The Renaissance of Market Definition

• Author: Joseph J. Simons,Michael A. Williams
• Date: 01 December 1993
• Published date: 01 December 1993
• DOI: 10.1177/0003603X9303800402
• Subject Matter: Article

The Antitrust Bulletin/Winter 1993 799

The renaissance

of

market definition

BY

JOSEPH

J. SIMONS*

and

MICHAEL

A. WILLIAMS**

Market definition has held acentral place in merger analysis

under section 7 of the Clayton Act 1for decades. The history

of

the

Supreme Court's treatment

of

market definition, unfortunately,

has been acheckered one. Almost 30 years ago, the Court in

Brown Shoe Co.

v.

United States?' borrowed from the economic lit-

erature and monopolization cases to craft a market definition stan-

dard for merger analysis that appeared relatively well suited to the

task. Unfortunately, defects in the Court's approach soon became

*Formerly Associate

Director

for Mergers, Bureau

of

Competition,

Federal Trade Commission.

** Vice President, Analysis Group, Inc.

AUTHORS' NOTE:

The

authors received thoughtful comments on prior

drafts from Steve Salop, Barry Harris, Tom Krattenmaker, Greg Werden.

and John Lopatka.

15 U.S.C. §18 (1988).

2370

U.S.

294 (1962).

Ii)

1994 by

Federal

Legal Publications.Inc.

800 : The antitrust bulletin

evident and the analysis deteriorated into what had the appearance

of

ad hoc gerrymandering to reach a predetermined outcome.3

Although the Supreme Court has been unable to rectify the sit-

uation, it is not entirely to blame. First, the Court has not had the

opportunity to revisit the market definition issue in the merger

context since the mid-1970s.4Second, even

if

it had had such an

opportunity, the Court until relatively recently received almost no

guidance from the legal or economics communities, and it proba-

bly would have been

ill

prepared to address this issue in any

event.

This state of affairs, however, changed markedly in the 1980s

with the introduction of the 1982 Department of Justice Merger

Guidelines! and subsequent, related developments. Market defini-

tion has been undergoing a renaissance.

Important developments have been made of both a theoretical

and practical nature. The major theoretical advances come from

the 1982 Merger Guidelines, while the practical advances provide

the means with which to apply the Guidelines' basicmethodol-

3See Pitofsky, New Definitions

of

Relevant Market and the Assault

on Antitrust, 90

COLUM.

L.R. 1805, 1807, 1849 n.182 (1990) ("Unfortu-

nately, no aspect

of

government enforcement has been handled nearly as

badly as market definition").

4This

has

been due largely to the passage of the Hart-Scott-Rodino

Antitrust Improvements Act of 1976, 15 U.S.C. §18a, which enabled the

antitrust challenges to most mergers to be brought prior to consummation.

As a result, mergers that are preliminarily enjoined rarely survive the

months or years necessary to reach a full trial on the merits of the case.

On the other hand, the Justice Department has routinely abandoned the

prosecution of mergers that survive preliminary injunction motions. The

Federal Trade Commission, however, routinely pursues cases administra-

tively after losing preliminary injunction motions in court. None

of

its

administrative cases, however, have reached the Supreme Court as yet.

5Department

of

Justice, 1982 Merger Guidelines (1982 Merger

Guidelines), reprinted in 4 Trade Reg. Rep.

(CCH)'

13,101. The Guide-

lines were revised again in 1984,

but

their basic market definition

paradigm remained the same. Compare Department

of

Justice, 1984

Merger Guidelines, at §2 (1984 Merger Guidelines), reprinted in 4 Trade

Reg. Rep.

(CeH)'

13,102, with 1982 Merger Guidelines §2.

Market definition :801

ogy. Unfortunately, as discussed below, the recently issued 1992

Department of Justice and Federal Trade Commission Horizontal

Merger Guidelines! represent a step backward in certain respects.

The 1982 Merger Guidelines contain two important innova-

tions with respect to market definition. First, they recognize that

market definition should be geared to the ultimate goal

of

the

analysis. In this regard, theirunifying theme is to prohibit mergers

that significantly enhance the ability of firms to collude, either

expressly or tacitly.' Although this goal also appears to have been

important to the Supreme Court, it did not gear its market defini-

tion standard specifically to that purpose.

The 1992 Merger Guidelines may represent a departure from

the prior practice of tying the market definition paradigm to the

ultimate purpose of the overall merger analysis.

It

is possible to

read the new Guidelines to apply the standard market definition

analysis to noncooperative behavior, in addition to cases

of

collu-

sion. This would be unfortunate, as discussed below, because non-

cooperative behavior requires a fundamentally different analysis.

It

is also possible to interpret the 1992 Guidelines as merely clari-

fying dominant firm analysis and involving no applications to

noncooperative behavior. The 1992 Guidelines, however, are

vague on this point, and the Federal Trade Commission and the

Department of Justice may be taking divergent positions.

The second important contribution of the 1982 Guidelines is

the introduction of a means to bound the market that is logically

linked to the ultimate goal of prohibiting mergers that enhance the

ability of firms to collude. In doing so, the Guidelines provide the

critical and missing link in the market definition standard enunci-

ated by the Supreme Court in Brown Shoe, resolving a problem

1\ Department of Justice and Federal Trade Commission, 1992 Hori-

zontal Merger Guidelines (1992 Merger Guidelines), reprinted in 4 Trade

Reg. Rep.

(CCH)'

13,104.

, 1982 Merger Guidelines §1; Panel Discussion, 54 ANrrrRUST

LJ.

31, 33 (1985) (remarks

of

Assistant Attorney General for Antitrust

William F. Baxter); Werden, Market Delineation Under the Department

of

Justice Merger Guidelines, 1983

DUKE

LJ.

514, 517 (1983).