PRODUCT MARKET DEFINITION IN THE
PHARMACEUTICAL INDUSTRY
M. Howard Morse*
I. INTRODUCTION
The pharmaceutical industry has become a major target of antitrust
investigations and litigation. Indeed, Federal Trade Commission officials
have said that almost 25 percent of new competition investigations in
recent years have involved pharmaceutical products,1 though prescription drugs account for only about 10 percent of health care spending2
and less than 2 percent of the U.S. gross domestic product.3
Over the last several years, the FTC and state attorneys general have
challenged both interim and permanent settlements of intellectual property litigation between pioneer and generic drug manufacturers alleged
to delay generic entry. They have also attacked patent listings in the
Food and Drug Administration “Orange Book” and have alleged monopolization through fraud on the Patent and Trademark Office and sham
litigation. Yet other cases have condemned distribution agreements as
unlawful exclusive dealing. These government actions have led to substantial private class action litigation against the pharmaceutical industry.
The FTC has also challenged numerous mergers and acquisitions in the
industry over the last decade.
One common feature in all of these cases is the need to define a
relevant market. In nonmerger cases, the FTC and private plaintiffs
* Member of the District of Columbia Bar and former Assistant Director, Bureau of
Competition, Federal Trade Commission, 1993–1998. The author thanks David Balto,
Jonathan Gleklen, Amy Miner, Robin Sampson, and Robert Skitol for their assistance and
helpful comments.
1 Timothy J. Muris, Everything Old Is New Again: Health Care and Competition in the
21st Century, Remarks Before 7th Annual Competition in Health Care Forum at 3 n.13 (Nov
7, 2002), available at http://www.ftc.gov/speeches/muris/murishealthcarespeech0211.pdf.
2 Centers for Medicare & Medicaid Services, Dep’t of Health & Human Services,
The Nation’s Health Dollar: 2001 ( Jan. 8, 2003), available at http://cms.hhs.gov/
statistics/nhe/historical/chart.asp.
3 Uwe E. Reinhardt, Perspectives on the Pharmaceutical Industry, 20 Health Affairs 136,
138 (Sept.–Oct. 2001).
633
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generally allege narrow markets, limited to a single drug and its generic
equivalent in some cases and to generic drugs excluding the bioequivalent “brand-name” drug in other cases. In its merger challenges,
on the other hand, the FTC has alleged markets ranging from those
based upon a particular chemical compound, to broader markets based
upon various drugs’ manner of interaction or dosage form, to still
broader markets of all drugs used to treat a disease or condition. In
numerous pharmaceutical merger challenges, the government has
included in the market not only currently marketed drugs but also other
drugs under development, alleging “innovation markets.” 4
It is not obvious how all of these cases can meet the Supreme Court’s
product market test of “reasonable interchangeability of use or the crosselasticity of demand between the product itself and substitutes for it.” 5
Unfortunately, most of the government actions contain only barebones
market allegations so they provide little guidance. In the one case the
FTC staff has litigated, an administrative law judge found that complaint
counsel failed to prove the alleged market definition and that the market
must be broadened to include “therapeutically equivalent” drugs.6 That
loss, even if reversed on appeal, suggests further attention to product
market definition is needed.
The broad range of product market definitions alleged in the various
cases warrants close examination to ensure that the government and
private plaintiffs are not gerrymandering market definitions to fit desired
outcomes in each case. This is particularly true because, at least in merger
cases, where the drugs at issue often account for only a small part of
the transaction, companies have strong incentives to address government
concerns without litigation. Private actions also often settle, after motions
to dismiss or motions for summary judgment. Because market definition
issues are intensely factual and often not resolved until trial, there are
only a handful of court decisions providing guidance about how to define
markets in the pharmaceutical industry.
Court decisions in pharmaceutical cases that address market definition
come out differently on a number of important questions that deserve
4 The use of innovation markets to challenge such mergers, which has generated substantial controversy, is beyond the scope of this article. For a detailed analysis of innovation
markets, see M. Howard Morse, The Limits of Innovation Markets, ABA, Antitrust and
Intellectual Property Newsletter, Spring 2001, at 22–35, available at http://www.aba
net.org/antitrust/mo/premium-at/ip/559817 2.pdf.
5 Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962).
6 See Schering-Plough Corp., Upsher-Smith Labs. & Am. Home Prods. Corp., FTC Docket
No. 9297 ( June 27, 2002) (Initial Decision), available at http://www.ftc.gov/os/2002/07/
scheringinitialdecisionp1.pdf.
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2003]
Product Market Definition
635
attention: Are pharmaceutical markets fundamentally different from
other markets? Who is the customer? Does price matter? Should a single
drug define the market? Should generic drugs be in the same market
as pioneer drugs or a distinct product market? Few cases address perhaps
the most important question of all, which is how one determines whether
the “Cellophane trap” applies. This article will address all of these issues.
II. AN INDUSTRY OVERVIEW
Defining pharmaceutical product markets requires an understanding
of the role of government regulation, technological innovation, and
competition in the industry.
A. Government Regulation
Research and development, as well as marketing of pharmaceuticals,
is heavily regulated by the FDA. Under the Federal Food, Drug and
Cosmetic Act,7 any person seeking to market a new drug (a so-called
“pioneer” applicant), must first obtain FDA approval by filing a New
Drug Application (NDA) establishing the drug is safe and effective for
its intended use.8 The Drug Price Competition and Patent Term Restoration Act of 1984,9 commonly referred to as the Hatch-Waxman Act,
established a streamlined approval process for “generic” versions of
approved drugs with the same active ingredients. The Act authorizes
Abbreviated New Drug Applications (ANDAs) for generic drugs that are
bio-equivalent to pioneer drugs as well as paper new drug applications
(paper NDAs) that rely on published literature to demonstrate safety
and efficacy.10
Intellectual property law also significantly influences the pharmaceutical industry. Studies have shown that the industry is heavily dependent on intellectual property generally and the patent laws in particular
to justify investment in research and development.11 Absent patent
7
21 U.S.C. §§ 301–397.
Id. § 355.
9 Pub. L. No. 98-417, 98 Stat. 1585 (1984).
10 21 U.S.C. § 355. See Eli Lilly & Co. v. Medtronic, Inc., 496 U.S. 661, 676 (1990).
11 See Richard C. Levin, Testimony Before FTC/DOJ Joint Hearings on Competition and
Intellectual Property Law (Feb. 6, 2002) (“In most industries . . . patents were not regarded
as highly effective in protecting a firm’s competitive advantage. The pharmaceutical and
certain other chemical industries were striking exceptions.”), available at http://
www.ftc.gov/os/comments/intelpropertycomments/levinrichardc.htm; Richard C. Levin
et al., Appropriating the Returns from Industrial Research and Development, Brookings Papers
on Economic Activity 783 (1987), available at http://cowles.econ.yale.edu/P/cp/p07a/
p0714.pdf; Edwin Mansfield, Patents and Innovation: An Empirical Study, 32 Mgmt. Sci. 173,
175 (1986) (65% of innovations in the pharmaceutical industry would not have been
8
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protection or a similar barrier, imitators could free ride on innovators’
R&D efforts.
B. Technological Innovation
The pharmaceutical industry is characterized by substantial expenditures on research and development, continual innovation, and introduction of new drugs. Development of new pharmaceuticals is an
increasingly lengthy and costly business fraught with significant risk.12
Early-stage pharmaceutical R&D focuses on discovery of new molecular
entities (NMEs) or new chemical entities (NCEs), which are new therapeutic compounds not previously used or tested in humans. Prospective
drugs are discovered through designing new molecules or screening
of existing compounds. Drug candidates must then undergo rigorous
preclinical testing in laboratories and animals and clinical testing in
humans to establish safety and effectiveness. Clinical testing proceeds
through three successive phases, from testing on a small number of
usually healthy volunteers principally to explore pharmacokinetics and
establish safe dosages (Phase I), to testing relatively small numbers of
subjects with the targeted disease or condition to obtain evidence on
safety and preliminary data on efficacy (Phase II), to large-scale, multicenter trials to establish efficacy and uncover side- effects that may occur
infrequently (Phase III). Even after a drug is approved and introduced,
companies often undertake additional clinical R&D, as a condition of
approval, to compare effectiveness with other products, or to test new
therapeutic uses to expand the market.13 Pharmaceutical companies also
conduct R&D on new drug delivery mechanisms—such as implantable
drug infusion pumps or extended release tablets—to deliver therapeutic
agents to the desired site in the body at the desired dose. Companies
may also introduce follow-on products—new combinations, formulations, dosing forms, or dosing strengths—of existing compounds that
must also be tested in humans before market introduction.
Drug development has been analogized to wildcatting in Texas, with
many dry holes and a few gushers.14 That is, many drugs that companies
developed if patent protection was not available; other industries are far less dependent
on patents).
12 Technology and Innovation: Their Effects on Cost Growth of Healthcare, Before the U.S. Cong.
Joint Economic Committee ( July 9, 2003) (Statement of FDA Commissioner Mark McClellan),
available at http://www.fda.gov/ola/2003/healthcare0709.html.
13 See U.S. Food & Drug Admin., From Test Tube to Patient: Improving Health
Through Human Drugs 6 (Sept. 1999), available at http://www.fda.gov/cder/about/
whatwedo/testtube.pdf.
14 Philip J. Hilts, Seeking Limits to a Drug Monopoly, N.Y. Times, May 14, 1992, at D1.
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2003]
Product Market Definition
637
develop and test prove unsuccessful and are never marketed. One recent
study, in fact, estimates the success rate for compounds entering clinical
testing at only 22 percent, and few compounds that companies research
ever even make it into clinical trials.15 The FDA has likened the process
of discovering a new drug to searching for the proverbial needle in a
haystack, noting “literally hundreds and sometimes thousands of chemical compounds must be made and tested to find one that can achieve
the desirable result without too-serious side effects.” 16
Recent studies have estimated that, on average, discovering and developing a new drug takes ten to fifteen years and costs over $800 million
(taking into account expenses of failed development efforts and the cost
of capital), more than twice what it cost a decade ago.17 Studies also
show that the top 10 percent of newly marketed drugs account for half
of the financial returns on all new drug development, and only onethird of newly introduced drugs generate returns that exceed average
R&D costs.18
C. Competition
Competition in the pharmaceutical industry occurs on two levels: the
development of new drugs, and the sale of drugs.
Companies compete to be the first to market with a drug to meet an
unmet medical need or with a drug that is safer or more effective at
treating a condition or disease than current treatments. The first to
15 See Henry Grabowski & John Vernon, Effective Patent Life in Pharmaceuticals, 19 Int’l
J. Tech. Mgmt. 98 (2000). Only one of 5,000 screened compounds is ever approved as
a new medicine according to the Pharmaceutical Research and Manufacturers of America;
See Pharmaceutical Research and Manufacturers of America (PhRMA), Pharmaceutical Industry Profile 2003 at 3, available at http://www.phrma.org/publications/
publications/profile02/index.cfm.
16 Food & Drug Admin., supra note 13, at 14.
17 See Joseph A. DiMasi et al., The Price of Innovation: New Estimates of Drug Development
Costs, 22 J. Health Econ. 151 (2003); Tufts Center for the Study of Drug Development,
Post-Approval R&D Raises Total Drug Development Costs to $897 Million, Impact Report, vol.
5, no. 3 (2003); Grabowski & Vernon, supra note 15; Congressional Budget Office,
How Increased Competition from Generic Drugs Has Affected Prices and Returns
in the Pharmaceutical Industry xiii, 14–15 (1998), available at ftp://ftp.cbo.gov/6xx/
doc655/pharm.pdf.
18 Henry Grabowski, John Vernon & Joseph DiMasi, Returns on Research and Development
for 1990s New Drug Introductions, 20 Pharmacoecon. suppl. 3, 11–29 (2002). The Congressional Budget Office reports that the present discounted value of the return from the
average marketed drug—including both blockbusters and those that do not cover the
cost of their own development—exceeded the capitalized costs of R&D by $22 to $36
million in the 1980s and total returns from marketing a new drug have on average decreased
by about $27 million since 1984. Congressional Budget Office, supra note 17, at xv,
14–15, 38, 47.
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market will often gain a substantial first-mover advantage, largely as a
result of establishing standard physician prescribing practices.19
Pharmaceutical companies also compete in marketing drugs. Several
different market participants are involved today in purchasing pharmaceuticals, which may complicate market definition analyses. The patient
is the ultimate consumer, but patients cannot obtain prescription pharmaceuticals without a physician’s prescription. Traditionally, physicians
selected drugs for their patients without considering price. Pharmaceutical companies still expend substantial sums on physician-directed
marketing efforts, including so-called “detailing” visits by sales representatives, free samples, advertising in scientific and medical journals, and
sponsorship of continuing medical education.20 These expenditures, like
advertising in other industries, are viewed as procompetitive by some
and as wasteful by others. Today, patients are also targeted by direct-toconsumer advertising aimed at influencing purchasing patterns, generating complaints about consumer pressure on physicians.21
Third party payers also play an important role in the market today.
Increasingly, employer-sponsored health insurance policies cover pharmaceutical expenses, with third-party payments now accounting for twothirds of national spending on prescription drugs.22 In recent years,
there has also been a shift of large numbers of patients from conventional
indemnity or fee-for-service health insurance plans to health maintenance organizations (HMOs), preferred provider organizations (PPOs),
and other managed care organizations (MCOs). Many health care plans,
including traditional fee-for-service plans, now rely on pharmacy benefit
managers (PBMs) to administer pharmaceutical benefit plans and manage drug utilization. PBMs negotiate discounts and rebates with suppliers,
establish formularies of approved or preferred drugs, and influence
drug selection through multiple-tier reimbursement co-payment (fixed
consumer payment per prescription) or co-insurance (fixed consumer
percentage payment per prescription) and other policies. Drugs disfavored by the PBM can, for instance, be discouraged by higher co19 See F.M. Scherer & David Ross, Industrial Market Structure and Economic
Performance 584–92 (1990).
20 Congressional Budget Office, supra note 17, at 19–21.
21 See generally Meredith B. Rosenthal et al., Demand Effects of Recent Changes in Prescription
Drug Promotion ( June 2003), available at http://www.kff.org/content/2003/6085/Demand
Effect revised 61803.pdf; John E. Calfee, Public Policy Issues in Direct-to-Consumer Advertising
of Prescription Drugs, 21 J. Pub. Pol’y & Mktg. 174 ( July 8, 2002); Meredith B. Rosenthal
et al., Promotion of Prescription Drugs to Consumers, 346 New Eng. J. Med. 498 (2002); Michael
S. Wilkes et al., Direct-to-Consumer Prescription Drug Advertising: Trends, Impact and Implications,
19 Health Affairs 110 (2000).
22 Reinhardt, supra note 3, at 138.
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2003]
Product Market Definition
639
payments or co-insurance rates and prior authorization requirements
that impose additional costs on patients. PBMs also pay pharmacists
higher dispensing fees for favored drugs, use maximum allowable cost
(MAC) programs to limit reimbursement to prices of low- cost drugs,
and pay pharmacists incentives for achieving levels of performance in
distributing favored drugs. They also monitor drug use by patients with
chronic conditions through disease management (DM) programs and
track physician prescribing practices to identify physicians for educational interventions. Group purchasing organizations (GPOs) also now
put pressure on pharmaceutical companies for reduced prices. As a
result, manufacturers regularly offer discounts and rebates based in part
on a firm’s ability to shift sales to the company’s drug.23
Pharmaceuticals are approved for sale by the FDA for particular indications, though physicians may prescribe approved drugs for off-label use.
While there are diseases or conditions for which there is only a single
pharmaceutical available, other diseases or conditions may be treated
by various drugs that compete to varying degrees. Alternative drugs may
be chemically similar or very different, and may have the same or different
mechanisms of action, yet be functionally similar. In such circumstances,
drug prices are set considering length of use (whether the drug treats
chronic or acute conditions), convenience of use, and relative safety and
efficacy profiles. Studies have shown that the availability of alternatives
limits drug manufacturers’ pricing ability and “new drug prices tend to
reflect the degree of price sensitivity in the market and the perceived
value of the product to patients.” 24 In addition to drug alternatives, a
patient with a particular disease or condition may at times be treated
with an alternative form of medical therapy. While the suggestion that
pain is an alternative to medical treatment and should be included in
the relevant market as once proposed may be appropriately ridiculed,25
23 See generally David H. Kreling, Cost Control for Prescription Drug Programs: Pharmacy
Benefit Manager (PBM): Efforts, Effects and Implications, Prepared for U.S. Department
of Health and Human Services Conference on Pharmaceutical Pricing Practices, Utilization
and Costs (Aug. 8–9, 2000), available at http://aspe.hhs.gov/health/reports/drug-papers/
kreling-final.htm; Roy Levy, The Pharmaceutical Industry: A Discussion of Competitive and Antitrust Issues in an Environment of Change, FTC Bureau of Economics
Staff Report 3–4, 24–30 (Mar. 1999), available at http://www.ftc.gov/reports/pharmaceutical/drugrep.pdf; Congressional Budget Office, supra note 17, at 5–11, 23–27.
