

about future market power); Phillip Areeda, Market Definition and Horizontal Restraints, 52

A

NTITRUST

L.J. 553, 555 (1983) (“[Past] performance data cannot reveal unexercised power. . . .

Thus, performance data is not relevant for determining whether a new merger creates new

power.”); Gregory J. Werden, Market Delineation and the Justice Department’s Merger Guide-

lines, 1983 D

UKE

L.J. 514, 515 (1983) (“[A]pplication of [Section 7] requires predictions about

the effects on competition of changes in market structure.”). Kaplow’s best effort to extend his

approach to merger analysis rests on the assumption that the merger is between producers of a