Topic 11: Market Definition

1. Antitrust Economics 2013 David S. Evans University of Chicago, Global Economics Group Elisa Mariscal CIDE, Global Economics Group Topic 11: Market Definition Topic 11| Part 1 26 September 2013 Date

2. Overview

3. Key Questions to Think About

4. Things You Really Need to Know

5. Role of Market Definition

6. Market Definition and Market Power

7. Market Definition and Context F G Firms in the market A, B, C, D, E H Firms outside of the market: F, G, H, …

8. Market Definition and Measures

9. Market Definition, the Case Law, and Economics

10. Market Definition Sets Hard Boundaries Between Products that are “In” or “Out” of the Market. Out Out In Product in question Continuum of product substitutes—farther away are less substitutable

11. General Principles of Market Definition

12. Identifying Relevant Substitutes by Asking What Would Constrain an Increase in Price Demand-side Supply side Will producers of other products divert capacity? How will marginal customers react? Product market Would firms in one area supply another? Will customers buy from other areas? Geographic market

13. Demand-side substitution

14. Demand-side substitution and the marginal consumer F is an “average consumer” of beer (from O to C) O A,B, C, D are at “the margin” of buying or not buying beer. F A C D B G G is not a consumer of beer at current prices

15. Supply-side substitution

16. Standard Steps for Identifying a Relevant Market

17. Which products to consider as demand and supply substitutes for BMW’s MINI Cooper Mini Cooper Other small cars Supply of new small cars Mid-size cars All cars All means of transportation

18. Hypothetical Monopolist (SSNIP) Test for Market Definition

19. Hypothetical Monopolist Test

20. How to proceed? Demand-side then supply-side Potential substitute products Candidate Market 1 A B  C  2 Demand-side A+B+C D X A+B+C 3 S1  Supply-side A+B+C+S1 S2 X

21. Issues Concerning Hypothetical Monopolist Test

22. Hypothetical Monopolist Test Depends on Where One Starts Large Cars Scooters Small cars

23. Relevant Market at End of Analysis G, H A, B, C, D, E, F L K I

24. Critical Loss Analysis Implementing the Hypothetical Monopolist (SSNIP) Test

25. Critical loss analysis is a method for implementing SSNIP test in practice Price Profit = ($20 - $10) x 100 = $1,000 $20 $10 MC Quantity 100

26. Critical loss analysis is a method for implementing the SSNIP test Price $22 $20 $10 MC Quantity 100 83.33 If fewer than 16.7 units of sales switch than a 10% price increase is profitable

27. Critical Loss Analysis Depends on Customer Switching—an Example of a Calculation

28. Critical Loss Analysis is a Method for Implementing the SSNIP Test Price $22 $20 Dmore elastic $10 MC Dimplied by critical loss Dmore inelastic Quantity 100 83.33 Regression analyses, natural experiments, and internal market studies can help determine actual loss.

29. Critical Loss Analysis is a Method for Implementing the SSNIP Test

30. Comparison of Actual Versus Critical Loss Determines if Market is Large Enough to be Monopolized. Actual loss greater than critical loss Implies price increase is unprofitable so assumed “market” can’t be profitably Monopolized and is therefore too small. Actual loss less than critical Loss implies that price increase is profitable so assumed “market” can be profitably monopolized. Market is therefore at least this narrow. Critical Loss

31. The Simple Math of Critical Loss Analysis

32. The Simple Math of Critical Loss Analysis—Example

33. End of Part 1, Next Class Part 2