24 Joseph DiMasi, Price Trends for Prescription Pharmaceuticals 1995–1999, Prepared
for U.S. Department of Health and Human Services Conference on Pharmaceutical Pricing
Practices, Utilization and Costs (Aug. 8–9, 2000), available at http://aspe.hhs.gov/health/
reports/drug-papers/dimassi/dimasi-final.htm.; see also Congressional Budget Office,
supra note 17, at xi, 18–23; Z. John Lu & William S. Comanor, Strategic Pricing of New
Pharmaceuticals, 80 Rev. Econ. & Stat. 108–18 (1998).
25 See Can a High Pain Threshold Beat a Medical Cartel? FTC Watch No. 358, Jan. 13, 1992
(“knowledgeable staff members reacted with shocked incredulity last month when an
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surgery or other medical procedures may at times be a realistic alternative
to medication.
Much has been made of increasing drug expenditures in recent years,26
and data do show total expenditures for prescription drugs in the United
States rising almost 16 percent per year on average from 1996 to 2001.27
But studies attribute those increases much more to new drugs and
increased utilization than to price increases on drugs on the market.
The most recent study attributes 47 percent of recent price increases to
increased utilization, 27 percent to changes in the types of drugs used,
and only 26 percent to price increases.28 It is surprising that increased
output and introduction of new products should be of concern to antitrust officials, yet they continue to emphasize total expenditures in public speeches.29
It is worth noting that while there have been a number of major
mergers and acquisitions among manufacturers in recent years, it is
widely recognized that the pharmaceutical industry as a whole is not
concentrated. The Department of Commerce identifies more than 700
companies in the United States engaged in pharmaceutical manufacturagency economist suggested that kidney stone victims could defeat any cartel controlling
access to machines which pulverize [kidney] stones sonically by showing patience,” quoting
an internal FTC staff memo suggesting “an increase in the price of lithotripsy may lead
some patients with smaller stones to be more patient and let the stones pass without
lithotripsy” and noting “[t]he economic analysis which triggered internal revulsion . . .
was part of a discussion of ‘the relevant product market’”).
26 See generally John Carey & Amy Barrett, Drug Prices: What’s Fair? Bus. Wk., Dec. 10,
2001, at 60; David Noonan, Why Drugs Cost So Much, Newsweek, Sept. 25, 2000, at 22.
27 Health Care Finance Administration, National Health Expenditure Table 2,
Aggregate Amounts and Average Annual Percent Change by Type of Expenditure
( Jan. 8, 2003), available at http://cms.hhs.gov/statistics/nhe/historical/t2.asp.
28 Kaiser Family Found., Prescription Drug Trends (2003), available at http://
www.kff.org/content/2003/3057-03/3057-03.pdf.; see also Reinhardt, supra note 3, at 136;
Michael Doonan, The Economics of Prescription Drug Pricing, Before the Council on
the Economic Impact of Health System Change (Mar. 2001), available at http://sihp.
brandeis.edu/council/pubs/DoonanRxPricing.pdf; Robert W. Dubois et al., Explaining
Drug Spending Trends: Does Perception Match Reality? 19 Health Affairs 231 (2000).
29 See, e.g., FTC Testimony, An Overview of Federal Trade Commission Antitrust Activities,
Remarks Before the U.S. House Committee on the Judiciary Antitrust Task Force ( July
24, 2003) (“The growing cost of prescription drugs is a significant concern. . . Drug
expenditures doubled between 1995 and 2000. In response, the FTC has increased its
pharmaceutical-related investigations.”), available at http://www.ftc.gov/os/2003/07/anti
trustoversighttest.htm; FTC Testimony, Competition in the Pharmaceutical Marketplace:
Antitrust Implications of Patent Settlements, Before the U.S. Senate Committee on the
Judiciary (May 24, 2001) (“The surging cost of prescription drugs is a pressing national
issue. Recent reports suggest expenditures for retail outpatient prescription drugs rose
. . . 18.8% . . . from the previous year. This dramatic increase has helped focus attention
on the need to ensure competition in pharmaceutical markets.”), available at http://
www.ftc.gov/os/2001/05/pharmtstmy.htm.
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2003]
Product Market Definition
641
ing, accounting for $67 billion in sales, with the eight largest accounting
for approximately 50 percent and the top 20 firms accounting for approximately 70 percent of total revenues.30 The largest firm, Pfizer has only
about an 11 percent share of U.S. drug sales, followed by GlaxoSmithKline with about a 7 percent share, and AstraZeneca, Johnson & Johnson,
and Merck, rounding out the top five with about a 5 percent share each.
Smaller competitors include Abbott, Aventis, Bristol-Myers Squibb, Eli
Lilly, Novartis, Roche, Schering-Plough, and Wyeth, with about a 2–4
percent share each.31 Concentration is of course higher in more narrowly
defined segments of the industry.
Generic drugs—which are bioequivalent to their brand counterparts—
are also an important part of the competitive landscape. When a firm
introduces a generic drug, it typically does so at a substantial discount
to the pioneer drug.32 The Supreme Court has explained, “[g]eneric
drugs, also called ‘copycat’ or ‘me-too’ drugs, are usually marketed at
relatively low prices because their manufacturers do not incur the
research, development, and promotional costs normally associated with
the creation and marketing of an original product.” 33 Some studies have
suggested that drug prices may fall even further with the introduction
of additional generics.34 Data also demonstrate that, increasingly, sales
shift very rapidly to generic entrants.35 PBM policies often strongly
encourage use of generic drugs, particularly through use of lower copayments required from consumers and higher dispensing fees paid to
pharmacists. The trend also appears to be attributable at least in part to
state generic substitution laws, which permit, and in some states require,
pharmacists to dispense bioequivalent generic drugs (unless specifically
30 U.S. Dep’t of Commerce, Concentration Ratios in Manufacturing ( June 2001),
available at http://www.census.gov/prod/ec97/m31s-cr.pdf (NACIS Code 325412 comprising establishments primarily engaged in manufacturing in-vivo diagnostic substances and
pharmaceutical preparations except biologicals).
31 See IMS Health, IMS Drug Monitor (2002), available at http://www.ims-global.com/
insight/insight.htm.
32 See Federal Trade Comm’n, Generic Drug Entry Prior to Patent Expiration 9
( July 2002), available at http://www.ftc.gov/os/2002/07/genericdrugstudy.pdf; Congressional Budget Office, supra note 17, at 27–32 (1998).
33 United States v. Generix Drug Corp., 460 U.S. 453, 455 n.1 (1983).
34 See David Reiffen & Michael R. Ward, Generic Drug Industry Dynamics, Bureau
of Economics Working Paper No. 248 (Feb. 2002), available at http://www.ftc.gov/be/
workpapers/industrydynamicsreiffenwp.pdf; Richard E. Caves et al., Patent Expiration, Entry,
and Competition in the U.S. Pharmaceutical Industry, in Brookings Papers on Economic
Activity: Microeconomics 1991, at 1 (1991).
35 See Grabowski & Vernon, supra note 15; Levy, supra note 23, at 13–14; Congressional
Budget Office, supra note 17, at 27–31; Henry Grabowski & John Vernon, Longer Patents
for Increased Generic Competition: The Waxman-Hatch Act After One Decade, 10 PharmacoEcon.
Supp. 2, at 110 (1996).
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overridden by a doctor’s order).36 It is also now well documented that
pioneer manufacturers often curtail detailing and raise the price of the
pioneer drug in response to generic entry.37 The net effect may be a
reduction in the average price of off-patent drugs, but with reduced
marketing, a decline in total output rather than an increase in output,
as one would normally expect with a price decrease.
III. FTC PHARMACEUTICAL MARKET
DEFINITION ANALYSIS
The FTC’s approach to product market definition in its pharmaceutical cases is not transparent. While the Commission has challenged at
least twenty mergers involving pharmaceuticals since 1990, including
three in the last two years, each one was resolved through a consent
order38 or abandonment of the transaction before the Commission filed
suit.39 The Commission complaints accompanying consent orders in
these matters are not very detailed; they generally allege relevant product
markets in a conclusory manner with little support. Further discussion
of market definition in these complaints would help the public to understand the Commission’s analysis.
36 See National Institute for Health Care Management, A Primer: Generic Drugs,
Patents and the Pharmaceutical Marketplace (2002), available at http://www.nihcm.
org/GenericsPrimer.pdf.
37 See Levy, supra note 23, at 18–19; Congressional Budget Office, supra note 17, at
29–31; Richard G. Frank & David S. Salkever, Generic Entry and the Pricing of Pharmaceuticals, 6 J. Econ. & Mgmt. Strategy 75 (1997); see also Inwood Labs., Inc. v. Ives Labs.,
Inc., 456 U.S. 844, 847 (1982) (“normal industry practice” for pioneer manufacturer
to direct marketing efforts to convince physicians that product is superior, until generic
entry).
38 See Pfizer Inc. & Pharmacia Corp., FTC Docket No. C-4075 (May 27, 2003); Baxter
Int’l, Inc. & Wyeth, FTC Docket No. C-4068 (Feb. 3, 2003); Amgen Inc. & Immunex Corp.,
FTC Docket No. C-4956, (Sep. 3, 2002); Glaxo Wellcome plc & SmithKline Beecham plc,
FTC Docket No. C-3990 ( Jan. 26, 2001); Pfizer Inc. and Warner-Lambert Co., FTC Docket
No. C-3957 ( Jul. 27, 2000); Hoechst AG, FTC Docket No. C-3919 ( Jan. 18, 2000); Zeneca
Group plc, 127 F.T.C. 874 (1999); Merck & Co., Inc., 127 F.T.C. 156 (1999); Roche
Holding Ltd., 125 F.T.C. 919 (1998); Am. Home Prods. Corp., 123 F.T.C. 1279 (1997);
Ciba-Geigy, Ltd., 123 F.T.C. 842 (1997); Baxter Int’l, Inc., 123 F.T.C. 904 (1997); Upjohn,
Co., 121 F.T.C. 44 (1996); Hoechst AG, 120 F.T.C. 1010 (1995); Eli Lilly & Co., 120 F.T.C.
243 (1995); Glaxo plc, 119 F.T.C. 815 (1995); IVAX Corp., 119 F.T.C. 357 (1995); Am.
Home Prods. Corp., 119 F.T.C. 217 (1995); Roche Holding Ltd., 118 F.T.C. 1140 (1994);
Dow Chem. Co., 118 F.T.C. 730 (1994); Roche Holding Ltd., 113 F.T.C. 1086 (1990);
Institut Merieux S.A., 113 F.T.C. 742 (1990).
39 Cytyc Corporation’s proposed acquisition of Digene Corporation was abandoned in
June 2002 after the FTC authorized its staff to file suit. See FTC Press Release, FTC Seeks
to Block Cytyc Corp.’s Acquisition of Digene Corp. ( Jun. 24, 2002), available at http://
www.ftc.gov/opa/2002/06/cytyc digene.htm. In addition, a proposed acquisition by
Abbott Laboratories of ALZA Corporation was abandoned in 2000 after the parties and
the staff could not agree on the terms of a consent decree. See Richard Parker & David
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2003]
Product Market Definition
643
The FTC is required to allow public comment on proposed consent
orders by publishing an explanation in the Federal Register,40 and some
additional understanding of agency thinking may be discerned from
review of those “analyses to aid public comment” and from agency press
releases. Unlike European Commission merger decisions following second phase investigations,41 however, such statements do not address even
significant overlaps between the merging firms that the agency decided
not to challenge. Moreover, unlike EU decisions, such statements do
not specifically address arguments presented to the agency by the merging firms or other interested parties. The analyses to aid public comment
do not even constitute “official interpretations” and press releases are
issued by the staff, under the direction of the FTC Chairman but generally
without review by other Commissioners.42
A review of recent FTC enforcement actions in the pharmaceutical
industry provides a flavor of the range of market definitions alleged by
the FTC. The various cases define markets based upon:
(1) whether drugs treat the same disease, condition, or indication;
(2) whether drugs treat a disease by interacting with the body in
the same manner (i.e., whether they have the same “mechanism
of action”);
(3) whether drugs have the same specific chemical compounds;
Balto, The Evolving Approach to Merger Remedies, Antitrust Rep., May 2000, at 2, available
at http://www.ftc.gov/speeches/other/remedies.htm.
40 16 C.F.R. § 2.34(c) provides: “Promptly after the acceptance of the consent agreement,
the Commission will place the order contained in the consent agreement, the complaint,
and the consent agreement on the public record for a period of 30 days, or such other
period as the Commission may specify, for the receipt of comments or views from any
interested person. At the same time, the Commission will place on the public record an
explanation of the provisions of the order and the relief to be obtained thereby and any
other information that it believes may help interested persons understand the order. The
Commission also will publish the explanation in the Federal Register.”
41 The European Commission issues detailed decisions at the conclusion of each investigation whether it blocks the transaction, accepts “undertakings” from parties, or approves
it without relief. See, e.g., Case No. Comp/M.2922, Pfizer/Pharmacia (Feb. 27, 2003)
(focusing on “therapeutic indications” as the “operational market definition” and considering whether drugs are “substitutes for the treatment of a specific illness or disease,” taking
into account mechanism of action, diagnosis profile, patient profiles, active ingredients,
pathologies, and method of administration, considering marketed drugs and drugs at an
“advanced stage of development”); see also Case No. Comp/M.1878, Pfizer/WarnerLambert (May 22, 2000); Case No. Comp/M.1846, GlaxoWellcome/SmithKline Beecham
(May 8, 2000); Case No. Comp/M.1403, Astra/Zeneca (Feb. 26, 1999); Case No. Comp/
M.1378, Hoechst/Rhone-Poulenc (Aug. 9, 1999).
42 See FTC Operating Manual, ¶¶ 6.10.6 & Ill. 7, 6.13.1, 17.2.2, available at http://
www.ftc.gov/foia/adminstaffmanuals.htm.
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(4) whether drugs have the same dosage form such as injectable,
liquid, capsule, tablets, or topical;
(5) whether drugs have the same frequency of dosage, such as oncea- day or extended release;
(6) whether drugs have the same strength of dosage, distinguishing,
for example, 30mg and 60mg tablets;
(7) whether drugs are branded or generic;
(8) whether drugs require a prescription or are sold over-thecounter; and
(9) whether drugs are currently marketed or are in development.
Product markets alleged in recent merger enforcement actions include
(i) drugs for the treatment of a particular disease or condition, (ii) drugs
that have the same mechanism of action, and (iii) specific compounds.
The broadest markets alleged cover all drugs for a disease or condition.
For instance, in its most recent challenge to a blockbuster merger, Pfizer
Inc.’s $60 billion acquisition of Pharmacia Corporation, in May 2003,
the FTC alleged a market of “research and development, and the manufacture and sale of prescription drugs for the treatment of ED” or erectile
dysfunction. Pfizer’s Viagra was alleged to have a 95 percent share in that
market while Pharmacia had two drugs in early clinical development.43
Addressing Pfizer’s earlier $90 billion merger with Warner-Lambert in
2000, the agency similarly alleged a market of “research, development,
manufacture and sale of drugs for the treatment of Alzheimer’s disease.”
There Pfizer was alleged to have a 98 percent market share while WarnerLambert accounted for the rest of the market and a third firm had just
launched a new product.44
In challenging Glaxo Wellcome plc’s $182 billion merger with SmithKline Beecham plc, the FTC also defined certain markets by indication,
43 Pfizer Inc. & Pharmacia Corp., FTC Docket No. C-4075 (May 27, 2003) (Complaint
¶¶ 6, 20(c), 24), available at http://www.ftc.gov/os/2003/04/pfizercmp.htm; FTC Press
Release, Pfizer, Pharmacia Will Divest Assets to Settle FTC Charges (Apr. 14, 2003), available
at http://www.ftc.gov/opa/2003/04/pfizer.htm; Pfizer Inc. & Pharmacia Corp., FTC
Docket No. C-4075 (Apr. 14, 2003) (Analysis of Proposed Consent Order to Aid Public
Comment), available at http://www.ftc.gov/os/2003/04/pfizeranalysis.htm.
