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Market definition

  • Calculating market shares and competition: influential in other areas of antitrust beyond mergers
  • Practices
  • Enforcement policy

Intended to assist:​

  • Business community and the public
  • Antitrust bar
  • Courts
  • 2023 Guidelines: 11 categories (structure is distinct from previous 2010 guidelines, which laid out principles rather than categories, although the content is very similar besides 7)

(1) Concentration thresholds: how to map economics and data onto the law (PNB)

(2) Competition between firms: unilateral competitive effects (major theory)

(3) Risk of coordination: concentration decreases the incentive to compete, increases incentive to coordinate

(4) Potential entrant: preventing a firm from entering prevents it from playing a competitive role in the market

(5) Exclusion of rivals: merger can result in rivals being cut off from distribution, suppliers

(6) Dominant position: concerns about monopolization

(7) Trend toward consolidation: protect small business by preventing larger firms from consolidating (basically reviving Brown Shoe – see critiques of case below)

(8) Series of acquisitions: the aggregate of a dominant firm buying lots of small rivals could be anticompetitive even when a single acquisition wouldn’t be

(9) Platforms: specifically address the novelty of two-sided platforms

(10) Competition between buyers:

(11) Partial ownership: there are situations where it is unclear who controls a firm after merger, identifying the independent actors is tricky

Market Definition

Steps courts take to define market:

(1) Identify commodities that are “reasonably interchangeable” by consumers “for the same purpose” (Cellophane)

  • Consider price, use, and qualities; cross-elasticities of demand

(2) Identify a narrower “submarket” (Brown Shoe)

  • Consider a “grab bag” of “practical indicia”: (a) recognition of the submarket as a separate economic entity, (b) product’s characteristics and uses, (c) unique production facilities, (d) distinct customers, (e) distinct prices, (f) sensitivity to price chances, and (g) specialized vendors

(3) Hypothetical monopolist test: a product market is the smallest product or group of products and narrowest geographic area such that a

  • (a) Hypothetical monopolist who is the
  • (b) only present and future seller of products in the market
  • (c) would be able to profitably impose a “small but significant and non-transitory increase in price" (SSNIP) (or decrease the transaction quality, meant to capture Google (SSNIPT))
    • Usually, a 5% increase starting from prices that would prevail absent the merger suffices
  • (d) Assuming the terms of sale of all other products are held constant
  • The analysis begins with the narrowest possible market and then adds the “next best substitute” until a SSNIP would be profitable (then stops)
  • General flow: P argues for a narrow market definition using Du Pont and Brown Shoe, D will argue that Brown Shoe distinctions are arbitrary, potentially ground the analysis in hypothetical monopolist test (although opposing experts will fight about this too)

Benefit of hypothetical monopolist test: connects the analysis of product and geographic market to anticompetitive case (Cellophane + Brown Shoe doesn’t get at anticompetitive effects even though that is the whole point of the analysis)

  • 2023 merger guidelines: the goal is to define a market to identify some anticompetitive effects from a merger – concentration alone isn’t dispositive

Define a market to identify whether there is “any line of commerce” or “section of the country” in which the merger “may substantially lessen competition” or “tend to create a monopoly” (Clayton Act § 7)

Agencies define “area of effective competition” in which competition may be lessened with reference to a product and geographic market

Market definition also allows Agencies to identify market participants and measure market shares and market concentration

Viewed as more controversial than prior guidelines (although prof. believes only number 7 is really different)

Evidence agencies use to identify relevant antitrust market:​

(1) Direct evidence of substantial competition between the merging parties

(2) Direct evidence of the exercise of market power can demonstrate the existence of a relevant market in which that power exists

(3) A relevant market can be identified from evidence on observed market characteristics (“practical indicia”)

(4) The hypothetical monopolist test, which examines whether a proposed market is too narrow by asking whether a hypothetical monopolist over the market could profitably worsen terms significantly, for example, by raising price

  • Hypothetical monopolist test examples: the test is consistent with cellophane, more quantitatively grounded

Coke​

Suppose narrowest product definition is Coke: a hypothetical monopolist likely would not be able to profitably impose a SSNIP – consumers would just switch to other colas

Suppose we add all other formulas of caramel-colored cola (Pepsi, Dr. Pepper, etc.): a hypothetical monopolist probably could profitably impose a SSNIP – people who want cola are likely to be willing to pay more rather than switch to another drink like Sprite

Thus, the product market of caramel-colored cola would likely be a relevant market for antitrust purposes

This could be revealed by Coke’s own documents (don’t need an economic expert) – marketing team has likely done thorough research on what consumers will do, how they will substitute Coke for other products as price rises

Organic grocery stores​

Suppose one firm owned all organic grocery stores in Berkeley – could they profitably raise prices by 5-10%?

