Market Definition

in AntitrustTheory and Case Studies

/uvS E C T I O N O F

ANTITRUST■ lawH

Promoting Competition Protecting Consnmeri

A \D efending Liberty Pursuing Justice

CONTENTS

F orew ord .................................................................................................................. xiiiP reface ........................................................................................................................ xv

Chapter IG eneral P rincip les of M ark e t D efin ition ..........................................................1A. Introduction...........................................................................................................1B. M arket Definition: Legal and Economic Principles.....................................2

1. O verview ........................................................................................................22. M arket Definition in Government M erger E nforcem ent...................6

a. The DOJ/FTC Horizontal Merger G uidelines................................6b. Key Features of the Merger G uidelines ............................................8

(1) The Hypothetical Monopolist Paradigm and the S S N IP 8(2) Different Roles for Demand-and Supply-Side

Substitution.....................................................................................10(3) Price D iscrim ination.................................................................... 13(4) Geographic M arkets .................................................................... 13

c. Criticisms of M arket-Definition-Based M ethodologies in M erger Investigations......................................................................... 15(1) Introduction.................................................................................... 15(2) Product D ifferentiation................................................................18(3) Competitive Analysis as an Alternative to Market

Definition........................................................................................203. M arket Definition in Monopolization and Section 1 Rule of

Reason C ases ............................................................................................. 21C. Empirical M ethodologies for Market Definition.....................................23

1. Critical Loss and Upward Pricing Pressure Analyses......................23a. Critical Loss A nalysis.........................................................................23b. Role of Profit Margins in Critical Loss A nalysis.........................28c. Other Uses of Critical Loss A nalysis..............................................31d. Upward Pricing Pressure.................................................................... 32

2. M erger Simulation M odels.....................................................................333. Price Correlation Tests.............................................................................364. The Elzinga-Hogarty Test for Geographic M ark ets ........................ 37

ii Market Definition In Antitrust

A ppendix IE lasticities of D em and and Econom ic M odels o f M ark e t P o w er 39A. The Classic Monopoly M o d el........................................................................ 39

1. The Definition of M arket Pow er............................................................392. The Own-Price Elasticity of D em and..................................................403. The Cross-Price Elasticity o f D em and.................................................41

B. M arket Power with M ultiple S upp lie rs ......................................................431. The Dominant Firm Pricing M odel.......................................................442. The Cournot M odel...................................................................................453. The Bertrand M odel..................................................................................46

C h ap te r IIM an u fac tu rin g In p u t M a rk e ts ........................................................................... 49A. Introduction....................................................................................................... 49

1. The Economics of Input M arkets..........................................................502. Price Discrimination M arkets ................................................................533. Merchant M arkets..................................................................................... 544. Other Issues in Defining Input M arkets.............................................. 555. Evidence Available for Assessing Relevant M arkets for Inputs... 56

B. Steel Industry..................................................................................................... 601. Industry Background.......................................................................... 602. Specific Issues in M arket Definition.....................................................603. Cases and Agency D ecisions................................................................. 61

a. United States v. Bethlehem Steel C orp ........................................ 61b. United States v. Mittal Steel C o .......................................................63

C. Chemical Industry ............................................................................................ 651. Industry Background.......................................................................... 652. Specific Issues in Market..Definition.....................................................67

a. Product Market D efinition ................................................................67b. Geographic Market D efinition.........................................................68c. M ultiple End Uses and Chemical G ra d es .....................................70d. Related Technical Services...............................................................71e. Distribution C hannels ........................................................................ 71f. M erchant M arkets in C hem icals..................................................... 72g. Price Discrimination with Customer Switching C o sts .............. 72

3. Cases and Agency D ecisions..................................................................74a. Associated Octel C o ............................................................................74b. Occidental Petroleum Corp.-Tenneco Polymers Inc .................. 76

Contents 111

c. Dow Chemical Co.-Union Carbide Corp.: Product D ifferentiation...................................................................................... 80

d. Solvay S.A.-Ausimont SpA: Markets Based on End U se 82e. American Air Liquide, Inc.-M esser Griesheim GmbH and

Linde AG-BOC Group P L C .............................................................84(1) Customer D ifferentiation............................................................84(2) Geographic M arkets ....................................................................85

f. United States v. Engelhard Corp.: Switching C osts...................86g. Decisions Focusing on M erchant M arkets.................................... 87

A ppendix IIC ritical Loss C alculation T esting W h eth er T in M ill P ro d u cts Sold in the E aste rn U nited S tates is an A n titru s t M a rk e t.......................................91A. Likely Sales Loss from Customers Switching to Alternative