44 Pfizer Inc. & Warner-Lambert Co., FTC Docket No. C-3957 ( Jul. 27, 2000) (Complaint
¶¶ 19(c), 23), available at http://www.ftc.gov/os/2000/06/pfizercmp.htm; FTC Press
Release, FTC Order Clears Way for $90 Billion Merger of Pfizer Inc. and Warner-Lambert
Company ( June 19, 2000), available at http://www.ftc.gov/opa/2000/06/pfizer.htm; Pfizer
Inc. and Warner-Lambert Co., FTC Docket No. C-3957 ( June 19, 2000) (Analysis of
Proposed Consent Order to Aid Public Comment), available at http://www.ftc.gov/os/
2000/06/pfizeranalaysis.htm.
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2003]
Product Market Definition
645
alleging markets of “drugs for the treatment of irritable bowel syndrome”
and “prophylactic herpes vaccines.”45 In each of these cases, the merging
parties were two of few firms marketing any drugs in the broad category,
or one was marketing and the other was developing such a drug. That
may explain in part why one would expect substitution between drugs
that are based on different chemicals and different mechanisms of action
with unique effectiveness and side effect profiles, in response to modest
price increases, in these cases but not others. But the agency’s rationale
is not clearly articulated.
Other alleged markets focus on mechanism of action or class of drug.
In September 2002, for instance, addressing concerns raised by Amgen
Inc.’s $16 billion acquisition of Immunex Corporation, the Commission
alleged anticompetitive effects in three markets defined by mechanism
of action. The agency alleged two separate markets (TNF inhibitors and
IL-1 inhibitors) of drugs which block cytokines that trigger inflammation,
for the treatment of rheumatoid arthritis and other autoimmune diseases. At the same time, the agency included distinct neutrophil regeneration or colony stimulating factors that stimulate different white blood
cells used to treat cancer patients with a low white blood cell count, in
the same market, without explanation.46
In challenging the Glaxo-SmithKline merger, the FTC also defined
certain markets by mechanism of action. There, the FTC alleged markets
of (1) “prescription pharmaceuticals of the topoisomerase 1 inhibitor
class . . . for the treatment of cancer,” (2) “drugs of the triptan chemical
class . . . for the treatment of migraine headaches,” and (3) “any 5HT-3
receptor antagonist prescription pharmaceutical compound indicated
for the prevention and treatment of nausea and vomiting associated with
medical treatment.” 47
45 Glaxo Wellcome plc & SmithKline Beecham plc, FTC Docket No. C-3990 ( Jan. 26,
2001) (Complaint ¶¶ 5,6), available at http://www.ftc.gov/os/2000/12/glaxosmithkline
cmp.pdf; FTC Press Release, Resolving Competitive Concerns, FTC Agreement Clears
$182 Billion Merger of SmithKline Beecham and Glaxo Wellcome (Dec. 18, 2000), available
at http://www.ftc.gov/opa/2000/12/skb.htm; Glaxo Wellcome plc & SmithKline Beecham
plc, FTC Docket No. C-3990 (Dec. 18, 2000) (Analysis of Proposed Consent Order to Aid
Public Comment), available at http://www.ftc.gov/os/2000/12/glaxoana.htm.
46 Amgen Inc. & Immunex Corp., FTC Docket No. C-4053 (Sept. 3, 2002) (Complaint
¶¶ 7, 17, 19–21), available at http://www.ftc.gov/os/2002/07/amgencomplaint.pdf; FTC
Press Release, Resolving Anticompetitive Concerns, FTC Clears $16 Billion Acquisition of
Immunex Corp. by Amgen Inc. ( July 12, 2002), available at http://www.ftc.gov/opa/2002/
07/amgen.htm; Amgen Inc. and Immunex Corp., FTC Docket No. C-4053 ( July 12, 2002)
(Analysis of Agreement Containing Consent Order to Aid Public Comment), available at
http://www.ftc.gov/os/2002/07/amgenanalysis.htm.
47 Glaxo Wellcome plc & SmithKline Beecham plc, FTC Docket No. C-3990 ( Jan. 26,
2001) (Complaint ¶¶ 16 (a), (g), (i)), available at http://www.ftc.gov/os/2000/12/glaxo
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646
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In another recent action, in February 2003, the FTC focused primarily
on specific chemical compounds in addressing Baxter International
Inc.’s acquisition of Wyeth Corporation’s generic injectable drug business. The Commission alleged that the acquisition would reduce competition in five distinct markets. One market was defined as the manufacture
and sale of Propofol, a specific general anesthetic commonly used during
surgery and as a sedative for patients on mechanical ventilators. The
agency’s analysis to aid public comment emphasized the product’s
unique characteristics and uses, compared to other anesthetics, noting
its “many benefits” including “the ability to quickly adjust the amount
of sedation and its superior safety profile,” and the fact that it is “the
preferred anesthetic agent for out-patient surgery.” Three other markets,
for two specific neuromuscular block agents used to freeze muscles
during surgery and for patients mechanically ventilated, and a specific
antiemetic used to prevent and treat nausea and vomiting in patients
undergoing certain types of chemotherapy and for post-operative treatment, were similarly defined to include branded and generic equivalents
of specific chemical compounds.48 In challenging the Glaxo/SmithKline
merger, the FTC also defined one market narrowly as drugs that contain
“ceftazidime . . . a semisynthetic, broad-spectrum antibacterial derived
from cephaloridine.”49 In none of these cases is there any discussion of
smithklinecmp.pdf; FTC Press Release, Resolving Competitive Concerns, FTC Agreement
Clears $182 Billion Merger of SmithKline Beecham and Glaxo Wellcome (Dec. 18, 2000),
available at http://www.ftc.gov/opa/2000/12/skb.htm; Glaxo Wellcome plc & SmithKline
Beecham plc, FTC Docket No. C-3990 (Dec. 18, 2000) (Analysis of Proposed Consent
Order to Aid Public Comment), available at http://www.ftc.gov/os/2000/12/glaxoana.htm.
See also Pfizer Inc. & Warner-Lambert Co., FTC Docket No. C-3957 ( Jul. 27, 2000) (serotonin reuptake inhibitors (SRIs) and selective norepinephrine reuptake inhibitors (SNRIs)
for the treatment of depression; Epidermal Growth Factor receptor tyrosine kinase
(EGFr-tk) inhibitors for the treatment of solid cancerous tumors).
48 Baxter Int’l, Inc. & Wyeth, FTC Docket No. C-4068 (Feb. 3, 2003) (Complaint ¶¶ 14,
16–20), available at http://www.ftc.gov/os/2002/12/baxter wyethcomplaint.pdf; FTC
Press Release, FTC Requires Divestitures in Connection with Baxter’s Purchase of Wyeth’s
Generic Injectable Drug Business (Dec. 20, 2002), available at www.ftc.gov/opa/2002/12/
baxter wyeth.htm; Baxter Int’l, Inc. & Wyeth, FTC Docket No. C-4068 (Dec. 20, 2002)
(Analysis of Agreement Containing Consent Orders to Aid Public Comment), available at
http://www.ftc.gov/os/2002/12/baxter wyethanalysis.htm. The fifth market, on the other
hand, was defined more broadly as “new injectable iron replacement therapies” to treat
iron deficiency in patients undergoing hemodialysis. That market included both injectable
iron gluconate and injectable iron sucrose, with no discussion of substitutability to explain
why more than a single drug was included in the market.
49 Glaxo Wellcome plc & SmithKline Beecham plc, FTC Docket No. C-3990 ( Jan. 26,
2001), available at http://www.ftc.gov/os/2000/12/glaxosmithklinecmp.pdf; FTC Press
Release, Resolving Competitive Concerns, FTC Agreement Clears $182 Billion Merger of
SmithKline Beecham and Glaxo Wellcome (Dec. 18, 2000), available at http://www.ftc.gov/
opa/2000/12/skb.htm; Glaxo Wellcome plc & SmithKline Beecham plc, FTC Docket No.
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2003]
Product Market Definition
647
substitution to explain why the market is not defined more broadly by
mechanism of action or indication.
The FTC has also used dosage form and dosage frequency to narrow
the relevant market. For instance, in challenging Pfizer’s acquisition of
Pharmacia, the FTC alleged one market limited to “extended release
drugs for the treatment of overactive bladder.” The agency explained
in its analysis that extended release products, dosed at once or twice-aday, “offer a more convenient dosing schedule and fewer side effects”
than generic products that must be taken three times a day, but did not
tie such convenience to the possibility of substitution.50 The markets
alleged in challenging the Glaxo/SmithKline merger similarly included
“second generation oral and intravenous antiviral drugs for the treatment
of herpes” and “prescription topical herpes antiviral medications indicated for the treatment of . . . oral herpes.” Such markets were justified
based on the drugs’ “greater bioavailability, superior efficacy, and
requirements for less frequent dosing” over the first-generation drug.51
In one recent nonmerger case, also settled before the complaint issued,
the FTC even divided a market by dosage strength, alleging separate
markets for 30mg and 60mg tablets of a drug. In August 2002, the
Commission issued a complaint against Biovail Corporation and Elan
Corporation challenging a distribution agreement, which the agency
said provided incentives for the firms not to introduce competing generic
drugs. The Commission alleged that the two firms had market power in
U.S. markets for 30mg and 60mg dosages of a generic anti-hypertension
drug, excluding the bio-equivalent brand-name drug, Adalat CC. There
is no discussion at all of substitution between the 30mg and 60mg dosages
(or generic and branded Adalat CC), though the agency did assert that
C-3990 (Dec. 18, 2000) (Analysis of Proposed Consent Order to Aid Public Comment),
available at http://www.ftc.gov/os/2000/12/glaxoana.htm.
50 Pfizer Inc. & Pharmacia Corp., FTC Docket No. C-4075 (May 27, 2003) (Complaint
¶¶ 7, 13, 20(a), 22), available at http://www.ftc.gov/os/2003/04/pfizercmp.htm; FTC Press
Release, Pfizer, Pharmacia Will Divest Assets to Settle FTC Charges (Apr. 14, 2003), available
at http://www.ftc.gov/opa/2003/04/pfizer.htm; Pfizer Inc. & Pharmacia Corp., FTC
Docket No. C-4075 (Apr. 14, 2003) (Analysis of Proposed Consent Order to Aid Public
Comment), available at http://www.ftc.gov/os/2003/04/pfizeranalysis.htm.
51 Glaxo Wellcome plc & SmithKline Beecham plc, FTC Docket No. C-3990 ( Jan. 26,
2001) (Complaint ¶¶ 5, 11, 16(b), (c), 19, 21), available at http://www.ftc.gov/os/2000/
12/glaxosmithklinecmp.pdf; FTC Press Release, Resolving Competitive Concerns, FTC
Agreement Clears $182 Billion Merger of SmithKline Beecham and Glaxo Wellcome (Dec.
18, 2000), available at http://www.ftc.gov/opa/2000/12/skb.htm; Glaxo Wellcome plc &
SmithKline Beecham plc, FTC Docket No. C-3990 (Dec. 18, 2000) (Analysis of Proposed
Consent Order to Aid Public Comment), available at http://www.ftc.gov/os/2000/12/
glaxoana.htm; see also Zeneca Group plc, FTC Docket No. C-3880 ( June 7, 1999) (longacting local anesthetics).
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“[e]ntry of a second generic product at each dosage level would likely
cause a significant reduction in the price of, and hence the profits from,
that dosage.”52
Most of the actions discussed above either explicitly or implicitly
focus on prescription pharmaceuticals. The FTC has also specifically
alleged over-the-counter markets, including hydrocortisone creams and
ointments, motion sickness medications, and cough drops in the PfizerPharmacia merger challenge53 and histamine 2 blockers for acid relief
in the Glaxo-SmithKline merger challenge.54
Another issue that has affected market definition is availability of
generic forms of a drug. The Propofol market alleged in the BaxterWyeth matter explicitly included both the pioneer drug (manufactured
by a company not involved in the transaction) and generics in the same
market in challenging a merger between generic actual or potential
competitors.55 That case and others have also challenged mergers combining branded and generic drugs.56
52 Biovail Corp. & Elan Corp., FTC Docket No. C-4057 (Aug. 15, 2002) (Complaint ¶¶ 6,
11, 16, 1), available at http://www.ftc.gov/os/2002/08/biovalcmp.pdf; FTC Press Release,
Consent Order Resolves Charges that Biovail and Elan Agreement Unreasonably
Restrained Competition in Market for Generic Anti-Hypertension Drug ( June 27, 2002),
available at www.ftc.gov/opa/2002/06/biovailelan.htm; Biovail Corp. & Elan Corp., PLC,
FTC Docket No. C-4057 ( June 27, 2002) (Analysis to Aid Public Comment), available at
http://www.ftc.gov/os/2002/06/biovailelananalysis.pdf.
53 Pfizer Inc. & Pharmacia Corp., FTC Docket No. C-4075 (May 27, 2003) (Complaint
¶¶ 20(g)(h)(i), 28, 29, 30), available at http://www.ftc.gov/os/2003/04/pfizercmp.htm;
FTC Press Release, Pfizer, Pharmacia Will Divest Assets to Settle FTC Charges (Apr. 14,
2003), available at http://www.ftc.gov/opa/2003/04/pfizer.htm; Pfizer Inc. & Pharmacia
Corp., FTC Docket No. C-4075 (Apr. 14, 2003) (Analysis of Proposed Consent Order to
Aid Public Comment), available at http://www.ftc.gov/os/2003/04/pfizeranalysis.htm.
54 Glaxo Wellcome plc & SmithKline Beecham plc, FTC Docket No. C-3990 ( Jan. 26,
2001) (Complaint ¶¶ 9, 16(f), 23), available at http://www.ftc.gov/os/2000/12/glaxosmith
klinecmp.pdf; FTC Press Release, Resolving Competitive Concerns, FTC Agreement Clears
$182 Billion Merger of SmithKline Beecham and Glaxo Wellcome (Dec. 18, 2000), available
at http://www.ftc.gov/opa/2000/12/skb.htm; Glaxo Wellcome plc & SmithKline Beecham
plc, FTC Docket No. C-3990 (Dec. 18, 2000) (Analysis of Proposed Consent Order to Aid
Public Comment), available at http://www.ftc.gov/os/2000/12/glaxoana.htm.
55 Baxter Int’l, Inc. & Wyeth, FTC Docket No. C-4068 (Feb. 3, 2003) (Complaint ¶¶ 14,
19), available at http://www.ftc.gov/os/2002/12/baxter wyethcomplaint.pdf; FTC Press
Release, FTC Requires Divestitures in Connection with Baxter’s Purchase of Wyeth’s
Generic Injectable Drug Business (Dec. 20, 2002), available at www.ftc.gov/opa/2002/12/
baxter wyeth.htm; Baxter Int’l, Inc. & Wyeth, FTC Docket No. C-4068 (Dec. 20, 2002)
(Analysis of Agreement Containing Consent Orders to Aid Public Comment), available at
http://www.ftc.gov/os/2002/12/baxter wyethanalysis.htm.
56 Baxter Int’l, Inc. & Wyeth, FTC Docket No. C-4068 (Feb. 3, 2003) (Complaint ¶¶ 14,
18) (Metoclopramide), available at http://www.ftc.gov/os/2002/12/baxter wyeth
complaint.pdf; FTC Press Release, FTC Requires Divestitures in Connection with Baxter’s
Purchase of Wyeth’s Generic Injectable Drug Business (Dec. 20, 2002), available at
www.ftc.gov/opa/2002/12/baxter wyeth.htm; Baxter Int’l, Inc. & Wyeth, FTC Docket No.
71 Antitrust Law Journal No. 2 (2003). Copyright 2003 American Bar Association. Reproduced by permission. All rights reserved.
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2003]
Product Market Definition
649
On the other hand, in at least one merger57 and two nonmerger58
cases, the agency has defined generic-only markets. In one early case,
in a concurring statement, one Commissioner suggested that while it
may seem obvious that two bio- equivalent drugs must be in the same
relevant product market, “branded drugs and their generic counterparts
typically vary dramatically in price, suggesting that consumers may not
view the products as equivalent or interchangeable.” She suggested that
“[t]his price differential may be greatest where there is intense price
competition among different generic versions of a drug.” 59 Most recently,
in challenging Pfizer’s acquisition of Pharmacia, the agency included
private-label products in certain markets and noted that generics
accounted for “a significant share of the market,” but at the same time
the FTC alleged the generics had “limited competitive significance and
virtually no impact on the pricing,” or “do not constrain the pricing of
the branded products.” 60 These statements suggest confusion in the
agency’s approach to market definition because if substitution to an
alternative product does not constrain price, the alternative is generally
excluded from the market.
