Market Definition Part I
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- General Comments
- Shortcomings of Traditional Economic Approaches
- Case Law
Often regarded as first step in competition analysis.
- Particularly important in mergers and abuse of dominance cases.
- Why Define the Market.
'a relevant market is something worth monopolising'
Owen and Wildman (1992) Video Economics
- The more narrowly the market is defined the more likely a firm or group of firms will be found to have market power.
- Firms tend to advocate wider market definitions than those adopted by competition authorities.
- Competition Authority Study on Newspapers.
- EU Commission has been accused, on occasion, of defining markets so as to secure a particular outcome.
- Certainly evidence of this in some Article 82 cases
- Facilitated by subjective approach.
- 'Price, characteristics and intended use' formula
'My lament is that this battle on market definitions…..has received virtually no attention from us economists. Except for a casual flirtation with cross-elasticities of demand and supply, the determination of markets has remained an undeveloped area of economic research at either the theoretical or empirical level.'
G. Stigler (1982): The Economists and the Problem of Monopoly, American Economic Review.
- Cross price elasticities
- Price correlations
- Shipments data (geographic market definition).
- All have serious limitations.
where qi and pj denote the quantity and price of two products i and j respectively and d denotes the rate of change.
US Supreme Court first adopted cross-price elasticities in Times-Picayune Publishing Co. v. US (1952).
Confirmed in US v. E.I. du Pont de Nemours & Co. (the 'cellophane case'), (1957).
Reed, J: in order to define a market 'what is called for is an appraisal of the ‘cross-elasticity' of demand'.
- How high does Cross Price Elasticity need to be?
- May be asymmetrical.
- Focus on only 2 products
– breakfast cereal example
Du Pont produced 85 per cent of all cellophane
Court ruled that other packaging materials substitutes at prevailing market prices, and thus market not limited to cellophane.
In dominance case such an analysis is flawed.
Profit-maximising monopolist will generally raise price to the point where other products become close substitutes.
Cross-price elasticity tests will indicate that there are good substitutes at prevailing prices.
Essential point of identifying the relevant market in dominance cases is to assess whether firm has power to raise price.
Cross price elasticity looks at the position after the firm has raised its prices.
- Prices of two products perfectly correlated if a specified percentage change in the price of one results in a consistent percentage change in the price of the other.
- Based on traditional economic view - Market an area within which price of homogeneous products will generally be equal, after allowing for transport costs.
- Possible to have high levels of price correlation even though products are not good substitutes for one another.
- Spurious correlations can arise result if one fails to control for mutual causal factors.
- Can still be useful - If prices not closely correlated products are clearly not substitutes.
- Elzinga and Hogarty (1973 and 1978) proposed using data on product flows to define geographic markets.
- Threat of shipments from producers in one area may be sufficient to constrain the pricing decisions of producers in another area making actual shipments unnecessary. Italian Flat Glass (1988 OJ l33/34) illustrates this point.
- Successfully argued that market was that for beer in the State of Wisconsin
- Wisconsin had highest per capita beer consumption in the US
- Relatively little beer was imported into Wisconsin.
- Ignored fact that 75 per cent of the beer brewed in Wisconsin was shipped out of the State.
- Geographic market widely defined because transport costs were low.
- Price data and company planning documents supported a narrower geographic market definition.
Declined to apply a cross price elasticity of demand test.
'The banana has certain characteristics, appearance, taste, softness, seedlessness, easy handling and a constant level of production which enables it to satisfy the constant needs of an important section of the population consisting of the very young, the old and the sick.'
United Brands Co .v. Commission, [1978] ECR 207, [1978] 1 CMLR 429.
'the interests of the toothless are sufficiently protected by the inability of the dominant firm to discriminate against them. It would lose so much market share from the rest of the population that it would not be worth raising prices to exploit the weak.'
V. Korah, (1990): An Introductory Guide to EC Competition Law and Practice, 4th ed.
[1992] IR 319 - health insurance
Deane v. VHI
[1994] 2 IR 305 - electricity. Donovan v. ESB,
Neither case set out any guiding principles for defining the market.
, [1993] ILRM 145.Masterfoods t/a Mars v. HB Ice Cream Ltd.
Keane J defined market as being that for impulse ice-cream products
'largely on what has been described as the 'common sense' or 'innate characteristics' test.
'I do not think that someone going into a confectioner's or newsagent to buy an ice cream who finds the cabinet temporarily empty would treat their appetite as slaked by a can of coke or a bag of crisps.'
Judgement rejected cross-price elasticity analysis because the 'acknowledged incapacity of that procedure to embrace all the significant variables which would have to be taken into account significantly reduces its value.'
Ballina Mineral Water Company v. Heineken Ireland Limited.
Held: Lager did not constitute a separate product market but was part of the wider beer market.
Referring to United Brands judge stated:
'Again, one can, I think...substitute the word 'lager' there for the word 'banana' and other beer products for other fruit products, and one arrives at a situation where on the application of that test, it seems to me that the appropriate market definition or product market is the beer market.'
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