P roducts...............................................................................................................92B . Likely Sales Loss to Imports and the California P roducer..................... 94C. Estimation of the Profitability o f a Five Percent Price Increase in TM P

in the Eastern United States............................................................................96

C h ap te r IIID ifferen tiated C onsum er P ro d u c t M a rk e ts .................................................. 99A. Introduction........................................................................................................ 99B. Specific Issues in M arket D efinition .......................................................... 100

1. Types of Evidence and How Evidence Is E valua ted ......................102a. Qualitative Inform ation.................................................................... 102b. Non-Econometric Empirical Analyses......................................... 103

2. Econometric A nalyses........................................................................... 105a. Demand A nalysis...............................................................................105b. Natural E xperim ents.........................................................................108

3. The Use of Scanner D a ta .......................................................................108C. Cases and Agency D ecisions.......................................................................112

1. Superpremium Ice C ream ..................................................................... 112a. Case D escription................................................................................ 112b. Types of Evidence Relied on by the F T C ....................................113

2. Ready to Eat C e re a l................................................................................ 113a. Case D escription................................................................................113b. Types of Evidence Relied on by the State of New York

and K ra ft..............................................................................................1153. W hite Pan B read ......................................................................................117

iv Market Definition In Antitrust

a. Case D escription.................................................................................117b. Types o f Evidence Relied on by the D O J..................................1 18

4. Intense M in ts .............................................................................................120a. Case D escription.................................................................................120b. Types of Evidence Relied on by the F T C ..................................122

5. Cruise Line Serv ices............................................................................... 123a. Description of the C ase .....................................................................123b. Types of Evidence Relied on by the F T C ...................................125

D. Conclusion........................................................................................................ 128

C h ap te r IVE nergy R esource M a rk e ts ................................................................................129A. Introduction.......................................................................................................129B. C o a l..................................................................................................................... 131

1. Industry Background............................................................................... 1312. Specific Issues in M arket Definition................................................... 1313. Cases and Agency D ecisions..............................................................133

a. Recent Case Law Defining Markets N arrow ly ......................... 133b. The “Energy M arket” and Broader Market Definitions

in Earlier Decisions............................................................................136C. O il.........................................................................................................................139

1. Industry Background.............................................................................. 1392. Spacific Issues in M arket.Definition....................................................140

a. Crude O il...............................................................................................141b. Bulk Transport of Crude O il .......................................................... 142c. R efin in g ................................................................................................142d. Bulk Transport of Refined Petroleum P roducts......................... 144e. Product Term inals.............................................................................. 144f. Gasoline M arketing............................................................................145

3. Cases and Agency D ecisions................................................................ 146D. Natural G as........................................................................................................149

1. Industry Background..............................................................................1492. Specific Issues in Market Definition...................................................1503. Cases and Agency D ecisions................................................................ 151

C h ap te r VM edia M arkets: N ew spapers an d R ad io .......................................................155A. Introduction......................................................................................................155B. The Newspaper In d u stry ..............................................................................156

Contents v

1. Industry Background...............................................................................156a. Historical Consolidation and Formatting T rends.......................156b. The Two-Sided Nature of D em and............................................... 159

2. Specific Issues in Market Definition...................................................160a. Institutional Features Relevant to M arket Definition in the

Newspaper Industry ..........................................................................161b. Media Ownership Rules...................................................................163c. Economic Literature on the Newspaper Industry and

Implications for Market D efinition............................................... 165(1) Studies Examining Substitution across M ed ia ................... 165(2) Studies Examining Newspaper Market

Structure, Demand, and Com petition.................................... 167(3) Summary of Implications for Market Definition................170

3. Cases and Agency D ecisions............................................................... 171a. Arkansas Newspapers (1 9 9 5 )....................................................... 171b. Advo, Inc. v. Philadelphia Newspapers (1 9 9 5 )....................... 174c. United States v. Village Voice Media & NT Media (2003) .. 176d. Knight-Ridder/M cClatchy (2006)..................................................177e. Joint Operating Agreement A ctiv ity ............................................. 178

4. Concluding Remarks Concerning N ew spapers...............................180C. Radio Industry .................................................................................................181

1. Industry Background.............................................................................. 181a. Audio Information Platform (AIP) Technologies......................181b. Local Analog and Digital R ad io ....................................................183c. Satellite Digital Audio Radio Service (S D A R S ).......................184d. Non-Broadcast Audio Information P latform s.............................185

2. Specific Issues in Market Definition.................................................. 187a. Extent and Strength of Interplatform or Intermodal

Substitution......................................................................................... 187b. Price Discrimination Im pacts..........................................................190c. M ultisided M arkets........................................................................... 191