A review of nonmerger matters is also instructive to understand FTC
thinking. In October 2002, the Commission issued a final order in
another matter involving Biovail (in this case as a pioneer manufacturer),
involving an alleged wrongful listing of a patent in the FDA “Orange
Book.” There the Commission alleged a market for Tiazac, a diltiazembased prescription drug taken once a day to treat high blood pressure
C-4068 (Dec. 20, 2002) (Analysis of Agreement Containing Consent Orders to Aid Public
Comment), available at http://www.ftc.gov/os/2002/12/baxter wyethanalysis.htm;
Hoechst AG, 120 F.T.C. 1010 (1995) (branded and generic rifampin); Dow Chem. Co.,
118 F.T.C. 730 (1994) (branded and generic dicyclomine).
57 IVAX Corp., 119 F.T.C. 357 (1995) (generic verapamil market).
58 Biovail Corp. & Elan Corp., FTC Docket No. C-4057 (Aug. 15, 2002) (Complaint ¶ 6)
(alleging separate markets for 30mg and 60mg dosage forms of generic Adalat), available
at http://www3.ftc.gov/os/2002/08/biovalcmp.pdf; FTC v. Mylan Labs., Inc., FTC Docket
No. 1:98CV03114 (Dec. 21, 1998) (alleging separate markets of generic lorazepam tablets and generic clorazepate tablets), available at http://www.ftc.gov/os/1998/12/
mylancmp.htm.
59 In Dow Chem. Co & Marion Merrell Dow Inc., File No. 941-0019, 1994 FTC Lexis 86
at *7 (FTC May 24, 1994) (proposed consent) (Owen, Cmm’r, concurring) (“In general,
where the price differential between the branded product and the generic product is
great, the products are more likely to be in separate markets. Conversely, where the price
gap between the branded product and the generic product is relatively small (for example,
where there is only one generic version available to consumers), the products are more
likely to be in the same market.”).
60 Pfizer Inc. & Pharmacia Corp., FTC Docket No. C-4075 (May 27, 2003) (Complaint
¶¶ 20(g)(h)(i), 28, 29, 30), available at http://www.ftc.gov/os/2003/04/pfizercmp.htm;
FTC Press Release, Pfizer, Pharmacia Will Divest Assets to Settle FTC Charges (Apr.
14, 2003), available at http://www.ftc.gov/opa/2003/04/pfizer.htm; Analysis of Proposed
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(hypertension) and chronic chest pain (angina), including generic bioequivalent versions of Tiazac. The Commission explained that other
therapeutic agents could be used to treat hypertension and angina,
including other branded and generic formulations of once-a-day diltiazem, but asserted those drugs “do not significantly constrain Tiazac’s
pricing.” In contrast, the Commission alleged entry of a generic version
of Tiazac “likely would result in a significant, immediate decrease in the
sales of branded Tiazac and lead to a significant reduction in the average
market price paid for Tiazac and its generic bioequivalents.” Thus Biovail
was alleged to have a 100 percent market share and monopoly power
in the relevant market.61
The FTC challenges to agreements among firms involved in patent
litigation have garnered perhaps the most attention.62 In each of these
cases, the product market definition alleged is similar, limited to the
pioneer drug and its generic equivalents. In Abbott/Geneva, the FTC
alleged a market of terazosin hydrochloride, used principally to treat
benign prostatic hyperplasia or enlarged prostate, bioequivalent to
Abbott’s Hytrin. The FTC complaint there alleged that “[o]ther drugs
are not effective substitutes . . . because they are different in terms of
chemical composition, safety, efficacy, and side effects” and “[i]n addition, there is little price sensitivity between terazosin HCL and nonterazosin HCL products.” 63 In Hoechst/Andrx, the Commission alleged a
market of once-a- day time-release diltiazem in capsule form, designed to
be taken once every twenty-four hours. The Commission noted diltiazem
belongs to a group of drugs known as calcium channel blockers, used
principally to treat hypertension and to decrease the occurrence of
angina. The agency complaint alleged that “[o]ther calcium channel
blockers are not acceptable substitutes” for several reasons, including
differences in efficacy and side effects and risks associated with switching
Consent Order to Aid Public Comment, Pfizer Inc. & Pharmacia Corp., FTC Docket No.
C-4075 (Apr. 14, 2003), available at http://www.ftc.gov/os/2003/04/pfizeranalysis.htm.
61 Biovail Corp., FTC Docket No. C-4060 (Oct. 2, 2002) (Complaint ¶¶ 18-20, 22), available
at http://www.ftc.gov/os/2002/04/biovailcomplaint.htm; FTC Press Release, Wrongful
“Orange Book” Listing Raises Red Flag with FTC; Leads to Consent Order with Biovail
Corp. Concerning its Drug Tiazac (Apr. 23, 2002), available at www.ftc.gov/opa/2002/04/
biovailtiazac.htm.
62 See generally M. Howard Morse, Settlement of Intellectual Property Disputes in the Pharmaceutical and Medical Device Industries: Antitrust Rules, 10 Geo. Mason L. Rev. 359 (2002); David A.
Balto, Pharmaceutical Patent Settlements: The Antitrust Risks, 55 Food & Drug L.J. 321 (2000).
63 Abbott Labs. & Geneva Pharm., Inc., FTC Docket Nos. C-3945, 3946 (May 22, 2000)
(Complaint ¶ 12), available at http://www.ftc.gov/os/2000/05/c3945complaint.htm; see
also FTC Press Release, FTC Charges Drug Manufacturers with Stifling Competition in
Two Prescription Drug Markets (Mar. 16, 2000), available at http://www.ftc.gov/opa/2000/
03/hoechst.htm.
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patients from one calcium channel blocker to another.64 Notably, however, there is no allegation that the loss of new patients to alternative
channel blockers (even if current patients were locked in) would render
a price increase unprofitable.65
In the one Commission litigated case, against Schering-Plough and
Upsher-Smith (the one case challenging a permanent settlement of
litigation as opposed to an “interim” settlement), the Commission likewise alleged a market of a single drug and bioequivalent generics. The
Commission alleged a market of 20 milliequivalent extended-release
potassium chloride tablets and capsules, used to treat patients with
depleted potassium levels.66 The complaint asserted that such patients
have “no practical substitute for potassium chloride supplements” and
“[f]or clinical reasons, among others, physicians and patients prefer 20
milliequivalent extended-release potassium chloride tablets over other
forms and dosages of potassium chloride.” The complaint asserted further that “[t]he existence of other potassium chloride products has not
significantly constrained Schering’s pricing of K-Dur 20.” According to
the complaint, Schering’s K-Dur 20 had 100 percent of the sales of 20
milliequivalent extended-release potassium chloride tablets and
capsules.67
The Schering case is currently on appeal to the full Commission after
the ALJ found, inter alia, that “Complaint Counsel failed to prove or
properly define the relevant product market.” The ALJ found that the
there are many “therapeutically equivalent” products, and concluded
that the relevant product market must be all oral potassium supplements
that can be prescribed by a physician for a patient in need of a potassium
supplement. The ALJ noted that advertisements urged doctors to substitute two 10 mEq pills for a 20 mEq pill and emphasized that the staff’s
64 Hoechst Marion Roussel, Inc. & Andrx Corp., FTC Docket No. 9293 (Mar. 16, 2000)
(Complaint ¶ 12), available at http://www.ftc.gov/os/2000/03/hoechstandrxycomplaint.
htm. See also FTC Press Release, FTC Charges Drug Manufacturers with Stifling Competition
in Two Prescription Drug Markets (Mar. 16, 2000), available at http://www.ftc.gov/opa/
2000/03/hoechst.htm.
65 Id.
66 Schering-Plough Corp., Upsher-Smith Labs. & Am. Home Prods. Corp., FTC Docket
No. 9297 (Mar. 30, 2001) (Complaint ¶ 21), available at http://www.ftc.gov/os/2001/04/
scheringpart3cmp.pdf. The Commission’s complaint also alleged a relevant market of “all
potassium chloride supplements approved by the FDA.” Id. The broader market, however,
was dropped by the staff during the litigation. Schering-Plough Corp., Upsher-Smith Labs.
& Am. Home Prods. Corp., FTC Docket No. 9297 ( June 27, 2002) (Initial Decision at
87), available at http://www.ftc.gov/os/2002/07/scheringinitialdecisionp2.pdf.
67 Id. ¶¶ 21–27; FTC Press Release, FTC Charges Schering-Plough over Allegedly Anticompetitive Agreements with Two Other Drug Manufacturers (Apr. 2, 2001), available at http://
www.ftc.gov/opa/2001/04/schering.htm.
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expert did not systematically study relative prices or rebates, in rejecting
complaint counsel’s narrower proposed market.68
IV. PRODUCT MARKET IN LITIGATION
With little explanation of product market in most of the government
cases resolved through consent agreement, one must look to litigation
for additional illumination. Case law teaches that (1) market definition
is critical to the outcome of antitrust litigation, (2) the burden of proof
on market definition is on the government or private antitrust plaintiff,
and (3) market definition is seldom resolved early in litigation, though
judicial standards do leave room for dismissing cases based on unsustainable market definition allegations.
A. Market Definition Is Critical to the Outcome
of Antitrust Litigation
Market definition is often critical to the outcome of antitrust cases,
whether brought under the Sherman Act, the Clayton Act, or the Federal
Trade Commission Act.69 Unilateral conduct, including filing of baseless
patent infringement claims, does not raise antitrust concern unless the
firm engaging in the conduct is a monopolist or its conduct creates a
dangerous probability that it will become a monopolist. Similarly, most
forms of joint conduct, including agreements to settle litigation and
mergers, pose no harm to competition in the absence of market power.
In most cases, therefore, it is necessary to define a relevant market.
It has long been recognized that, other than for conduct that is illegal
per se without inquiry into actual effect, “rule of reason” analysis under
Section 1 of the Sherman Act generally requires a detailed examination
of a challenged agreement’s effect in a well- defined market. Without
defining the market, there is no meaningful context in which to assess
a restraint’s competitive effects.70 If adverse effects are “obvious” and
68 Schering-Plough Corp., Upsher-Smith Labs. & Am. Home Prods. Corp., FTC Docket
No. 9297 (FTC June 27, 2002) (Initial Decision at 16, 19, 78–79, 87–95, 12), available
at http://www.ftc.gov/os/2002/07/scheringinitialdecisionp1.pdf and http://www.ftc.gov/
os/2002/07/scheringinitialdecisionp2.pdf.
69 See, e.g., Robert Pitofsky, New Definitions of Relevant Market and the Assault on Antitrust,
90 Colum. L. Rev. 1805, 1807 (1990) (“Knowledgeable antitrust practitioners have long
known that the most important single issue in most enforcement actions—because so
much depends on it—is market definition.”).
70 See, e.g., State Oil Co. v. Khan, 522 U.S. 3, 10 (1997) (“[M]ost antitrust claims are
analyzed under a ‘rule of reason’. . . .”); Copperweld Corp. v. Independence Tube Corp.,
467 U.S. 752, 768 (1984) (rule of reason requires “an inquiry into market power and
market structure designed to assess the combination’s actual effect”); Continental T.V.,
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procompetitive effects are “implausible” or there is “proof of actual
detrimental effects, such as a reduction of output,” restraints may be
condemned under a “quick look” analysis without defining the relevant
market because market power is but “a surrogate for detrimental effect.” 71
The Supreme Court has made clear, however, that an abbreviated analysis
is appropriate only where “an observer with even a rudimentary understanding of economics could conclude that the arrangements in question
have an anticompetitive effect on customers and markets.” 72
Proof of the relevant market is similarly an essential element of any
claim for monopolization or attempted monopolization under Section 2
of the Sherman Act. The Supreme Court has made clear that “[w]ithout
Inc. v. GTE Sylvania Inc., 433 U.S. 36, 45 (1977) (restraint must be examined “in light
of the competitive situation in ‘the product market as a whole’”); Tanaka v. Univ. of S.
Cal., 252 F.3d 1059, 1063 (9th Cir. 2001) (“A restraint violates the rule of reason if the
restraint’s harm to competition outweighs its procompetitive effects. The plaintiff bears
the initial burden of showing that the restraint produces ‘significant anticompetitive
effects’ within a ‘relevant market.’”); California Dental Ass’n v. FTC, 224 F.3d 942, 952
(9th Cir. 2000) (‘ “Proving injury to competition in a rule of reason case almost uniformly
requires a claimant to prove the relevant market and to show the effects of competition
within that market.’”); Polygram Holding, Inc., FTC Docket No. 9298, slip op. at 29 ( July
24, 2003) (“In most cases, conduct cannot be adjudged illegal without an analysis of its
market context to determine whether those engaged in the conduct or restraint are likely
to have sufficient power to harm consumers.”), available at http://www.ftc.gov/os/2003/
07/polygramopinion.pdf.
71 FTC v. Indiana Fed’n of Dentists, 476 U.S. 447, 458–61 (1986) (“‘[N]o elaborate
industry analysis is required’” to condemn direct restraint on output where evidence of
actual adverse effects on competition are clear.); NCAA v. Bd. of Regents, 468 U.S. 85,
109–10 n.39 (1984) (“‘[N]o elaborate industry analysis is required to demonstrate the
anticompetitive character of . . . an agreement’” where “‘the rule of reason can . . . be
applied in the twinkling of an eye.’” (quoting Phillip Areeda, The “Rule of Reason”
in Antitrust Analysis: General Issues 37–38 (Federal Judicial Center, June 1981));
Todd v. Exxon Corp., 275 F.3d 191, 206 (2d Cir. 2001) (“[A]n actual adverse effect on
competition . . . arguably is more direct evidence of market power than calculations of
elusive market share figures.”).
72 California Dental Ass’n v. FTC, 526 U.S. 756, 770 (1999). See also Polygram Holding,
Inc., slip op. at 29 (A “plaintiff may avoid . . . the pleading and proof of market power if
it demonstrates that the conduct at issue is inherently suspect owing to its likely tendency
to suppress competition” but such analysis is only appropriate for conduct where “past
judicial experience and current economic learning have shown to warrant summary condemnation.”), available at http://www.ftc.gov/os/2003/07/polygramopinion.pdf. At the
same time, California Dental teaches that there is “no categorical line to be drawn between
restraints that give rise to an intuitively obvious inference of anticompetitive effect and
those that call for more detailed treatment,” suggesting that a long, lingering look, short
of “the fullest market analysis,” might be sufficient in some cases and that not “every case
attacking a less obviously anticompetitive restraint . . . is a candidate for plenary market
examination.” California Dental, 526 U.S. at 779–81. The FTC has also suggested that,
depending on the circumstances and the degree to which courts have experience with
similar restraints, a quick look “may or may not require evidence about the particular
market at issue.” Polygram Holding, Inc., supra, at 32.
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a definition of [the] market there is no way to measure [a defendant’s]
ability to lessen or destroy competition.” 73
Proof of market definition is also essential to a plaintiff’s case under
Section 7 of the Clayton Act, which prohibits mergers and acquisitions
the effect of which may be substantially to lessen competition “in any
line of commerce . . . in any section of the country.” The Supreme
Court has explained that “[d]etermination of the relevant product and
geographic markets is a ‘necessary predicate’” to a Section 7 claim.74
Under the government’s Merger Guidelines, one must ask whether a
transaction will significantly increase concentration in a relevant market
and create market power, allowing the combined firm, unilaterally or
through coordinated action, to raise price above competitive levels.75
The Federal Trade Commission enforces the Sherman and Clayton
Acts through the FTC Act’s prohibition on “unfair methods of competition.” Although the reach of Section 5 of the FTC Act is generally viewed
as coextensive with that of the Sherman and Clayton Acts, the Supreme
Court has held that the Commission may “define and proscribe an unfair
competitive practice, even though the practice does not infringe either
the letter or the spirit of the antitrust laws.” 76 Nonetheless, the Commis73 Walker Process Equip., Inc. v. Food Mach. and Chem. Corp., 382 U.S. 172, 177 (1965).
