Use and limits of market definition

11 November 2015St. Martin’s conference, Brno

Alexis WalckiersBelgian Competition Authority and ECARES-Université libre de Bruxelles

Introduction

• market definition is a tool to define the boundaries of competitiono establish competitive constraints that undertakings faceo alternative sources of supply for the customers of the undertakings

involvedo product dimensiono geographic dimension

• in practice, defining a market makes it possible to calculate market shares, which conveys information on market conduct and performanceo existence, creation or strengthening of market powero but to what extent?o In how far does the structure of a market determines a firm’s conduct

on that market and the performance of the market?

Structure-conduct-performance benchmark

• identifying competitors that are capable of preventing firms from behaving independently is crucialo to assess whether a company is dominant

o which is necessary to find an abuse

o to analyse whether and how a notified merger affects consumerso if the combined market share of the notifying parties post-merger is high, they will be

able and have an incentive to raise priceso if there are few competitors left on the market, their ability to coordinate their

conduct rises

• according to the Structure-conduct-performance paradigmo performance follows from structureo there is an inverse relationship between market share and degree of

market competitiono in a Cournot model the price cost margin of a firm raises when its market share

increaseso in a Cournot model, welfare decreases when market concentration increases (HHI)

Limits of structure-conduct-performance

• difficulty to delineate the marketo some markets are easier to define than otherso in differentiated markets, some products are closer substitutes than

others: not black and whiteo in some markets, price discrimination is crucial, and different

categories of consumers end up paying significantly different priceso some goods must be used with a secondary product that is a

complement (aftermarkets); are these separate marketso two-sided markets are difficult to define, because the indirect effect

of the other side can be significanto defining the market for an innovative good can be difficult, because

the good may be unique in the eyes of consumers, or a complement and a substitute of alternatives

o in cluster markets, companies provide a range of goods or services; purchasing from a single provider brings transaction complementarities

Limits of structure-conduct-performance

• are market shares a good proxy for competitive constraints?o in differentiated markets, competitive constraints relate to intensity of

competition and substitution between products more than to market shares

o in bidding markets, closeness of competition between bidders is more informative than market shares

o in aftermarkets, a high market share in the secondary product may not mean that competitive constraints are inexistent ); ex post, consumers can be locked in, but ex ante they may be able to choose between a number of options

o platforms with significant market shares on one side can experience significant competitive constraints from the other side

o in some innovation-driven markets, firms compete for the market, and not necessarily in the market

Policy implications

• how much resources should be invested in defining markets?o market definition is and will remain a crucial tool for competition

investigationso in some markets (eg, those discussed above), it is less important to

carefully define marketso better to directly focus on competitive constraints, and on the likely

effects of the merger, or the abuse

• some competition authorities downplay the role of market definition in merger assessmento eg. US horizontal merger guidelines (2010), UK merger assessment

guidelineso … and highlight other techniques to more directly assess the effect of

the merger (UPP, GUPPI, merger simulation, etc.)