If yes, then that is a product market and would raise concern about a merger

If not (i.e., consumers just turn to other grocers like Safeway), then organic grocery stores is not a market and the algorithm should be continued by expanding the set of stores

  • Math: 2 points:

(1) For an economist to run hypothetical monopolist test, they need:

  • (a) Prices: observable
  • (b) Quantity sold: observable
  • (c) Marginal cost to produce another unit of good: this is the opportunity cost (not accounting cost), which experts can reasonably disagree on
  • (d) Demand elasticity: some sophisticated firms (e.g., Google) will have these data; otherwise, opposing economists will provide estimates and argue about which is better

(2) Critical loss: how many units would a monopolist have to lose for monopolization to not be profitable?

  • Evidence for hypothetical monopolist test: answer the question “how will buyer respond to a price increase?”

Buyer responses to prices in the past: cross elasticities

Information from buyers on how they would respond to prices: survey evidence

Conduct of sellers: past behavior of sellers

Timing/cost of switching to buyers: is it easy or hard for buyers to switch

Legal/regulatory requirements

  • Geographic markets: consumers’ willingness or ability to substitute products/suppliers’ willingness or ability to serve customers are often limited by distance

Limiting factors: (a) transportation costs, (b) language, (c) regulation, (d) tariff and non-tariff trade barriers, (e) custom and familiarity, (f) reputation, and (g) local service availability

The hypothetical monopolist test can be carried out for locations: start with downtown Berkeley, could a hypothetical monopolist have raised prices by 5-10%, if yes then expand to Berkeley more broadly, etc.

Caselaw​

U.S. v. H&R Block (D.D.C. 2011) (shows how courts define markets in merger cases)​

Holding: merger is enjoined

  • Product market:
    • Under Cellophane/Brown Shoe, P will argue for a narrow market definition and D will argue for a broad market definition, while the judge can justify anything
    • Under hypothetical monopolist test, (1) test is less arbitrary and more grounded; (2) you can get much narrower markets with the hypothetical monopolist test (but surrenders case to expert economist
    • Court’s hypothetical monopolist test: start with narrowest product market, DDIY
      • Use of D’s documents:
        • TA: analysis by investment bank for an actual market transaction identifies market as composed of digital providers
        • HRB: merger strategy documents say HRB is trying to maximize its digital footprint with the merger
      • Assisted tax preparation is not part of the market:
        • DDIY pricing: constraint on pricing is coming predominantly from digital providers
        • Price differentials: large difference between assisted tax prep and DDIY ($200 vs. $50) – a 5-10% increase in the price of DDIY software ($50 > $55) wouldn’t cause consumers to shift to assisted tax prep (think about demand elasticity)
        • Assisted services pricing: there are some lower priced assisted tax preparation services, but not enough to discipline price increase in the DDIY market
      • Manual tax preparation is not part of the market: if manual tax preparation was part of the market, then consumers would have not alternative but to not do their taxes, which is illegal and would be an absurd market definition
  • DDIY tax preparation is the product market

Facts: Proposed merger of two providers of tax software products (H&R Block and TaxAct). Three methods of preparing a tax return: manual preparation, assisted preparation, and digital do-it-yourself tax preparation (DDIY). DDIY includes HRB (16%), TA (13%), and Intuit (TurboTax) (62%).

Prof. Note: court uses Cellophane, Brown Shoe, and the hypothetical monopolist test to arrive at a market definition

  • Case shows that Cellophane and Brown Shoe are fairly indeterminate approaches to market definition
  • The evidence from real transactions by decisionmakers not thinking about litigation is the best kind of evidence (see TA investment bank analysis, merger strategy docs)