Market Definition
Briefs
Competition practitioners frequently discuss relevant markets to understand the dynamics of competition within specific sectors. The concept of defining markets is crucial in competition analyses as it helps identify the boundaries within which firms operate and compete. For instance, consider the scenario where two banks are merging. Both banks provide commercial banking services across a regional area that encompasses multiple cities; however, they only compete in one city. While there are numerous competitors in the broader regional area, there are no other competitors in the overlapping city where both banks operate.
The primary competition concern pertains to the areas of overlap rather than the specific locations where the banks operate or compete. Both banks are conducting their business and competing within the larger regional area. However, the most significant competition issue is likely to arise in the overlapping city, as consumers typically bank where they reside. Therefore, the pertinent geographic market is identified as the overlapping city.
An earlier decision, Brown Shoe Co., Inc. v. United States, 370 U.S. 294 (1962), established a list of indicators for defining relevant markets. Rather than relying on these indicators, the hypothetical monopolist test was first introduced conceptually by economist Morris Adelman in 1959.1 Loosely, this test may identify a group as a relevant market if the hypothetical monopolist can raise prices significantly, typically by 5%, as more products or geographic areas are included. In 1982, the U.S. Department of Justice incorporated the hypothetical monopolist test into its merger guidelines.2
We acknowledge that there are limitations associated with any tool used for defining relevant markets; however, we will address this matter in a separate technical note.
Also, there has been ongoing discussion among competition economists regarding the necessity of market definition in the context of mergers. If it can be demonstrated that the merging parties will significantly increase their prices following the merger, the rationale for defining markets becomes unclear. Although this argument against market definition may appear valid, it is essential to comprehend the methodology used to ascertain post-merger prices. Typically, an analysis of competing prices is conducted to evaluate the impact on demand. However, the question arises: how should one select which competing prices to include in this analysis?
Morris A. Adelman, Economic Aspects of the Bethlehem Opinion, 45 Va. L. Rev. 684, 688 (1959).
For a discussion on the acceptance of the hypothetical monopolist test among competition agencies, see Gregory J. Werden, The 1982 Merger Guidelines and the Ascent of the Hypothetical Monopolist Paradigm, June 4, 2002.