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Defining a Relevant Market
Markus H. Meier
Assistant Director
African Competition Forum
March 26, 2013
Introduction to Defining a
Relevant Market
• A “relevant” market is a group of products
that significantly constrain each other’s
pricing, when viewed from both the demand
side (consumers) and supply side
(producers).
• A relevant market has both product and
geographic dimensions.
Key Questions in Defining Markets
• What products do consumers view as reasonable
substitutes?
– Considering price, use, quality, and other significant
characteristics
• What alternative products can others supply, and
under what circumstances will they do so?
– Establishes others who are in the market
• Where can consumers practicably turn for supply?
– Can be local, regional, national, or international
Product Market Definition
• Start with each product at issue of the target of
the investigation – this is the “tentative” relevant
product market.
– Use common product names
• If there is more than one possible definition for a
product, use the narrowest definition first.
• Remember, a product can be a good, a service,
or a combination of both.
Demand-Side Analysis
• What products do customers view as reasonable substitutes?
• Would a significant number of customers substitute to other
products?
• Would so many substitute away so as to make the price
increase unprofitable?
• If yes, then expand the tentative product market by adding the
closest substitutes.
• What would customers do in response to a price increase in
this new tentative product market?
• Keep expanding the tentative product market until there is a
relevant product that could be the subject of market power.
Demand-Side Analysis Illustrated
•
•
•
•
“A” is a tentative product market.
Raising A’s price causes significant substitution to B.
Raising A & B’s price does not cause substitution to C.
A & B comprise a relevant product market.
1
2
C
C
A
A
B
B
Consumer substitution to B defeats price increase.
No consumer substitution to C. A and B a market.
The 5% Question
• The hard question is: how close does a substitute
have to be to be included in the market and at what
price?
• In the U.S., the antitrust agencies generally define
product markets by asking this question:
• “If there were a small but significant, non-transitory
increase in the price of the product to what other
products would customers turn (if any)?”
– Most often, a 5% price increase is used. Note that this is
a relative price increase, holding all else equal.
– “Non-transitory” means the price increase is not just
temporary.
Supply-Side Analysis
• Supply-side analysis involves the identification of which
other firms are in the market.
• It asks the question: if the price of the relevant product is
increased by a small but significant amount, would other
firms begin to produce the product?
• Supply substitution is primarily a matter of evaluating
whether other firms can begin to produce the product and
whether they will do so if the price goes up.
• Firms likely to enter and have a competitive impact within
a year should be considered to be in the product market.
Evidence for Defining Product Markets
• Views and behavior of customers
• Views and behavior of suppliers and potential
suppliers
• End use of product
• Physical and technical characteristics of product
• Customers’ switching costs
• Price relationships (correlation)
• Suppliers’ cost of adapting production
processes, distribution, and marketing
• Existence of second hand, reconditioned, or
leased products
Geographic Market Definition
• Start with the area in which the target of the
investigation sells the relevant product.
• If there is more than one factory or similar
location, start by treating each separately.
• Think about what customers would do if the
price of the relevant product in the area
increased by a small but significant amount.
Geographic Market Definition
Issues
• Would a significant number of customers substitute to
new sources of supply outside the area?
• Would so many customers substitute away so as to make
the price increase unprofitable?
• If yes, then expand the tentative geographic market by
adding the area of the closest substitutes.
• What would customers do in response to a price increase
in this new tentative geographic market?
• Keep expanding the tentative geographic market until
there is an area that could be the subject of market
power.
Geographic Market Definition Illustrated
•
•
•
•
A is a tentative geographic market.
Raising price in area A causes significant substitution to area B.
Raising A & B’s price does not cause substitution to area C.
Areas A & B comprise a relevant geographic market.
1
2
C
C
A
A
B
B
Consumer substitution to B defeats price increase.
No consumer substitution to C. A and B a market.
Evidence for Defining Geographic
Markets
• Views and behavior of customers
• Views and behavior of suppliers
• Transportation costs
• Local set-up costs
• Characteristics of the product (fragile, perishable)
• Price relationships (correlation)
• Shipment patterns
• Foreign competition and trade barriers
Combine the Information to
Define the Market
• Using the information learned during the
investigation, combine it to define the market.
• Normally this is stated as follows:
“The relevant market in which to analyze the
competitive effects of [the target’s conduct] is the
sale of motorcycles in the Gambia.”
• Double check the market definition against
common sense:
– Is it consistent with reality and common experience?
– Could firms in this market impose a monopolistic price
increase if they acted together?
Others Ways to Define Markets
• In economic terms, market definition is an
attempt to indirectly evaluate the “cross-elasticity
of demand” between a product and its closest
substitutes.
• It is used because the data to measure crosselasticities directly is rarely available.
• There are economic methodologies to try to
estimate cross-elasticities or market power more
directly, when the right data is available.
– Critical loss and diversion ratios
– Market entry event studies