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71 Antitrust L.J. 161 (2003-2004)
A Critical Analysis of Critical Loss Analysis

handle is hein.journals/antil71 and id is 171 raw text is: A CRITICAL ANALYSIS OF
CRITICAL LOSS ANALYSIS
DANIEL P. O'BRIEN
ABRAHAM L. WICKELGREN*
I. INTRODUCTION
Critical loss analysis is a widely-used technique in antitrust practice.1
The basic idea is simple. One asks: given a price increase of X percent,2
what would the percentage loss in unit sales have to be to make the
price increase unprofitable? This loss is referred to as the critical loss
for an X percent price increase. If the actual loss is less than the critical
loss, the price increase would pay. Otherwise it would not.
The most common uses of critical loss analysis are to define relevant
markets and assess the competitive effects of mergers. For example,
experts representing merging parties often use this technique to argue
that where margins are high, the product market must be broader than
the government contends. The argument is that the larger the margins,
the greater the reduction in profits from sales lost after a price increase.
Therefore, it takes a smaller critical loss to make a given price increase
by a hypothetical monopolist unprofitable. The experts then argue that
the actual loss from a 5 percent price increase would surely exceed the
critical loss, implying that the relevant market must include substitutes
that are not included in the government's alleged market.3
* The authors are economists at the U.S. Federal Trade Commission. Patrick DeGraba,
Alan Frankel, Ezra Friedman,Jerry Hausman, Stephen Holland, Dan Hosken, David Scheff-
man, David Schmidt, Carl Shapiro, Mike Vita, and Charlotte Wojcik provided many useful
comments and suggestions. The views in this article are those of the authors and do not
necessarily reflect those of the Federal Trade Commission or any individual Commissioner.
I The use of critical loss analysis was first suggested by Barry C. Harris & Joseph
J. Simons, Focusing Market Definition: How Much Substitution Is Necessary? RESEARCH L. &
ECON. 12, 207-26 (1989). Since it was proposed, it has appeared in numerous White
Papers presented to the antitrust agencies, numerous pre-trial affidavits, and expert testi-
mony offered on behalf of antitrust defendants.
2 The analysis applies equally well for any potential price increase.
3 The FTC/DOJ Merger Guidelines define a product market as the narrowest set of
products such that a hypothetical profit-maximizing monopolist would raise price a small
but significant amount. U.S. Dep't of Justice and Federal Trade Comm'n, Horizontal
Merger Guidelines § 1.1 (1992, rev. 1997). For a discussion of the use of demand elasticities

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