Home / Summaries / Ch 4: Economic Foundations: The Concept of Market Power / market-product-courts

Economic Foundations: The Concept of Market Power

18 important questions on Economic Foundations: The Concept of Market Power

Reasonable Interchangeability Test for Substitutability - Cellophane (US 1956)

The question is whether commodities are reasonably interchangeable by consumers for the same purpose. Cellophane (US 1956). As it has been applied, courts will determine substitutability based on pragmatic and theoretical judgments.

Reasonable Interchangeability Test - Theoretical Economic Question

On the more theoretical level, courts often consider evidence relevant to "cross-price elasticity of demand." If a cross-price elasticity likely exists between 2 products/services, this suggests that consumers consider them good substitutes.
  • Note. Actually measuring cross-price elasticity would be expensive, labor intensive, and hotly contested. Thus, rather than requiring precise, accurate measurements, courts usually make use of rough estimates of cross-price elasticity based on the available evidence.

Cross Price Elasticity can be very misleading: the Cellophane Fallacy

Any monopolize product will begin to show some cross-price elasticity with other products once the monopolist has raised his price to some significantly supra-competitive price.
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Two arguments for excluding good from the defined product market

(1) The good are inadequate substitutes in terms of capabilities and intended use.
(2) The goods have sold at a lower price without stealing the defendant's sales (therefore are not good substitutes, b/c not viewed as interchangeable)


MSP Prong 2: Defining the Geographic Market - Basic Rule

A seller should be included in the defendants' geographic market IF (A) the seller CURRENTLY SELLS an identical or substitute product to customers in the same territory as D, OR (b) the seller could easily begin to sell an identical . .  OR . . (B) the seller could easily BEGIN TO SELL an identical or substitute product to customers in the same territory if Ds' prices increased.

MSP Prong 2: Defining the Geographic Market - Key Issue

Transportation Costs. Typically, an important issue in geographic market defining is transportation costs.

How do transportation costs factor into geographic market definition?

IF either [A] existing or potential consumers of good substitutes, who are not currently serving the D's territory, could easily ship goods there (low transportation $), OR [B] customers from D's territory could cheaply travel to buy these alternatives and bring them back (low transportation $), THEN those sellers should probably be included in the geographic market.

MSP Intermediate Step after Prongs 1 + 2: Measuring the D's Market Share

Once a product and geographic market has been defined, D's shares within that market must be calculated. Courts do so by tallying up the sales of each seller within the market and then determining what proportion of those sales go to D. Often times, this is measured by comparing the TOTAL REVENUES of the various sellers

When should D's market share not be measured based on total revenues of the various sellers in the market?

When the products included in the product market differ significantly in price. Here, courts should measure market share according to units sold or some other measure of volume not connected to price itself. If they went by total revenues, the share of the seller with the more expensive product will be exaggerated (note that this ordinarily should not occur because, if two products sell for substantially different prices, they probably aren't "reasonably interchangeable" substitutes).

MSP Prong 3: Assessing Other Indices of Market Power

In recent decades, element 3 has become the most important prong of the MSP test. Courts are now quite concerned that even large market shares do not logically prove that the defendant holds pricing freedom (aka market power).

Why does a large market share not necessarily show pricing freedom (market power)

In principle, a defendant might hold a large share in a market where participants have good information, the product is quite fungible, and entry barriers are low.

What will courts ask at prong 3?

Even if a plaintiff shows that D, within his relevant product and geographic market, holds a large percentage of sales, the court will ask whether there are other facts--in particular, low entry barriers--are present.

Analysis under Prong 3: Assessing other indices of market power

At prong 3, courts effectively engage in a very pragmatic estimation of certain elasticities (meaning the likelihood that Y will change when X changes). Here, courts seek to test the likely consequences of a price increase by D, given the known facts.

Three arguments in favor of MP to make at prong 3

Factors indicating that D holds MP
  1. D holds a large market share (based on gross revenues), according to the market as defined under prongs 1 + 2.
  2. The market is highly concentrated (i.e., 2 dominant firms)
  3. There are high barriers to entry (which suggests that D could raise prices without being effectively disciplined by competitive market forces.

When does "concentration" matter under AT law

Concentration is a measure of MP in the same sense as market share proxy, but is much less commonly used in AT law. EXCEPTION (MERGERS): Concentration is customarily calculated only in (1) merger challenges under CA 7 and (2) in the merger pre-clearance review process under HSR.

Why does "concentration" matter in the merger context?

Under current merger law, a plaintiff can create a presumption that the challenged transaction will have an anti-competitive effect by showing that it will significantly increase concentration in an already concentrated industry.

How is concentration measured?

Concentration is measured by a test known as HHI (the Hirfindahl-Hirschman concentration Index).

Overall Market Concentration: Calculating HHI: 4 steps.

  1. Define the relevant market (product + geographic)
  2. Measure each firm's share in that market (compare the total revenues, units sold, etc of the various firms in the market)
  3. Square each firm's market share
  4. Add all of the squared market share's together

The question on the page originate from the summary of the following study material:

Ch 4: Economic Foundations: The Concept of Market Power

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