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3 Antitrust 20 (1988-1989)
Understanding Econometric Methods of Market Definition

handle is hein.journals/antitruma3 and id is 122 raw text is: A R T IC LE S•A N D •F Understanding Econometric Methods of Market Definition by Janusz A. Ordover and Daniel M. Wall Can market definition be more than edu- cated guesswork? There are times when that seems doubtful. There is a wide- spread perception that the fact of a market with certain specific contours is not like other facts capable of definitive proof. For example, though it may be just as difficult to prove the existence of a conspiracy as it is to prove the market, at least lawyers embark upon the former task confident that there is a real an- swer-there either was a conspiracy or there wasn't. Market definition is differ- ent. The inherent fuzziness that the Supreme Court spoke about twenty-five years ago' is real, and it can make law- yering very difficult. As judges, lawyers, and economists have struggled to make sense out of mar- ket definition, there has been a prolifera- tion of techniques to define the market. Some have little basis in principle, as when one selectively quotes loose char- acterizations of the market found in busi- ness documents. The list of more princi- pled methods would begin with the celebrated Cellophane2 decision, which Jius A. Ordover is a Professor of Economics at New York University. He specializes in industrial organiza- dion, has written widely on such di- %verse subjects :as merger policy, standing, and predation, and regu- larly acts as'a Consultant for firms engaged in antitrust litigation. Daniel M. Wal is a member of Mc- Cuchen, Doyle, Brown & Enersen in San Francisco, California. He is a former trial attorney in the Antitrust Division of the U.S. Departmen of Justice, and has served as the Devel- , nts Editor of A~rlrRusT since. tl magazine began publication. He specializes in antitrust and other corn- ple litigation. ushered the concept of cross-elasticities into the working vocabulary of an anti- trust lawyer. Others would include the LOFI (little out from the inside) and LIFO (little in from the outside) tests for geographic markets developed by El- zinga and Hogarty,3 the regression ap- proach proposed by Horowitz,4 the price correlation test of Stigler and Sherwin,' and the well-known five percent price increase test of the 1982 Department of Justice Merger Guidelines.' Each of these methods has its proponents and critics, and the economics journals have been the forum for lively debate. To bor- row a phrase from Judge Easterbrook, the market for market definition methods is highly competitive.7 Our goal in this article is to introduce the practicing antitrust attorney to two Hi-tech economic methods of market definition that have been developed re- cently for use in merger cases. To be performed correctly, these techniques will ordinarily require the services of an expert econometrician, so we make no claim that attorneys can utilize these methods on their own. Nor do we suggest that these techniques finally bring cer- tainty to market definition. They do not. Like all previous methods, these should be looked at as tools to make a better estimation of the market-to eliminate as much of that fuzziness as one can. We hope to demystify the econometric approach to market definition so that at- toreys faced with difficult market defi- nition questions can consider these tech- niques and interact intelligently with the econometrician should they choose to use them. Economics and Market Definition in Merger Cases To understand the theory behind the mar- ket definition techniques described be- low, it is helpful to review how an econo- mist thinks about the competitive effects of a merger. From the perspective of eco- nomic theory, antitrust law's preoccupa- tion with market definition has always seemed somewhat peculiar. Arguments for and against a merger that turn upon distinctions between broad and narrow market definitions are, to an economic purist, an inadequate substitute for, and a diversion from, sound direct assess- ment of a merger's effect. A direct as- sessment would focus first on the assets combined by the merger, next on the cross-elasticities of demand for the prod- ucts produced with the merged assets, and ultimately on the effects of the merger on the total price elasticity of demand facing the firm. In plain English, that means that one would try to measure the extent to which, on account of the merger of assets, the merged firm could raise prices relative to costs without los- ing sales. A horizontal merger will allow 20 ANTITRUST We hope to demystify the econometric approach to market definition so that attorneys faced with difficult market definition questions can consider these techniques and interact intelligently with the econometrician should they choose to use them. E A T U R E S

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