3. Cases and Agency D ecisions............................................................... 191a. Terrestrial R ad io ................................................................................191b. Relevant SDARS Market: The XM-Sirius M erger................... 196

4. Concluding Remarks Concerning R a d io ......................................... 202

C h ap te r VIT ran sp o rta tio n M a rk e ts .................................................................................... 203A. Introduction.....................................................................................................203

vi Market Definition ln Antitrust

B . Passenger Airline In d u stry ........................................................................... 2031. Industry Background................................................................................2032. Specific Issues in M arket Definition....................................................207

a. Geographie M ark e t........................................................................... 209b. Firms in the Relevant M ark e t.........................................................209c. Empirical Support for M arket Definition................................... 211d. Code-Sharing Agreements, International Routes, and

Global A lliances ................................................................................212(1) oneworld A lliance .................................................................... 214

e. M ergers................................................................................................ 215(1) Continental Airlines-W estern A irlines................................218(2) Eastern Airlines-National A irlines.......................................220(3) People Express Airlines-Frontier A irlines.......................... 220(4) Northwest Airlines-Republic Airlines and

Trans W orld Airlines-Ozark Air L ines................................. 221(5) Southwest Airlines-Muse A ir ................................................ 222(6) Northwest Airlines-Continental A irlines.............................223(7) US Airways-United A irlin es..................................................224(8) Air France-KLM Royal Dutch A irlin es ..............................224(9) United Airlines-Continental A irlin es ...................................225(10) Conclusion....................................................................................228

f. P redation.............................................................................................. 229(1) Spirit Airlines v. Northwest A irlines....................................229(2) United States v. AMR C orp....................................................230

C. Air Cargo In d u stry ....................................................................................... 2311. Industry Background..............................................................................2312. Specific Issues in M arket Definition............................................. 2323. Cases and Agency D ecisions.................................................................232

D. Rail Industry .....................................................................................................2341. Industry Background.............................................................................. 2342. Specific Issues in Market Definition................................................... 234

a. Product M ark e t.................................................................................. 234b. Geographie M ark e t........................................................................... 239

3. Cases and Agency D ecisions.................................................................240a. The Union Pacific-Southern Pacific and Conrail Mergers .... 240b. The Rail Consolidation P rocedures ..............................................241

E. M otor Carrier Industry .................................................................................. 2411. Industry Background..............................................................................2412. Specific Issues in M arket D efinition............................................. 242

Contents vii

3. Cases and Agency D ecisions...............................................................243F. Ocean S hipping .............................................................................................. 245

1. Industry background.............................................................................. 245a. Dry C a rg o ...........................................................................................246

(1) General Cargo V esse ls .............................................................246(2) Dry Bulk V essels....................................................................... 247(3) Tween Deck V esse ls ................................................................ 248(4) Barge-Carrying V essels............................................................248

b. Liquid C arg o ...................................................................................... 248(1) Oil Tankers.................................................................................. 248(2) Parcel Tankers............................................................................ 249(3) Other Product Tankers..............................................................249(4) Liquid Gas T ankers...................................................................249

c. Handling R equirem ents.................................................................. 250d. Types of S erv ice ............................................................................... 250

2. Specific Issues in Market Definition................................................ 251a. Product M ark e t..................................................................................251b. Geographic M ark et...........................................................................253c. Other Factors in Market Definition...............................................255

(1) Jones Act V essels...................................................................... 255(2) Cargo Im balances...................................................................... 256(3) Price D iscrim ination................................................................. 256

3. Cases and Agency D ecisions...............................................................257G. Pipeline In d u stry ............................................................................................ 260

1. Industry Background..............................................................................260a. The Simplest E xam ple.....................................................................260b. Complex Pipeline Structures.......................................................... 262c . Cost F ac to rs....................................................................................... 264

2. Specific Issues in Market Definition.................................................. 2653. Cases and Agency D ecisions...............................................................268

a. Crude Oil P ipelines...........................................................................268b. Refined Petroleum P ro d u cts .......................................................... 268c. Natural Gas Pipelines....................................................................... 269d. Natural Gas L iquids..........................................................................275

Chapter VIIH ospitals and Physician S erv ices ................................................................ 277A. Introduction......................................................................................................277B. H ospital In d u s try ..........................................................................................278

viii Market Definition In Antitrust

1. Specific Issues in M arket Definition.................................................. 278a. Product M arket Definition in Hospital Serv ices........................279b. Information Used to Define Product M arkets............................ 281c. Geographie M arket Definition in Hospital Serv ices.................. 282

(1) Information Used to Define Geographie M arkets 283d. Use of Payor Contracting Inform ation......................................... 286e. Use of Other Inform ation.................................................................288