See also Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 455–56, 459 (1993) (“[T]o
establish monopolization or attempt to monopolize under § 2 of the Sherman Act, it [is]
necessary to appraise . . . the relevant market for the product involved.”); United States
v. Grinnell Corp., 384 U.S. 563, 570–71 (1966) (“The offense of monopoly under § 2 of
the Sherman Act has two elements: (1) the possession of monopoly power in the relevant
market and (2) the willful acquisition or maintenance of that power. . . .”); United States
v. Microsoft Corp., 253 F.3d 34, 50, 81 (D.C. Cir.) (en banc) (“A court’s evaluation of an
attempted monopolization claim must include a definition of the relevant market. Such
a definition establishes a context for evaluating the defendant’s actions as well as for
measuring whether the challenged conduct presented a dangerous probability of monopolization”); Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1355 (Fed. Cir. 1999) (relevant
market is “an indispensable element of any monopolization . . . case”).
74 United States v. Marine Bancorp., 418 U.S. 602, 618 (1974) (quoting United States
v. E. I. du Pont de Nemours & Co., 353 U.S. 586, 593 (1957)); Brown Shoe Co. v. United
States, 370 U.S. 294, 324 (1962) (same). See also FTC v. H.J. Heinz Co., 246 F.3d 708, 715
(D.C. Cir. 2001) (“First the government must show that the merger would produce ‘a
firm controlling an undue percentage share of the relevant market, and [would] result[]
in a significant increase in the concentration of firms in that market.’”); United States v.
Engelhard Corp., 126 F.3d 1302, 1305 (11th Cir. 1997) (“[E]stablishing the relevant
product market is an essential element in the Government’s case.”).
75 U.S. Dep’t of Justice & Federal Trade Comm’n, Horizontal Merger Guidelines § 1.0
(1992) (“[T]he likely competitive impact of a merger [must be evaluated] within the
context of economically meaningful markets; i.e., markets that could be subject to the
exercise of market power”), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104 [hereinafter
Horizontal Merger Guidelines].
76 FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 239–40 (1972). See also FTC v. Brown
Shoe Co., 384 U.S. 316, 319, 321–22 (1966) (The FTC has “broad power . . . [that] is
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2003]
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655
sion’s efforts to extend the FTC Act into areas beyond the limits of
the Sherman and Clayton Acts have often been struck down,77 and the
Commission has held that “[w]hile Section 5 may empower [it] to pursue
those activities which offend the ‘basic policies’ of the antitrust laws, we
do not believe that power should be used to reshape those policies
when they have been clearly expressed and circumscribed.” 78 Thus, the
Commission generally relies upon Sherman Act and Clayton Act market
definition principles in condemning particular practices.79
Importantly, standards for determining relevant market are the same
under the various antitrust statutes, and courts routinely rely on cases
decided under one statute when deciding cases under the other statutes.
The Supreme Court has in fact explicitly held that there is “no reason
to differentiate between ‘line’ of commerce in the context of the Clayton
Act and ‘part’ of commerce for purposes of the Sherman Act.” 80 And
particularly well established with regard to trade practices which conflict with the basic
policies of the Sherman and Clayton Acts even though such practices may not actually
violate these laws.”); FTC v. Motion Picture Adver. Serv. Co., 344 U.S. 392, 394–95 (1953)
(“[T]he Federal Trade Commission Act was designed to supplement and bolster the
Sherman Act and the Clayton Act—to stop in their incipiency acts and practices which,
when full blown, would violate those Acts, as well as to condemn as ‘unfair methods of
competition’ existing violations of them.” (citations omitted)).
77 See, e.g., Boise Cascade Corp. v. FTC, 637 F.2d 573 (9th Cir. 1980); Official Airline
Guides, Inc. v. FTC, 630 F.2d 920 (2d Cir. 1980); E.I. du Pont de Nemours & Co. v. FTC,
729 F.2d 128 (2d Cir. 1984).
78 Gen. Foods Corp., 103 F.T.C. 204, 365 (1984).
79 But see Dell Computer Corp., 121 F.T.C. 616 (1996) (alleging violation of FTC Act
based on unilateral conduct in failing to disclose patents to standard-setting organization
without alleging attempted or actual monopolization); Rambus Inc., FTC Docket No. 9302
( June 18, 2002) (Complaint ¶¶ 122–24) (alleging failure to disclose patent applications
during standard setting unreasonably restrained trade in violation of the FTC Act in
addition to alleging monopolization and attempted monopolization in violation of the
Act), available at http://www.ftc.gov/os/2002/06/rambuscmp.htm.
80 United States v. Grinnell Corp., 384 U.S. 563, 573 (1966). See also Apani Southwest,
Inc. v. Coca-Cola Enters., 300 F.3d 620, 627 (5th Cir. 2002) (“The same test applied for
determining the relevant product and geographic markets for Clayton Act claims is also
used for alleged violations of the Sherman Act.”); Image Technical Servs., Inc. v. Eastman
Kodak Co., 125 F.3d 1195, 1204 n.3 (9th Cir. 1997) (noting that “[t]he Supreme Court
has held that its precedent relating to the ‘line of commerce’ under § 7 of the Clayton
Act applies to market definition under the ‘part of commerce’ language in the Sherman
Act”); Hornsby Oil Co. v. Champion Spark Plug Co., 714 F.2d 1384, 1393 n.9 (5th Cir.
1983) (“Basic principles governing definition of the relevant product and geographic
markets in section 2 cases may be applied in actions arising under section 1 of the Sherman
Act, and section 7 of the Clayton Act.”); Borden, Inc. v. FTC, 674 F.2d 498, 509–10 (6th
Cir. 1982); Photovest Corp. v. Fotomat Corp., 606 F.2d 704, 712 (7th Cir. 1979) (“The
relevant factors for defining the market in a § 2 Sherman Act case are similar to those
used to define the market in a § 7 Clayton Act case.”); United States v. Engelhard Corp.,
970 F. Supp. 1463 (M.D. Ga. 1997) (“The standards applied in Sherman Act cases for
defining the relevant product market are the same as in cases involving Section 7 of the
Clayton Act.”), aff’d, 126 F.3d 1302 (11th Cir. 1997); United States v. Syufy Enters., 712
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the FTC relied on the Merger Guidelines in defininig the market in its
most recent monopolization decision.81
B. The Government and Private Antitrust Plaintiffs
Bear the Burden of Proof on Market Definition
The burden of establishing the relevant market falls on the government or private plaintiff in federal court and on the FTC staff supporting
an administrative complaint, known as “complaint counsel.” 82 As
explained in one recent case, “any gap in the evidence is a flaw in
plaintiff’s case—not defendants’.” 83
C. Courts Seldom Resolve Market Definition Early in
Litigation, Though May Dismiss Baseless Cases
Despite the critical importance of product market to antitrust cases,
it is the rare case in which market definition issues are resolved early in
the litigation.
Because relevant market determinations are fact-intensive, and courts
must accept the allegations in the complaint as true and construe them
in the light most favorable to the plaintiff on motions to dismiss, courts
are often reluctant to grant such motions directed to the way the market
is defined, at least where the plaintiff has alleged a market.84
F. Supp. 1386, 1396 (N.D. Cal. 1989) (“The relevant market is generally the same for
cases brought under either Section 2 of the Sherman Act or Section 7 of the Clayton
Act.”), aff’d 903 F.2d 659 (9th Cir. 1990); U.S. Dep’t of Justice & Federal Trade Comm’n,
Antitrust Guidelines for Collaborations Among Competitors § 3.32(a) (2000) (“[F]or
goods markets affected by a competitor collaboration, the Agencies approach relevant
market definition as described in Section 1 of the Horizontal Merger Guidelines.”), reprinted
in 4 Trade Reg. Rep. (CCH) ¶ 13,161.
81 See Int’l Tel. & Tel. Corp., 104 F.T.C. 280, 409–11 (1984).
82 See, e.g., United States v. Microsoft Corp., 253 F.3d 34, 50, 81 (D.C. Cir. 2001) (plaintiffs
have the burden to “define the relevant market”); Double D Spotting Serv., Inc. v. Supervalu, Inc., 136 F.3d 554, 560 (8th Cir. 1998) (“It is the plaintiff’s burden to define the
relevant market.”); Brokerage Concepts, Inc. v. U.S. Healthcare, Inc., 140 F.3d 494, 513
(3d Cir. 1998) (“The burden is on the plaintiff to define both components [product and
geographic] of the relevant market.”); R.R. Donnelley & Sons Co., 120 F.T.C. 36, 38
(1995) (“Complaint Counsel bear the burden of proving a relevant market within which
anticompetitive effects are likely as a result of the acquisition.”); Adventist Health Sys.,
117 F.T.C. 224, 297 (1994) (dismissal of complaint by ALJ affirmed because “Complaint
Counsel failed to carry the burden of proof” on market definition).
83 United States v. Sungard Data Sys., Inc., 172 F. Supp. 2d 172, 185 (D.D.C. 2001).
84 Todd v. Exxon Corp., 275 F.3d 191, 199–200 (2d Cir. 2001) (“Because market definition is a deeply fact-intensive inquiry, courts hesitate to grant motions to dismiss for failure
to plead a relevant product market.”); Double D Spotting Serv., Inc. v. Supervalu, Inc.,
136 F.3d 554, 560 (8th Cir. 1998) (“Most often, ‘proper market definition can be determined only after a factual inquiry into the commercial realities faced by consumers.’ This
general rule, however, does not amount to ‘a per se prohibition against dismissal of antitrust
claims for failure to plead a relevant market under Fed. R. Civ. P. 12(b)(6).”); In re
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A number of courts have held, however, that bare legal conclusions
are not enough to survive a motion to dismiss.85 The Third Circuit has
suggested a minimal pleading standard that should allow courts to dismiss
complaints based on market definition allegations that are internally
inconsistent or nonsensical. In Queen City Pizza, Inc. v. Domino’s Pizza,
Inc.,86 the court explained:
Where the plaintiff fails to define its proposed relevant market with
reference to the rule of reasonable interchangeability and crosselasticity of demand, or alleges a proposed relevant market that clearly
does not encompass all interchangeable substitute products even when
all factual inferences are granted in plaintiff’s favor, the relevant market
is legally insufficient and a motion to dismiss may be granted.87
Other courts have granted motions to dismiss where the plaintiff’s product market allegations failed to explain why apparent substitutes were
not interchangeable or were conclusory, internally inconsistent, or
implausible.88 Thus, unsupported narrow product market allegations may
Cardizem CD Antitrust Litig., 105 F. Supp. 2d 618, 681 (E.D. Mich. 2000) (“The determination whether there are additional products that are ‘reasonably’ interchangeable with
Cardizem CD involves questions of fact not properly addressed in a Rule 12(b)(6) motion
to dismiss.”).
85 See, e.g., Papasan v. Allain, 478 U.S. 265, 286 (1986) (“we are not bound to accept as
true a legal conclusion couched as a factual allegation.”) Knoll Pharms. Co. v. Teva Pharms.
USA, Inc., 2001 WL 1001117, at *3 (N.D. Ill. 2001) (“The pleader may not evade these
requirements by merely alleging a bare legal conclusion . . . .”). See generally 5A Charles
Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1357 (2d
ed. 1997) (noting courts deciding 12(b)(6) motions have rejected “legal conclusions,”
“unsupported conclusions,” “unwarranted inferences,” “unwarranted deductions,” “footless conclusions of law,” or “sweeping legal conclusions cast in the form of factual
allegations”).
86 124 F.3d 430 (3d Cir. 1997).
87 Id. at 436.
88 See 42nd Parallel N. v. E Street Denim Co., 286 F.3d 401, 406 (7th Cir. 2002) (affirming
dismissal where plaintiff’s proposed market was “absurdly small” considering “any sensible
awareness of commercial reality”); Tanaka v. Univ. of S. Cal., 252 F.3d 1059, 1063 (9th
Cir. 2001) (affirming dismissal because plaintiff “failed to identify an appropriately defined
product market”; “conclusory assertion that [product] is ‘unique’ and hence ‘not interchangeable with [other products]’ is insufficient”); Hack v. President and Fellows of Yale
College, 237 F.3d 81, 86 (2d Cir. 2000) (“[t]o survive a motion to dismiss, . . . the alleged
. . . market must be plausible”); Big Bear Lodging Ass’n v. Snow Summit, Inc., 182 F.3d
1096, 1105 (9th Cir. 1999) (complaint dismissed because it failed to allege that there were
no other goods or services that were reasonably interchangeable); E-Z Bowz, LLC v. Prof’l
Prod. Research Co., 2003 WL 22068573, at *26 (S.D.N.Y. 2003) (“[A]n antitrust complaint
must explain why the market it alleges is the relevant, economically significant product
market. . . . ‘plaintiff’s failure to define its market by reference to the rule of reasonable
interchangeability is, standing alone, valid grounds for dismissal.’”); Intellective, Inc. v.
Mass. Mut. Life Ins. Co., 190 F. Supp. 2d 600, 609–10 (S.D.N.Y. 2002) (“To survive a motion
to dismiss, the alleged product must (1) ‘include all products reasonably interchangeable,
determination of which requires consideration of cross-elasticity of demand,’ and (2) be
plausible.”) (citations omitted); Fresh Made, Inc. v. Lifeway Foods, Inc., 2002-2 Trade Cas.
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be dismissed. This approach is consistent with the Supreme Court’s
caution that in an antitrust case “a district court must retain the power
to insist upon some specificity in pleading before allowing a potentially
massive factual controversy to proceed.” 89
Motions for summary judgment90 based on the plaintiff’s failure to
establish a product market are more common. Of course, even at that
stage, “[t]he evidence of the [plaintiff] is to be believed, and all justifiable
inferences are to be drawn in [the plaintiff’s] favor.” 91 Thus, summary
adjudication is inappropriate where the pertinent economic facts are
disputed.
The reluctance of some courts to grant summary judgment can be
seen in Mutual Pharmaceutical Co. v. Hoechst Marion Roussel, Inc.92 The
plaintiff there alleged monopolization based on manipulation of the
FDA and pled a market of terfenadine, a non-sedating antihistamine
sold under the brand name Seldane. The defendant moved for summary
judgment on the ground that terfenadine competes with other antihistamines. The court found that such drugs treat the same symptoms, have
similar mechanisms of action, are priced similarly, and are aggressively
marketed and promoted against one another. Mutual even conceded
that terfenadine “competes with other non-sedating antihistamines for
some consumers” but asserted a relevant market of “consumers for whom
only terfenadine provides therapeutic relief.” The court agreed that the
plaintiff had produced evidence that terfenadine had “unique therapeutic benefit to some consumers.” Therefore, despite finding other drugs
(CCH) ¶ 73,779 (E.D. Pa. 2002) (“[W]here a ‘complaint fails to allege facts regarding
substitute products, to distinguish among apparently comparable products, or to allege
other pertinent facts relating to cross-elasticity of demand,’ a motion to dismiss may be
properly granted.”); Adidas Am., Inc. v. NCAA, 64 F. Supp. 2d 1097, 1103 (D. Kan. 1999)
(plaintiff “failed to explain or even address why other similar [products] . . . are not
reasonably interchangeable”); Syncsort, Inc. v. Sequential Software, Inc., 50 F. Supp. 2d
318, 325, 327–33 (D.N.J. 1999) (“[a]n antitrust plaintiff must plead facts sufficient to
demonstrate a viable relevant market” and “explain its rationale for ignoring other existing
or potential sources of supply”; plaintiff did not state in its pleading that defendant’s
product was “unique” and “inexplicably ignored the broader . . . market”); B.V. Optische
v. Hologic, Inc., 909 F. Supp. 162, 171–72 (S.D.N.Y. 1995) (rejecting market for chest
equalization radiography based on the failure of the complaint to “refer to any reasonably
interchangeable alternatives” or to “offer an explanation” as to why the product market
was defined “in such narrow terms”).
89 Associated Gen. Contractors of Cal., Inc. v. California State Council of Carpenters,
459 U.S. 519, 528 n.17 (1983).
90 Under the federal rules, summary judgment will be entered “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if
any, show that there is no genuine issue as to any material fact and the moving party is
entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56.
91 Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 456 (1992).
92 1997-2 Trade Cas. (CCH) ¶ 72,001 (E.D. Pa. 1997).
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“largely compete for the same customers,” and without suggesting a price
discrimination theory, which might justify a narrower market in such
circumstances, the court concluded that whether a relevant market for
terfenadine exists “can only be decided on a full record at trial.” 93
Other courts have held, however, that market definition is an appropriate issue for summary judgment where relevant economic facts are
not in dispute or where the antitrust plaintiff with the burden of proof
provides only conclusory support for its alleged market.94 Courts hearing
cases involving pharmaceutical products should follow these precedents.
