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Market definition

Test for monopoly (market) power: Monopoly power is the power to control prices or exclude competition

Market definition: commodities reasonably interchangeable for the D's commodity by consumers for the same purpose

  • Consider use, price, characteristics, adaptability, and quality
  • Also look at cross-elasticity of demand: how much does quantity of product X change when you change the price of product Y

General analytical flow to determine if D has market power:

  • What is the market?
    • What are the substitutes for the good (i.e., what goods are reasonably interchangeable)?
      • What are the cross-price elasticities?

Cellophane fallacy: a high cross-price elasticity could indicate that a firm is already exercising market power

  • Could just be the case that prices are so high that non-substitutes appear as substitutes (e.g., if flights are expensive enough, driving might look attractive)
Overcoming the fallacy:
  • Examine the own-price elasticity of demand or cross-price elasticity of demand at the competitive price
  • Look for evidence that a firm can profitably raise the price of the good above the competitive level

Main point: always ask yourself whether the elasticity is high because the firm is already pricing at monopoly levels

Caselaw:​

U.S. v. E. I. Du Pont De Nemours (aka Cellophane) (1956)​

  • Holding: DuPont didn't have market power in the relevant market
    • Relevant market is any commodity reasonably interchangeable by consumers for the same purpose as cellophane
    • Court finds that the relevant market is "flexible packaging material"
      • At minimum, it is what DuPont is selling: cellophane
      • Identify products that are interchangeable in terms of:
        • Use: packaging various food items, cellophane didn't have highest share for any
        • Price: similar prices, but not identical
        • Characteristics (not as impotant as use): papers much different from cellophane that were put to the same use
        • Adaptability: for different uses, what different goods can be used
        • Quality: higher vs. lower (can compare within and across quality)
        • Cross-elasticity of demand: what are the goods that are substitutes for cellophane
  • Facts: DuPont produces 75% of cellophane in U.S. and 20% of "flexible packaging material"
  • Note: which marekt you pick often determines the case
    • Each of the techniques used to identify substitutes here are fair to use today