2. Cases and Agency D ecisions...............................................................289a. Product Market D ecisions............................................................... 289

(1) Inpatient / Outpatient S erv ices.............................................. 289(2) Acute Care / Nonacute Care S erv ices ..................................291(3) Primary / Secondary / Tertiary Services.............................. 292(4) Individual Service L ines.......................................................... 293(5) Ambulatory Surgery ................................................................. 293

b. Geographic M ark ets ..........................................................................294C. Physician Services..........................................................................................297

1. Specific Issues in M arket D efinition.................................................. 297a. Product M arket D efinition.............................................................. 298

(1) Individual Physician Specialties............................................ 298(2) Primary / Specialty Physician S erv ices............................... 299(3) Office-based v. Hospital-based P hysic ians........................ 300(4) Distinction by License Type: MD v. D O ............................ 301

b. Geographic M arket D efinition....................................................... 302(1) Office-based P hysic ians...........................................................303(2) Hospital-based Physicians....................................................... 304

2. Cases and Agency D ecisions............................................................... 305

C h a p te r V IIIP h a rm a c e u tic a ls a n d M edica l D ev ices ........................................................307A. Introduction..................................................................................................... 307B . Pharmaceutical Industry ............................................................................... 307

1. Industry Background.............................................................................. 3072. Specific Issues in Market Definition.................................................. 313

a. Definition of Geographic M arkets.................................................313b. Identifying the Customer in the Pharmaceutical In d u stry 313c. Classification of Pharm aceuticals..................................................316d. Methods Used to Define Relevant M arkets ................................ 318

Contents ix

(1) Empirical Approaches to Determining W hether Pharmaceutical Products are Reasonably Interchangeable...........................................................................318

(2) Inferring Market Definition from Direct Proof of Market Pow er............................................................................................ 321

3. Cases and Agency D ecisions...................................................... 322a. Cases Involving Only Brand-Name D ru g s .................................... 324b. Cases Involving Brand-Name Drugs and Their Generic

Equivalents..........................................................................................329c. Cases Involving Only Generic Equivalents o f a Brand

Name D rug..........................................................................................332C. Medical D evices.............................................................................................334

1. Industry Background..............................................................................3342. Specific Issues in M arket Definition..................................................335

a. A Complex Purchasing D ecision .................................................. 335b. Ongoing Innovation and Technological C h an g e ...................... 336c. Clinical Treatment P ro toco ls......................................................... 340d. The Complicated Pricing and Purchasing Process of

Devices that Comprise Multiple C om ponents........................... 341e. R egulation........................................................................................... 344

3. Cases and Agency D ecisions...............................................................349a. Clinical Applications and End Uses: The Case of

Orthopedic-Vascular C -A rm s........................................................ 349b. Innovation and the Potential for Price-Based

Segmentation: The Case of Cardiac Ultrasound Machines.,.. 351c. Clinical Use and Functionality: The Case of

Mammography and Breast Biopsy S ystem s...............................353d. Systems Competition: The Case of Pulse O xim etry.................355

C h ap te r IXW holesaling an d R e ta ilin g ............................................................................... 357A. Introduction .................................................................................................... 357B. W holesaling.................................................................................................... 359

1. Specific Issues in M arket Definition...................................................3592. Cases and Agency D ecisions............................................................... 362

C. Supermarkets and Drug S to res....................................................................3661. Specific Issues in Market Definition................................................... 3662. Cases and Agency D ecisions............................................................... 367

a. Case Law Involving Superm arkets..............................................367

X Market Definition In Antitrust

b. The FTC’s Definition o f a Superm arket......................................370c. Specialized Supermarkets: FTC v. W hole F o o d s ..................... 375d. Matters Involving Drug S tores........................................................377

D. Department S to res...........................................................................................3801. Specific Issues in M arket D efinition...................................................3802. Cases and Agency D ecisions................................................................380

E. Specialty Retail Stores....................................................................................3851. Specific Issues in Market Definition...................................................3852. Cases and Agency D ecisions................................................................387

a. Authority Recognizing Specialty Stores Subm arkets 387b. Authority Rejecting Specialty Stores S ubm arkets.................... 391

F. Gasoline Station M ark ets ..............................................................................3931. Specific Issues in M arket Definition...................................................3932. Cases and Agency D ecisions................................................................398

a. Retail Divestitures Due to Competitive Concernsin Retail and Upstream Product M arkets .....................................398

b. Geographic M arket D efinition....................................................... 400G. Markets Limited to a Single B ra n d ............................................................402