V. ARE PHARMACEUTICAL MARKETS DIFFERENT?
The first question that one must ask in order to analyze market definition in cases involving pharmaceuticals is whether pharmaceutical
markets are different—that is, do or should different rules apply to
pharmaceutical markets.
The case law offers two different answers. There are at least some
cases that start from the premise that “the pharmaceutical market is
fundamentally different from the market for other products.” 95 On the
other hand, the Supreme Court has long taught that while “[t]he ‘market’
which one must study to determine when a producer has monopoly
power will vary with the part of commerce under consideration, . . .
[t]he tests are constant.” 96 Markets are composed of products that “have
reasonable interchangeability for the purposes for which they are
93 Id. at 80,944–46; see also Bristol-Myers Squibb Co. v. Ben Venue Labs., 90 F. Supp. 2d
540, 547 (D.N.J. 2000) (“The relevant market element of an antitrust claim ‘can be
determined only after a factual inquiry into the commercial realities’ of the market.”).
94 See, e.g., PepsiCo, Inc. v. Coca-Cola Co., 315 F.3d 101, 107 (2d Cir. 2002) (summary
judgment affirmed where there was “no discrete class of customers that has such a strong
preference for [product] that it would not consider substitutes if other factors (especially
price) changed” and there was a “high sensitivity to price change”); Golan v. Pingel Enter.,
Inc., 310 F.3d 1360, 1369 (Fed. Cir. 2002) (antitrust plaintiff “failed to provide sufficient
evidence to establish a relevant market . . . only conclusory allegations”); Levine v. Cent.
Florida Med. Affiliates, 72 F.3d 1538, 1551–53 (11th Cir. 1996) (holding that plaintiff’s
“narrow definition of the relevant product market does not satisfy his burden of presenting
prima facie evidence of the relevant market”); Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d
1421, 1435 (9th Cir. 1995) (If plaintiff’s “evidence cannot sustain a jury verdict on the
issue of market definition, summary judgment is appropriate.”); W. Parcel Express v.
United Parcel Serv. of Am., Inc., 65 F. Supp. 2d 1052, 1057–60 (N.D. Cal. 1998) (plaintiff
failed to produce evidence rebutting defendant’s proof that customers viewed services as
a broad “continuum of . . . options and prices”), aff’d, 190 F.3d 974 (9th Cir. 1999).
95 In re Cardizem CD Antitrust Litig., 200 F.R.D. 297, 311 (E.D. Mich. 2001); accord
Geneva Pharms. Tech. Corp. v. Barr Labs., Inc., 201 F. Supp. 2d 236, 268 (S.D.N.Y. 2002).
96 United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 404 (1956); accord Int’l
Boxing Club of N.Y., Inc. v. United States, 358 U.S. 242, 250 (1959).
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produced—price, use and qualities considered.” 97 Indeed, these principles were recognized by the Third Circuit in one of the few appellate
decisions addressing pharmaceutical market definition, SmithKline Corp.
v. Eli Lilly & Co. 98
Thus, in defining markets—including pharmaceutical markets—
Supreme Court precedent requires the application of common market
definition principles. Thus, one must examine evidence of “reasonable
interchangeability of use” and “cross- elasticity of demand” as well as the
Brown Shoe “practical indicia” or “evidentiary proxies” for direct proof of
substitutability. Those indicia include “industry or public recognition. . . ,
the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and
specialized vendors.” 99 For more than twenty years, practitioners have
also followed the government’s Merger Guidelines, which require one
to examine whether a “small but significant and nontransitory” price
increase would cause enough buyers to shift to other products so that
the increase would be unprofitable for a hypothetical monopolist.100 This
test, called the “SSNIP test,” is now used regularly by the courts, as well
as by the enforcement agencies.101
97
du Pont, 351 U.S. at 404.
575 F.2d 1056, 1062–63 (3d Cir. 1978) (quoting du Pont, 351 U.S. at 404); accord
Geneva Pharms. Tech. Corp. v. Barr Labs., Inc., 201 F. Supp. 2d 236, 267 (S.D.N.Y. 2002).
99 Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962); Rothery Storage & Van
Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 218 (D.C. Cir. 1986). While the Brown Shoe
factors are certainly relevant to market definition, it is important to recognize that some
of those factors are more important than others. Market analysis requires more than
tabulating how many Brown Shoe factors support a proposed definition.
100 Horizontal Merger Guidelines, supra note 75, § 1.11.
101 See United States v. Sungard Data Sys., Inc., 172 F. Supp. 2d 172, 182, 190 (D.D.C.
2001) (“in order to determine the relevant market, the critical question is whether a
hypothetical monopolist could profitably raise price,” noting the Merger Guidelines’ hypothetical monopolist “methodology has been adopted by the courts”); United States v. Visa
USA, Inc., 163 F. Supp. 2d 322, 335 (S.D.N.Y. 2001) (“a market is properly defined when
a hypothetical profit-maximizing firm could charge significantly more than a competitive
price, i.e., without losing too many sales to other products to make its price unprofitable”);
FTC v. Swedish Match, 131 F. Supp. 2d 151, 160 (D.D.C. 2000) (noting “one way to
evaluate price sensitivity is to apply the . . . Horizontal Merger Guidelines’ ‘hypothetical
monopolist’ test”); California v. Sutter Health Sys., 130 F. Supp. 2d 1109, 1120 (N.D. Cal.
2001) (examining whether firms could “profitably impose at least a ‘small but significant
and nontransitory’ increase in price,” noting “[a]lthough the Merger Guidelines are not
binding, courts have often adopted the standards set forth in the Merger Guidelines in
analyzing antitrust issues”); FTC v. Staples, Inc., 970 F. Supp. 1066, 1076 n.8 (D.D.C. 1997)
(adopting 5% test). But see United States v. Engelhard Corp., 970 F. Supp. 1463, 1467–68,
1484 (M.D. Ga.), (noting Merger Guidelines “‘are not binding on the courts,’” and
commenting that the government’s “steadfast application of the [5–10%] test as the
foundation of its market definition analysis resulted in a pervasive failure to acknowledge
relevant information through the evidence of record”), aff’d 126 F.3d 1302 (11th Cir. 1997).
98
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VI. WHO IS THE CUSTOMER?
In order to address whether customers will switch to alternative products, one must first answer the question: “Who is the customer?” 102 Even
on this basic question, the case law provides conflicting answers.
The district court in In re Cardizem CD Antitrust Litigation 103 suggests
focusing on the alternatives available to the patient. According to the
court, once a physician prescribes a particular drug, a “consumer patient”
may only purchase that drug or its FDA-approved AB-rated bioequivalent.
Emphasizing that the relevant market for antitrust purposes is determined by the choices available to “the consumer,” the court noted that
“no . . . patient who entered a U.S. pharmacy with a physician’s prescription for [a particular drug] could obtain any drug other than [that
prescribed].” 104 Complaint counsel in Schering-Plough similarly focus on
the patient, suggesting “the requirement that a physician must approve
switching a prescription . . . prevents significant switching.” 105
Other courts have for many years focused on the options available to
the “prescribing physician.” 106 The administrative law judge in ScheringPlough similarly concluded that the “doctor is the most important in the
chain of those involved in the decision of which [drug] to prescribe”
since the doctor diagnoses and is knowledgeable about what drugs are
available to meet the patient’s needs. He reasoned that “the only logical
place from which to determine the relevant product market is from the
array of therapeutically substitutable choices available to the doctor.” 107
102 See generally W.E. Afield, Note, The New Drug Buyer: The Changing Definition of the
Consumer for Antitrust Enforcement in the Pharmaceutical Industry, 2001 Colum. Bus. L. Rev.
203 (2001); Matt Koehler, Comment, The Importance of Correctly Identifying the Consumer for
an Antitrust Relevant Market Analysis, 67 UMKC L. Rev. 521 (1999).
103 105 F. Supp. 2d 618 (E.D. Mich. 2000), aff’d, 332 F.3d 896 (6th Cir. 2003).
104 Id. at 680–81. This discussion in Cardizem is arguably dictum, as the court held the
agreement at issue between a pioneer manufacturer and prospective generic competitor
not to compete to be per se unlawful, making market definition irrelevant. Id at 676–79,
681 n.33. Moreover, even that court recognized “physician[ ] prescribing practices” are
relevant to defining the relevant market. Id. at 680.
105 Schering-Plough Corp., Upsher-Smith Labs. & Am. Home Prods. Corp., FTC Docket
No. 9297 (Oct. 21, 2002) (Reply Brief of Counsel Supporting the Complaint at 54),
available at http://www.ftc.gov/os/adjpro/d9297/021022ccrb.pdf.
106 See, e.g., SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056, 1063–64 (3d Cir. 1978);
see also United States v. Ciba Geigy Corp., 508 F. Supp. 1118, 1126 (D.N.J. 1976) (“The
process of marketing specialty drugs is largely directed at the prescribing physician. While
the doctor is not the consumer of the product, the patient-consumer is generally legally
incompetent to choose between different medications.”).
107 Schering-Plough Corp., Upsher-Smith Labs. & Am. Home Prods. Corp., FTC Docket
No. 9297 (FTC June 27, 2002) (Initial Decision at 8), available at http://www.ftc.gov/os/
2002/07/scheringinitialdecisionp2.pdf.
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The Third Circuit in Barr Laboratories, Inc. v. Abbott Laboratories,108 in
fact, upheld jury instructions advising that “[i]n the case of prescription
drugs . . . the person who selects the particular product in the first
instance is the prescribing physician.” The trial court there instructed
the jury that it should include in the relevant market drugs reasonably
interchangeable in meeting the needs of patients. Barr argued that the
instructions impermissibly removed from the jury the decision whether
the physician or the pharmacist was the consumer from whose perspective
the relevant market should be determined. The Third Circuit, however,
upheld the instruction as accurately informing the jury that the evidence
established that both physicians and pharmacists play a role in selecting
a particular drug for patients. The court reasoned that the jury was left
free to decide whether the pharmacist, the physician, or both should be
considered the consumer for purposes of defining the relevant market.109
Third-party payers, including insurance companies and managed care
organizations, as well as PBMs acting on their behalf, are increasingly
influencing the choice of pharmaceuticals, as discussed above.110 Therefore, in the future, actions of pharmacists, patients, and third-party payers, as well as physicians who influence selection of particular drugs, will
have to be considered in defining markets.
VII. DOES PRICE MATTER?
A key question in defining markets is the extent to which customers
shift their purchases in response to changes in price. This analysis is
complicated in the case of pharmaceutical markets because—like other
health care markets—they are sometimes said to be unresponsive to
price because of the complex interactions among providers, patients
and payers (who may be the patient, a third-party payer, or a combination
of the two where the patient is required to make co-payments).
Twenty-five years ago, the trial court in SmithKline reasoned that price
has little to do with physician prescribing practices. The court colorfully
stated, “The blunt truth is that most physicians and hospital administrators, in their daily practice, are no closer to the cost-benefit analysis
advocated by [the expert] than are little leaguers equal to the performance of the National League All-Star baseball team.” 111 The court suggested that “[p]erhaps in the long run there will be some massive
receptivity” to cost-conscious drug therapy that will dramatically alter
108
978 F.2d 98 (3d Cir. 1992).
Id. at 115–16.
110 See supra notes 22–23 and accompanying text.
111 SmithKline Corp. v. Eli Lilly & Co., 427 F. Supp. 1089, 1117 (E.D. Pa. 1976).
109
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the prescribing habits of physicians.112 However, the court reasoned it
must define the market on the basis of consumer-physician practices,
“whether their practices are rational, irrational, or unnecessarily
costly.” 113 At about the same time, the FTC seemed to be wishing for
price responsiveness. The Commission in one fully adjudicated case
reasoned, “we cannot assume that all physicians are so fixed in their
prescribing habits that a substantial increase in the existing price differential . . . would never cause some shift . . . [W]e can take notice that some
physicians, even if a minority, are conscious of price differences . . .
we see no reason to believe that price would never enter into some
physicians’ decisions.” 114
Cross-elasticity of demand is often, of course, a critical factor in defining markets. That is, courts regularly consider “the extent to which
consumers will change their consumption of one product in response
to a price change in another.” 115 The relevant inquiry is not whether
products compete against each other in some broad sense, but whether
products are “sufficiently substitutable that they could constrain” each
other’s prices.116 The Supreme Court in du Pont explained that “[i]f a
slight decrease in the price of cellophane causes a considerable number
of customers of other flexible wrappings to switch to cellophane, it would
be an indication that a high cross-elasticity of demand exists between
them; that the products compete in the same market.” 117 Thus, in SmithKline, the Third Circuit emphasized that “cephalosporins and noncephalosporin anti-infectives do not demonstrate significant positive
cross-elasticity of demand,” in concluding that these classes of antibiotics
were in separate antitrust markets.118
VIII. MUST PRODUCTS BE IDENTICAL?
It is well recognized that products need not be identical to be in the
same market. This principle is well established. The Supreme Court’s
du Pont decision teaches simply that it is not “a proper interpretation of
112
Id. at 1118.
Id. ; see also United States v. Ciba Geigy Corp., 508 F. Supp. 1118, 1153 (D. N.J. 1976)
(“When the physician prescribes, he is casting his drug decision in terms of therapeutic
efficiency and not in terms of price if indeed he is aware of price variations among
identical drugs. Perhaps a wide price variation resulting in patient complaints might
influence the physician’s choice, but a small price differential will not. The blunt fact is
that patients do not ‘shop’ for ethical pharmaceuticals.”).
114 Warner-Lambert Co., 87 F.T.C. 812, 877 (1976).
115 Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 469 (1992).
116 Coca-Cola Bottling Co. of the Southwest, 118 F.T.C. 452, 541 (1994).
117 351 U.S. 377, 400 (1956).
118 575 F.2d 1056, 1064 (3d Cir. 1978).
113
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the Sherman Act to require that products be fungible to be considered
in the relevant market.” 119 In any market with some degree of product
differentiation, goods of a single brand will enjoy a certain degree of
uniqueness, but that fact, without more, does not suffice to establish
that the manufacturer enjoys monopoly power.120 As Judge Posner has
noted, “[i]t would not be surprising . . . if every manufacturer of brand
name prescription drugs had some market power.” 121 That, however, is
to say nothing more than every differentiated product has a downwardsloping demand curve.
The Supreme Court recognized in du Pont that “[w]here there are
market alternatives that buyers may readily use for their purposes, illegal
monopoly does not exist merely because the product said to be monopolized differs from others.” 122 Two products or services are reasonably
interchangeable where there is sufficient cross- elasticity of demand.123
The Court there concluded that all flexible wrapping materials belonged
in the same market, notwithstanding cellophane’s physical advantages.
It should also now be beyond question that preferences by some
customers for a particular product is the beginning and not the end of
the analysis. Absent an ability to discriminate against the customers with
the preference, one must consider whether other customers more willing
to switch will protect such infra-marginal customers.
The task in defining the relevant market is to identify products that
compete to some substantial degree. As the Third Circuit put it in SmithKline : “[D]efining a relevant product market is a process of describing
those groups of producers which, because of the similarity of their
products, have the ability—actual or potential—to take significant
amounts of business away from each other.”124
The SmithKline court concluded that while there was some overlap in
therapeutic capability, there were “sufficiently unique features,” including “significant differences” in effectiveness and toxicity or undesirable
side effects between cephalosporins and other antibiotics, to warrant the
characterization of cephalosporins as a discrete market. In reaching that
119
du Pont, 351 U.S. at 394.
SMS Sys. Maint. Serv., Inc., v. Digital Equip. Corp., 188 F.3d 11, 17 (1st Cir. 1999).
121 In re Brand Name Prescription Drugs Antitrust Litig., 186 F.3d 781, 787 (7th Cir. 1999).
122 du Pont, 351 U.S. at 394; accord Geneva Pharms. Tech. Corp. v. Barr Labs., Inc., 201
F. Supp. 2d 236, 267 (S.D.N.Y. 2002).
123 Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962).
124 SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056, 1063 (3d Cir. 1978).
120
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conclusion, the court emphasized that cephalosporins were generally
used to treat specialized (penicillin-allergic) patients.125
IX. MAY A SINGLE DRUG CONSTITUTE
AN ANTITRUST MARKET?
