Use and limits of market
definition
11 November 2015
St. Martin’s conference, Brno
Alexis Walckiers
Belgian Competition Authority and ECARES-Université libre de Bruxelles
Introduction
• market definition is a tool to define the boundaries of
competition
o establish competitive constraints that undertakings face
o alternative sources of supply for the customers of the undertakings
involved
o product dimension
o geographic dimension
• in practice, defining a market makes it possible to calculate
market shares, which conveys information on market
conduct and performance
o existence, creation or strengthening of market power
o but to what extent?
o In how far does the structure of a market determines a firm’s conduct
on that market and the performance of the market?
Structure-conduct-performance benchmark
• identifying competitors that are capable of preventing firms
from behaving independently is crucial
o to assess whether a company is dominant
o which is necessary to find an abuse
o to analyse whether and how a notified merger affects consumers
o if the combined market share of the notifying parties post-merger is high, they will be
able and have an incentive to raise prices
o if there are few competitors left on the market, their ability to coordinate their
conduct rises
• according to the Structure-conduct-performance paradigm
o performance follows from structure
o there is an inverse relationship between market share and degree of
market competition
o in a Cournot model the price cost margin of a firm raises when its market share
increases
o in a Cournot model, welfare decreases when market concentration increases (HHI)
Limits of structure-conduct-performance
• difficulty to delineate the market
o some markets are easier to define than others
o in differentiated markets, some products are closer substitutes than
others: not black and white
o in some markets, price discrimination is crucial, and different
categories of consumers end up paying significantly different prices
o some goods must be used with a secondary product that is a
complement (aftermarkets); are these separate markets
o two-sided markets are difficult to define, because the indirect effect
of the other side can be significant
o defining the market for an innovative good can be difficult, because
the good may be unique in the eyes of consumers, or a complement
and a substitute of alternatives
o in cluster markets, companies provide a range of goods or services;
purchasing from a single provider brings transaction
complementarities
Limits of structure-conduct-performance
• are market shares a good proxy for competitive
constraints?
o in differentiated markets, competitive constraints relate to intensity
of competition and substitution between products more than to
market shares
o in bidding markets, closeness of competition between bidders is more
informative than market shares
o in aftermarkets, a high market share in the secondary product may
not mean that competitive constraints are inexistent ); ex post,
consumers can be locked in, but ex ante they may be able to choose
between a number of options
o platforms with significant market shares on one side can experience
significant competitive constraints from the other side
o in some innovation-driven markets, firms compete for the market,
and not necessarily in the market
Policy implications
• how much resources should be invested in defining
markets?
o market definition is and will remain a crucial tool for competition
investigations
o in some markets (eg, those discussed above), it is less important to
carefully define markets
o better to directly focus on competitive constraints, and on the likely
effects of the merger, or the abuse
• some competition authorities downplay the role of market
definition in merger assessment
o eg. US horizontal merger guidelines (2010), UK merger assessment
guidelines
o … and highlight other techniques to more directly assess the effect of
the merger (UPP, GUPPI, merger simulation, etc.)