1. General Principles....................................................................................4022. Cases and Agency D ecisions................................................................404

C h ap te r XN etw ork In d u stry M arkets: T elecom m unications................................... 411A. Introduction......................................................................................................411B. Telephone Serv ice.......................................................................................... 413

1. Specific Issues in Market D efinition...................................................413a. M ass-M arket versus Enterprise S erv ices.....................................415b. Product Bundles as the Relevant Product M arket..................... 417

2. Cases and Agency D ecisions................................................................423C. The In ternet..................................................................................................... 428

1. Specific Issues in M arket Definition...................................................4282. Cases and Agency D ecisions................................................................433

C h ap te r XIT w o-Sided M a rk e ts ..............................................................................................437A. Introduction ..................................................................................................... 437B. The Economics of Two-Sided P la tfo rm s.................................................439C. M arket Definition in Cases Involving Two-Sided P latform s 445

1. Defining Relevant P roducts..................................................................447

Contents xi

2. Considering Competitive Constraints on Both S ides.................... 4483. Accounting for Diverse Business M odels........................................449

D. Two-Sided Critical Loss Analysis and Hypothetical Monopolist T e s ts .................................................................................................................. 4521. The Hypothetical M onopolist T e s t ....................................................4532. Critical Loss Analysis Based on the Lerner Index.........................4553. Hypothetical M onopolist Tests Based on Demand Estimation .. 458

E. Cases and Agency D ecisions..................................................................... 460F. Conclusion......................................................................................................468

C h ap te r XIIInnovation M a rk e ts ............................................................................................471A. Introduction....................................................................................................471B . The Case for Innovation M arkets............................................................. 474C. Critique of Innovation M arkets .................................................................477

1. Reduced Competition Need Not Reduce Amount ofInnovation................................................................................................ 478

2. Reduced Competition Need Not Reduce Pace of Innovation 4793. M easuring Innovation Is D ifficu lt.................................................... 4804. Ability to Innovate is Hard to M onopolize..................................... 4835. Potential Competition Doctrine as an A lternative.........................484

D. Innovation Markets Analysis in Practice.................................................485E. Regulatory Actions Involving Innovation M arkets.............................. 487

1. FTC Investigations.................................................................................4872. DOJ Investigations.................................................................................498

F. Conclusion.......................................................................................................501

C h ap te r XIIIM ark e t Definition Before Foreign A n titru st A u th o ritie s ...................... 503A. Introduction.................................................................................................... 503B . M arket Definition Under EU Competition L aw .................................... 503

1. Introduction..............................................................................................5032. Product M ark e t.......................................................................................506

a. Differences From U.S. P rac tice .....................................................510b. Evidence U se d ...................................................................................512c. The Role of Empirical A nalysis.....................................................514

3. Geographic M ark et................................................................................516a. Evidence U se d ...................................................................................518b. M arket Integration and Geographic M arket................................519

x ii Market Definition In Antitrust

c. National Versus Community wide M arkets................................. 520d. Potential C om petition .......................................................................522e. Market Definition in Certain Regulated Industries...................522

C. Market Definition in Canadian Competition L aw .................................. 5241. Introduction...............................................................................................5242. Product M ark e t........................................................................................5273. Geographie M ark et.................................................................................532

D. Market Definition in Japanese Competition L aw ...................................5331. Introduction............................................................................................... 533

a. “Private M onopolization” Under Article 3 o f the Antimonopoly Act (M onopolization V iolations)...................... 534

b. “Unreasonable Restraint o f Trade” Under Article 2 o f the Antimonopoly Act (Cartel V io la tions)........................................ 534

c. Any Business Combination That Is Prohibited Under Articles 10(1), ]5 (l)(i), 15-2(1)0), or 16(1) o f the Antimonopoly Act (Business Combinations V iolations).............................................535

2. Product M ark e t........................................................................................5363. Geographic M ark et................................................................................ 538

E. Conclusion........................................................................................................539

Appendix IIIE x trac t from Jap an ese M erger G uidelines “ P a rtic u la r Field of

T ra d e ” .............................................................................................................. 5411. Basic Point o f View for the Scope of a Particular

Field of T rad e ............................................................................................5412. Product R an g e .........................................................................................542

a. A pplication.......................................................................................... 543b. Changes in Price, Quantity, e tc .......................................................544c. Recognition and Actions of the U sers...........................................544

3. Geographic R an g e .....................................................................................545a. Business Area of Suppliers, the Area for Users to

Purchase, e tc ..................................................................................................... 546b . Features of G oods................................................................................ 546c. Type or Cost of T ransportation ....................................................... 546

4. O th ers ...........................................................................................................546

Table o f Cases 549