It is also now hornbook law that “relevant markets generally cannot be
limited to a single manufacturer’s products.” 126 Courts are appropriately
skeptical of claims that a manufacturer has “monopolized” its own products. The Supreme Court in du Pont explained:
[O]ne can theorize that we have monopolistic competition in every
nonstandardized commodity with each manufacturer having power over
price and production of his own product. However, this power . . . is
not the power that makes an illegal monopoly.127
The Supreme Court’s decision in Eastman Kodak Co. v. Image Technical
Services, Inc. 128 is sometimes relied upon to support single-firm markets.129
The case can be quoted to the effect that “in some instances one brand
of a product can constitute a separate market.” 130 That statement, however, must be read in the context of the unique claim at issue there.
Kodak involved allegations that the company had tied the sale of service
for Kodak machines to the sale of parts and had monopolized and
attempted to monopolize aftermarket service for Kodak machines. In
effect, the Court said the relevant market might be limited to parts
and service for Kodak machines because once customers bought the
equipment they were locked into buying only Kodak parts and service.
125 See id. at 1064; see also Mutual Pharm. Co. v. Hoechst Marion Roussel, Inc., 1997 WL
805261, at *3 (E.D. Pa. 1997) (noting evidence to establish that a drug was “a unique
chemical compound with particular effectiveness and possibly a distinct set of consumer users”).
126 ABA Section of Antitrust Law, Antitrust Law Developments 566 (5th ed. 2002).
127 du Pont, 351 U.S. at 393; see also Brokerage Concepts, Inc. v. U.S. Healthcare, Inc.,
140 F.3d 494, 513 (3d Cir. 1998) (rejecting plaintiff’s proposed “single brand market
consisting solely of U.S. Healthcare members with prescription drug benefits”); Town
Sound & Custom Tops, Inc. v. Chrysler Motors Corp., 959 F.2d 468, 479–80 (3d Cir. 1992)
(en banc) (refusing to find Chrysler brand formed its own product market); Mathias v.
Daily News, L.P., 152 F. Supp. 2d 465, 482 (S.D.N.Y. 2001) (“[C]ourts have consistently
held that a brand name product cannot define a relevant market.”).
128 504 U.S. 451 (1992)
129 See, e.g., In re Cardizem CD Antitrust Litig., 105 F. Supp. 2d 618, 680 (E.D. Mich.
2000) (“Contrary to Andrx’s argument, a single brand of a product can constitute a
relevant market for antitrust purposes.” (citing Kodak, 504 U.S. at 481–82)); Mutual Pharm.
Co. v. Hoechst Marion Roussel, Inc., 1997 WL 805261, at *3 (E.D. Pa. 1997) (“The Supreme
Court has held that in some instances a single brand of a product may constitute a relevant
market or . . . submarket.”).
130 Kodak, 504 U.S. at 482. See, e.g., Knoll Pharms. Co. v. Teva Pharms. USA, Inc., 2001
WL 1001117 (N.D. Ill. 2001).
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The Court held only that a proposed market in a unique and noninterchangeable derivative product or service cannot be defeated on
summary judgment by the assertion that the primary market is competitive, where there were allegations that information and switching costs
limited cross-elasticity in the aftermarket. Kodak is inapposite where there
is no allegation of “lock-in” in an aftermarket.131
It should not be surprising, therefore, that in United States v. Ciba Geigy
Corp.,132 the court rejected a narrow hydrochlorothiazide market and
instead found a market of all products indicated for the treatment of
hypertension.133 The court noted that “different patients react in their
own idiosyncratic ways to different drugs or to different combinations
of drugs” 134 and patients typically were given various dosages and combinations to obtain optimum control of the disease.135 The court concluded
that the various medicines were, “from a medical point of view, reasonably
interchangeable” and that interchangeability “translated into commercial competition.” 136
Despite the law’s aversion to single firm markets, the FTC appears to
start with a presumption of narrow markets. FTC staff members summarized the Commission’s approach as follows:
In determining a relevant market, the Commission usually will start
with a presumption that the market is limited to a specific therapeutic
compound and then broaden the market as evidence is available that
physicians and hospitals use other compounds as substitutes. If sufficient
substitution occurs, the market may be expanded to a whole class of
drugs used to treat a particular condition or illness.137
While this approach sounds much like the Merger Guidelines, the Guidelines in fact examine whether the threat of substitution in response to
131 See Hack v. President and Fellows of Yale College, 237 F.3d 81, 86–87 (2d Cir. 2000)
(noting “‘[c]ourts have consistently refused to consider one brand to be a relevant market
of its own when the brand competes with other potential substitutes,’” and Kodak “concerns
are not present” where plaintiffs had “no ‘lock-in’ costs”); Brokerage Concepts, Inc. v.
U.S. Healthcare, Inc., 140 F.3d 494, 515 (3d Cir. 1998) (distinguishing Kodak where
plaintiff did not identify high “switching costs”).
132 508 F. Supp. 1118 (D.N.J. 1976).
133 Id. at 1155.
134 Id. at 1154 n.28.
135 Id. at 1153–55.
136 Id. at 1154.
137 David A. Balto & James F. Mongoven, Antitrust Enforcement in Pharmaceutical Industry
Mergers, 54 Food & Drug L. J. 255, 259 (1999); see also Robert E. Bloch et al., Product
Market Definition in Pharmaceutical Mergers, Antitrust Rep., Sept. 1997, at 17 (“[T]he FTC
likely starts with the presumption that the relevant product market is limited to a specific
compound or means of interaction and broadens the market only if it has specific evidence
of substitutability, such as consumer switching.”).
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a price increase would restrain a hypothetical monopolist. Evidence that
sellers base business decisions on the prospect of substitution as well as
evidence buyers have considered shifting purchases is relevant as well
as evidence buyers have shifted purchases in response to relative changes
in price.138
X. DO GENERICS COMPRISE A DISTINCT
PRODUCT MARKET?
Another important question that may have implications beyond the
pharmaceutical industry is whether generics should be treated as forming
a distinct market.
In a 1999 article, two FTC officials explained the Commission’s
approach to this question. They advised that “FTC investigations typically
have found that because of the significant price difference between
generic and brand name versions, an increase in the price of the brand
name version does not lead consumers to switch to the generic version,
and vice versa.” 139 Thus, they conclude that brand-name and generic
drugs “typically are not in the same product market.” 140 The FTC’s market
definition allegations, however, are not consistent, sometimes alleging
“generic only” markets, sometimes alleging “branded and generic” markets, and sometimes alleging “branded only” markets, as discussed
above.141
The court cases that have addressed this issue directly, In re Cardizem
CD Antitrust Litigation 142 and Geneva Pharmaceuticals Technology Corp. v.
Barr Laboratories, Inc.,143 start from the premise that generic drugs are
essentially fungible and interchangeable with their branded bioequivalent. That is, there is a “government-assured complete interchangeability,” 144 so that drugs and their AB-rated generics are “identical in all
material respects.” 145 In order to obtain FDA approval, generic manufacturers must demonstrate that their drugs are bioequivalent to the pioneer
drug and have the same active ingredient, conditions of use, route of
138
Horizontal Merger Guidelines, supra note 75, § 1.1.
Balto & Mongoven, supra note 137, at 259.
140 Id.
141 See supra notes 55–68 and accompanying text.
142 200 F.R.D. 297 (E.D. Mich. 2001).
143 201 F. Supp. 2d 236 (S.D.N.Y. 2002).
144 In re Cardizem CD Antitrust Litig., 200 F.R.D. 297, 311 (E.D. Mich. 2001); see also
Geneva Pharms. Tech. Corp. v. Barr Labs., Inc., 201 F. Supp. 2d 236, 268 (S.D.N.Y. 2002)
(quoting In re Cardizem CD Antitrust Litig.).
145 In re Cardizem CD Antitrust Litig., 200 F.R.D. at 310; see also Geneva Pharms. Tech. Corp.,
201 F. Supp. 2d at 267 (quoting In re Cardizem CD Antitrust Litig.).
139
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administration, dosage form, strength, and labeling.146 By law, generic
drugs are sold with the same package insert as the brand-name drug
and are subject to the same prescribing indications and warnings.147 They
may even be able to use the same tablet colors.148 As a result, courts have
held that “AB-rated generics are freely substitutable and interchangeable
with their brand name counterparts.” 149 Indeed, in many states, pharmacies are allowed, and in some states are required, to substitute generic
versions of brand-name drugs absent a contrary instruction from the
physician or patient.150 Thus, by definition, a drug and its generic bioequivalents are “two interchangeable versions . . . of the same drug product.” 151 Courts that have addressed the issue have reasoned that since
“[a]ntitrust law requires only that the two products at issue be close
substitutes for each other,” a drug and its generic bioequivalents necessarily “meet this requirement.” 152
Courts have further reasoned that “[m]arket behavior, which shows
generics capturing a significant percentage of the branded drug market
soon after they are introduced . . . supports the conclusion that the brand
and generic drugs are essentially fungible and interchangeable.” 153 They
have also noted that brand-name and generic drugs are sold to the same
customers—wholesalers, hospitals, retail pharmacy chains, mail order
houses, clinics, and managed care organizations.154 The fact that generics
are typically priced at a discount compared to pioneer drugs in order
146
Geneva Pharms. Tech. Corp., 201 F. Supp. 2d at 268.
Id.
148 See Qualitex Co. v. Jacobson Prods. Co., 514 U.S. 159, 169 (1995) (commenting that
competitors “might be free to copy the color of a medical pill where that color serves to
identify the kind of medicine . . . in addition to its source” (citing Inwood Labs., Inc. v.
Ives Labs., Inc., 456 U.S. 844, 853, 858 n.20 (1982))); Shire US Inc. v. Barr Labs., Inc.,
329 F.3d 348, 355, 358 (3d Cir. 2003) (affirming denial of injunction to block generic
drugs with same color scheme as pioneer since court found similarity in appearance
enhances patient safety by facilitating compliance with dosing regimens and “promoting
psychological acceptance” of generic drugs).
149 In re Cardizem CD Antitrust Litig., 200 F.R.D. at 310–11; see also Geneva Pharms. Tech.
Corp., 201 F. Supp. 2d at 267–68 (quoting In re Cardizem CD Antitrust Litig.).
150 See Geneva Pharms. Tech. Corp., 201 F. Supp. 2d at 268 (discussing generic substitution);
see also Inwood Labs., Inc. v. Ives Labs. Inc., 456 U.S. 844, 847 n.4 (1982) (“Since the early
1970’s, most States have enacted laws allowing pharmacists to substitute generic drugs for
brand name drugs under certain conditions.”).
151 In re Cardizem CD Antitrust Litig., 200 F.R.D. at 311; see also Geneva Pharms. Tech. Corp.,
201 F. Supp. 2d at 268 (quoting In re Cardizem CD Antitrust Litig.).
152 In re Cardizem CD Antitrust Litig., 200 F.R.D. at 311; see also Geneva Pharms. Tech. Corp.,
201 F. Supp. 2d at 268 (quoting In re Cardizem CD Antitrust Litig.).
153 In re Cardizem CD Antitrust Litig., 200 F.R.D. at 311; see also Geneva Pharms. Tech. Corp.,
201 F. Supp. 2d at 268 (quoting In re Cardizem CD Antitrust Litig.).
154 Geneva Pharms. Tech. Corp., 201 F. Supp. 2d at 268.
147
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to convince customers to switch to the generic has also been used to
support including both in the same market.155
In cases involving other products, courts have sometimes considered
price differences between products in finding products to be in different
markets,156 but the Supreme Court has made clear that the mere fact of
price differences is not “determinative.” 157 Thus, the fact that generic
drugs are typically priced lower than branded drugs should not be sufficient to define a separate market. Indeed, in Nifty Foods Corp. v. Great
Atlantic & Pacific Tea Co., Inc.,158 the Second Circuit determined that
national and private label waffles were in the same market despite differences in price.159 Under the Merger Guidelines or a cross- elasticity test,
the proper focus should be on responsiveness to price changes rather
than absolute price differences.160
In Warner-Lambert Co.,161 a pharmaceutical merger case litigated in the
1970s, the FTC even rejected the argument that branded and unbranded
thyroid drugs should be in separate product markets where there was a
lack of price elasticity at existing price levels, reasoning that an increase
in the existing price differential may cause a shift in prescribing habits.162
155
See id. at 269.
See, e.g., United States v. Aluminum Co. of Am., 377 U.S. 271, 276–77 (1964) (emphasizing price differential between copper and aluminum); U.S. v. Archer-Daniel-Midland
Co., 866 F.2d 242, 246 (8th Cir. 1988) (finding sugar prices artificially inflated by government price supports such that high fructose corn syrup prices could increase even though
products were functionally interchangeable).
157 United States v. Continental Can Co., 378 U.S. 441, 455 (1964); see also United States
v. E.I. du Pont de Nemours & Co., 351 U.S. 371, 401 (1956) (finding cellophane was in
the same market as aluminum foil, waxed paper, and other flexible packaging materials
despite costing two to three times more).
158 614 F.2d 832 (2d Cir. 1980).
159 Id. at 840–41. The Sixth Circuit has similarly held that generic heating, ventilating,
and air conditioning parts are in the same market as branded parts, Tarrant Serv. Agency,
Inc. v. Am. Standard, Inc., 12 F.3d 609, 614–15 (6th Cir. 1993), and the Ninth Circuit
found that branded and private-label bread are in the same market, William Inglis & Sons
Baking Co. v. Cont’l Baking Co., 942 F.2d 1332, 1346 (9th Cir. 1991) (Noonan, J., concurring and dissenting), modified, 970 F.2d 639 (1992), amended by 981 F.2d 1023 (1992). On
the other hand, in one case, the Eleventh Circuit concluded as a matter of law that the
relevant market was lightweight generic anchors despite functional interchangeability of
Danforth brand anchors finding a lack of significant cross-elasticity and given the “unusual
circumstance of severe price discrimination against a distinct group of consumers based
solely on brand preference.” U.S. Anchor Mfg., Inc. v. Rule Indus., Inc., 7 F.3d 986, 996–97
(11th Cir. 1993).
160 In Nifty Foods, the plaintiff argued that a private-label market was supported by a lack
of sensitivity of demand for brand-name waffles to private-label price changes. 614 F.2d
at 840 n.11. The court, however, found the evidence lacking. Id.
161 87 F.T.C. 812 (1976).
162 Id. at 877.
156
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On the other hand, in adjudicating a merger between competing soft
drink bottlers in 1994, the FTC rejected an “all soft drink” market and
excluded private-label soft drinks from the relevant market.163 After a
detailed review of the evidence, the agency there concluded that private
label soft drinks did not constrain branded pricing, emphasizing, for
example, evidence that private-label soft drinks were not available in
certain channels and that branded bottlers did not consider the price
of private-label soft drinks in setting prices.164 The Commission explained
that branded soft drinks may constrain nonbranded soft drinks, but
nonbranded soft drinks did not constrain branded soft drinks.165
The fact that pharmaceutical manufacturers may raise the price of
the pioneer drug in response to introduction of low-priced generics has
not led to different conclusions. At least one court has reasoned that
price increases for branded drugs in response to generic entry demonstrate that “[c]learly there is some interrelationship” between the generic
and branded drugs.166 Price movements over time are, of course, relevant
to market determinations but can be difficult to interpret. With the
burden of establishing market definition on the plaintiff, it is particularly
important that the plaintiff present expert evidence to establish separate
markets where branded and generic drugs are interchangeable.167
XI. DOES THE “CELLOPHANE FALLACY” REQUIRE
A DIFFERENT APPROACH?
A. The Theory
There has been substantial academic criticism that the Supreme
Court’s United States v. E.I. duPont de Nemours & Co. 168 decision falls into
what has become known as the “Cellophane fallacy” or “Cellophane trap.”
Professor Herbert Hovenkamp, for example, advises that “the court’s
definition of the relevant market was probably wrong.” 169 That is because
163 Coca-Cola Bottling Co. of the Southwest, 118 F.T.C. 452, 574 (1994); see also CocaCola Co., 117 F.T.C. 795, 931–40 (1994) (finding branded soft drink concentrate, and
not all soft drink concentrate, to be the relevant market for assessing Coca-Cola’s proposed
acquisition of Dr Pepper).
164 Id. at 553–74.
165 Id. at 564.
166 Geneva Pharms. Tech. Corp. v. Barr Labs., Inc., 201 F. Supp. 2d 236, 270
(S.D.N.Y. 2002).
167 See id. (emphasizing that the plaintiff “failed to conduct a formal test regarding the
degree of purported differential impact” on price of a competitor’s entry).
168 351 U.S. 377 (1956).
169 Herbert Hovenkamp, Federal Antitrust Policy § 3.4b, at 104 (2d ed. 1999); see
also Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization 614
(3d ed. 1999) (“[I]t was an error to include other wrapping materials in the market
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671
every firm, whether or not a monopolist, will price at a level where
further price increases will cause it to lose so many customers that the
price increase is unprofitable. Thus, the existence of a high crosselasticity may be indicative that a firm is currently exercising market
power, rather than that it lacks market power. As explained by the
Second Circuit:
The economic error allegedly committed by the Court in Cellophane
was in failing to recognize that a high cross-elasticity of demand may,
in some cases, be the product of monopoly power rather than a belief
on the part of consumers that the products are good substitutes for
one another. . . . “At a high enough price, even poor substitutes look
good to the consumer.” That is, in the Cellophane case, the high crosselasticity between cellophane and wax paper simply may have been a
function of the high price that du Pont demanded for cellophane.170
The Supreme Court in du Pont failed to recognize that a monopolist
that has reduced output and raised price may price its products so that
even inferior substitutes begin to look good to consumers, and may
therefore face highly elastic demand.
The difficulty is that determining whether or not the Cellophane fallacy
applies is not easy. Some commentators have suggested looking at profitability data to determine whether a firm is earning monopoly profits.171
There is ample literature, however, which demonstrates that standard
accounting data used to report corporate profits is an unreliable indicator
of true economic profits.172 Among other problems, defining markets
would require one to examine product-line, rather than firm, profitability. In addition, firms with monopoly power may become inefficient,
with high costs rather than high profits.
definition because they did not prevent the exercise of market power and constrain the
price of cellophane to competitive levels.”); Richard A. Posner, Antitrust Law 150–51
(2d ed. 2001) (criticizing the Court’s market definition in du Pont). Hovenkamp criticizes
the DOJ and FTC Horizontal Merger Guidelines for “commit[ing] a version of the Cellophane fallacy by defining markets in terms of current prices.” Hovenkamp, supra, § 3.4b,
at 105. The 1992 Horizontal Merger Guidelines in fact state that the government will base
its analysis on “prevailing prices of the products of the merging firms and possible substitutes for such products, unless premerger circumstances are strongly suggestive of coordinated interaction, in which case the [government] will use a price more reflective of the
competitive price.” Horizontal Merger Guidelines, supra note 75, § 1.11.
170 United States v. Eastman Kodak Co., 63 F.3d 95, 105 (2d Cir. 1995) (citations omitted).
171 See Robert Pitofsky, New Definitions of Relevant Market and the Assault on Antitrust, 90
Colum. L. Rev. 1805, 1818, 1823–24, 1847 (1990).
172 See, e.g., George J. Benston, Accounting Numbers and Economic Values, 27 Antitrust
Bull. 161 (1982) (discussing limitations of accounting data for answering economic
questions); Franklin M. Fisher & John J. McGowan, On the Misuse of Accounting Rates of
Return to Infer Monopoly Profits, 73 Am. Econ. Rev. 82 (1983) (discussing critical difference
between accounting profits and economic profits).
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Hovenkamp advises that in deciding whether a group of products
belong in the same market, one should consider looking for cost shocks
that affect the alleged monopolist but not other firms arguably in the
same market.173 A “true competitor, who faces a horizontal demand
curve, would be unable to respond to a firm specific cost increase by
raising price,” while “a firm with a downward sloping demand curve
would calculate a new price that equated with its marginal cost and
marginal revenues.” 174 Hovenkamp also suggests looking at past price
movements and changes in output of allegedly competitive products.175
Carlton and Perloff similarly advise that “a reasonable first step in defining
economic markets is to examine the price correlations (a statistical measure of how closely prices move together) among different products.” 176
B. The Cellophane Fallacy in the Courts
Despite its academic recognition, only a handful of antitrust cases
have ever discussed or even mentioned the Cellophane fallacy. The
Supreme Court in Eastman Kodak Co. v. Image Technical Services, Inc. 177
recognized the theory, noting that the existence of significant substitution at current prices does not disprove the existence of market power
because sellers may already be charging a monopoly price.178 But the
Court did not suggest any test to determine whether the fallacy applies.
Lower court cases that do discuss the Cellophane fallacy are skeptical
of applying it to establish that a firm does have market power without
corroborating evidence. The Second Circuit directly addressed the fallacy
in a 1995 decision, United States v. Eastman Kodak Co.179 The court there
affirmed a trial court decision to terminate two old consent decrees,
concluding that Kodak no longer possessed market power over the sale
of film.180 The district court found that the relevant geographic market
for film is worldwide while the government asserted Kodak still had
power in a U.S. film market.181 According to the government, Kodak
already was pricing its products at monopolistic levels and therefore
173
Hovenkamp, supra note 169, § 3.4c, at 106.
Id.
175 Id. § 3.4c, at 106–07.
176 Carlton & Perloff, supra note 169, at 614.
177 504 U.S. 451 (1992).
178 See id. at 471 (“‘[T]he existence of significant substitution in the event of further price
increases or even at the current price does not tell us whether the defendant already exercises
significant market power.’” (quoting Phillip Areeda & Louis Kaplow, Antitrust Analysis ¶ 340(b) (4th ed. 1988))).
179 63 F.3d 95 (2d Cir. 1995).
180 Id. at 109.
181 Id. at 102–03.
174
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consumers’ willingness to switch to other brands “actually demonstrates
that Kodak possesses market power.” 182 The appellate court rejected the
argument that the district court “fell victim to the Cellophane fallacy.” 183
The court explained that “the government’s contention assumes that
Kodak film is priced well above competitive levels” and reasoned that that
view was “simply . . . conjecture” and “not sufficient to call in question” the
market definition.184 The Second Circuit noted in particular that the
case before it did not involve highly differentiated products like cellophane and wax paper but rather products of comparable quality, suggesting that the Cellophane fallacy is inapposite where products are
“excellent substitute[s].” 185
Similarly, in Pepsico, Inc. v. Coca- Cola Co.,186 Pepsi “warn[ed] of the
so-called Cellophane fallacy” and argued that Coca-Cola’s pricing to
foodservice distributors was “already at a supracompetitive level.” 187 Pepsi
alleged Coca- Cola monopolized the market for fountain-dispensed soft
drinks distributed through independent foodservice distributors.188 The
court noted, however, that there was no pricing evidence and no evidence of Coca- Cola’s margins in the record, while there was evidence
of discounting by Coca-Cola.189 Because Pepsi’s market definition could
not be sustained, its monopolization and attempted monopolization
claims failed.190
Where a plaintiff merely presumes the existence of the Cellophane
fallacy, rather than proving its applicability to the case at hand, courts
should continue to reject the argument.
C. Market Power and Intellectual Property
A further complication arises in measuring market power where there
is intellectual property.
It is well recognized by now, despite some contrary Supreme Court
authority, that market power cannot be presumed from the existence
182
Id. at 105.
Id.
184 Id. at 105, 107, 108.
185 See id. at 104–05.
186 114 F. Supp. 2d 243 (S.D.N.Y. 2000), aff’d, 315 F.3d 101 (2d Cir. 2002).
187 Id. at 257.
188 Id. at 245.
189 Id. at 258.
190 Id. at 259; see also Aegerter v. City of Delafield, 174 F.3d 886, 892 (7th Cir. 1999)
(noting the “‘cellophane fallacy’”); Santa Cruz Med. Clinic v. Dominican Santa Cruz Hosp.,
1995-2 Trade Cas. (CCH) ¶ 71,254 at 76,096–97 (N.D. Cal. Sept. 7, 1995) (finding that a
genuine issue of material fact as to evidence of supracompetitive pricing precludes summary judgment as to the definition of the relevant market where Cellophane fallacy asserted).
183
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of a patent. Like real property, intellectual property gives one only the
right to exclude, not a monopoly. Whether or not a patent confers
monopoly power depends on the availability of substitutes.191
For many goods protected by intellectual property, the most significant
costs are fixed sunk costs incurred in developing the intellectual property
that do not vary with the number of goods produced. Marginal costs
are often small relative to the costs of initial development. Professors
Hovenkamp, Lemley, and Janis offer an example of a copyright-protected
movie, costing $150 million to produce, which can be duplicated onto
videotape for $2 per copy but sells for $20 per copy.192 They explain
that, at a price of $2, the movie “would lose money and a firm that
had contemplated such a price would never have made [it] in the first
place.” 193 Therefore, they conclude that “price-cost relationships on a
particular patent or copyright do not provide useful evidence about
market power.” 194 Accordingly, they argue, the “technically correct way”
to measure whether intellectual property produces returns above cost is
to compare development costs with profits generated during a product’s
marketable life.195 In a high-risk enterprise, moreover, one must take
into account failed products as well as those that are successful.196 Thus,
focusing on relationships between price and short-run marginal cost
cannot be said to provide useful evidence of market power.197
191 See Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 37 n.7 (1984) (O’Connor,
J., concurring) (“[A] patent holder has no market power in any relevant sense if there
are close substitutes for the patented product.”); In re Indep. Serv. Orgs. Antitrust Litig.,
203 F.3d 1322, 1325 (Fed. Cir. 2000) (“A patent alone does not demonstrate market
power.”); C.R. Bard, Inc. v. M3 Systems, Inc., 157 F.3d 1340, 1368 (Fed. Cir. 1998) (“It is
not presumed that the patent-based right to exclude necessarily establishes market power
in antitrust terms.”); Schlafly v. Caro-Kann Corp., 1998-1 Trade Cas. (CCH) ¶ 72,138, at
81,903 (Fed. Cir. Apr. 29, 1998) (“Mere possession of a patent, or a family of patents,
does not establish a presumption of antitrust market power.”); Abbott Labs. v. Brennan, 952
F.2d 1346, 1354–55 (Fed. Cir. 1991) (“A patent does not of itself establish a presumption of
market power in the antitrust sense.”); CCPI, Inc. v. Am. Premier, Inc., 967 F. Supp. 813,
817–18 (D. Del. 1997) (“‘[M]erely obtaining a patent for a product does not create a
product market for antitrust purposes.’”); see also U.S. Dep’t of Justice & Federal Trade
Comm’n, Antitrust Guidelines for the Licensing of Intellectual Property §§ 2.1, 2.2, 5.3
(1995) (“The Agencies will not presume that a patent, copyright, or trade secret necessarily
confers market power upon its owner.”), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,132.
But see Jefferson Parish, 466 U.S. at 16–17 (“[I]f the Government has granted the seller a
patent or similar monopoly over a product, it is fair to presume that the inability to buy
the product elsewhere gives the seller market power.”).
192 Herbert Hovenkamp, Mark D. Janis & Mark A. Lemley, IP and Antitrust § 4.1c,
at 4–6 (2002).
193 Id.
194 Id. § 4.1c, at 4–7.
195 Id. § 4.1c, at 4–6.
196 Id. § 4.1c, at 4–7.
197 Id.
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D. Application to the Pharmaceutical Industry
These problems are particularly acute in the pharmaceutical industry
which, as discussed above, faces huge research and development costs
on drugs that are never introduced as well as on those that become
successful, all of which must be recovered over the life of those drugs
that are successful.198 Unlike many industries, for which patents are not
an important incentive for innovation, many pharmaceuticals would
not be developed but for patent protection. If firms price at short-run
marginal cost, one would not expect new research and development
leading to the introduction of new drugs.
Notably, the FTC staff has explicitly invoked the Cellophane fallacy in
its challenge to the intellectual property litigation settlement agreements
in Schering-Plough.199 Complaint counsel rely on the economic literature
that generic drugs typically enter the market at a discount and pioneer
drugs lose sales in response to such entry to support their theory that
the branded drug had monopoly power.200 Under mandatory generic
substitution laws, however, pharmacists often must dispense AB-rated
generics, so it is not surprising that pioneer drugs lose sales and generics
gain sales. That phenomenon takes place, however, even where pioneer
drugs face good substitutes, and it seems particularly inappropriate to
assume the Cellophane fallacy applies where drugs are good therapeutic
substitutes. In fact, the same studies show that the price of the brandname drug typically rises after generic entry.201 At the same time, the
manufacturer of the brand-name drug typically reduces its promotional
efforts dramatically.202 The end result at times may be that output falls
rather than rises with generic entry, suggesting a higher average “qualityadjusted” price rather than a price decrease resulting from generic entry.
198
See supra notes 14–18 and accompanying text.
Schering-Plough Corp., Upsher-Smith Labs. & Am. Home Prods. Corp., FTC Docket
No. 9297 (Oct. 24, 2002) (Reply Brief of Counsel Supporting the Complaint at 56),
available at http://www.ftc.gov/os/adjpro/d9297/021022ccrb.pdf.
200 Schering-Plough Corp., Upsher-Smith Labs. & Am. Home Prods. Corp., FTC Docket
No. 9297 (Aug. 9, 2002) (Appeal Brief of Counsel Supporting the Complaint at 48),
available at http://www.ftc.gov/os/2002/08/scheringtrialbrief.pdf.
201 See Congressional Budget Office, supra note 17, at xiii; see generally Richard E.
Caves et al., Patent Expiration, Entry, and Competition in the U.S. Pharmaceutical Industry, in
Brookings Papers on Economic Activity: Microeconomics 1991, at 1 (1991) (analyzing competition surrounding patent expiration and generic entry in pharmaceuticals
markets); Frank & Salkever, supra note 37 (discussing model of price response for generic
drug entry into brand-name and generic drug market); Henry Grabowski & John Vernon,
Longer Patents for Increased Generic Competition: The Waxman-Hatch Act After One Decade, 10
PharmacoEcon. Supp. 2, at 110 (1996) (reporting on investigation into effects of WaxmanHatch Act on generic and brand-name drug prices); Henry Grabowski & John Vernon,
Brand Loyalty, Entry and Price Competition in Pharmaceuticals After the 1984 Drug Act, 35 J.L.
& Econ. 331 (1992) (same).
202 See Frank & Salkever, supra note 37, at 82.
199
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Plaintiffs in pharmaceutical cases cannot simply assume the existence
of market power from the existence of patents, from pricing above shortrun marginal cost, from generic entry at prices below the price of a
branded drug, or from reduced output of the branded drug upon generic
entry. A plaintiff’s proposed narrow market definition that does not
include therapeutic substitutes, like that in Geneva Pharmaceuticals Technology Corp. v. Barr Laboratories, Inc., should be rejected unless the plaintiff
presents a “formal test” showing the various drugs’ impact on the price
and quantity of sales.203
XII. CONCLUSION
Market definition in the pharmaceutical industry should not be different from that in other industries. The same rules apply. But they must
be applied with sensitivity to the industry’s characteristics. It seems most
appropriate for the government and courts to begin product market
analyses in the industry by focusing on the therapeutic indications, both
approved and off-label, for the drugs at issue in any matter. That is, one
must consider whether drugs may be substitutes for the treatment of a
particular disease or condition, taking into account the drugs’ mechanisms of action, therapeutic profiles, side effects, and methods of administration. The analysis must consider the impact of doctors, pharmacists,
patients, and third-party payers on the use of drugs, to analyze the
likelihood of switching in response to relative price increases, and the
impact of such switching on profitability. While price differences may
be considered, one must analyze price movements over time and the
impact of such movements on the quantities of drugs sold. Evidence
from knowledgeable witnesses and company documents, as well as data,
will be relevant as in any other industry. Presumptions based on the
existence of patents or experience with other drugs should not substitute
for careful analysis of the facts.
203 See Geneva Pharms. Tech. Corp. v. Barr Labs., Inc., 201 F. Supp. 2d 236, 270 (S.D.N.Y.
2002); see also Bailey v. Allgas, Inc., 284 F.3d 1237, 1247 (11th Cir. 2002) (rejecting plaintiff’s
proposed market definition where its expert failed to determine cross-elasticity of demand
among possible substitutes); Alcatel USA, Inc. v. DGI Techs., Inc., 166 F.3d 772, 783
(5th Cir. 1999) (rejecting plaintiff’s proposed market definition where plaintiff “never
compared [defendant’s] prices to its competitors’ prices”); Lantec, Inc. v. Novell, Inc.,
146 F. Supp. 2d 1140, 1147–49 (D. Utah 2001) (rejecting plaintiff’s proposed market
definition where there was “no evidence of price sensitivity”), aff’d, 306 F.3d 1003 (10th
Cir. 2002).
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