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Antitrust Market Definition: an Integrated Approach

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Antitrust Market Definition: an Integrated Approach California Law Review VOL. 72 JANUARY 1984 No. 1 Copyright 0 1983 by California Law Review, Inc. Antitrust Market Definition: An Integrated Approach Robert G. Harris and Thomas M. Jorde TABLE OF CONTENTS PAGE I. INTRODUCTION ............................................ 3 A. The Importance of Market Definition in Antitrust ...... 3 B. An IntegratedApproach io Market Definition .......... .6 II. "PROTECTED INTEREST" ORIENTATION IN MARKET DEFINITION .............................................. 8 A. Public Policy Criteriaand Antitrust Objectives ......... 9 1. Fairness........................................... 9 2 Equity ............................................ 10 3. Efficiency ......................................... 11 B. Benefts of a Fairnessand Equity-BasedApproach ..... 11 C. Protection of Buyer and Seller Interests ............... 14 1. Protection of Buyer Interests ...................... 14 2. Protection of Seller Interests ....................... 16 D. A "ProtectedInterest" Orientationin Market Defnition ............................................. 18 III. MARKET TRANSACTIONAL ORIENTATION IN MARKET D EFINITION ............................................... 20 A. The InstitutionalNature of Markets ................... 22 1. Types of Markets ................................. 22 2 Diferences Between Auction and Nonauction M arkets ........................................... 24 a. The Nature of the Exchange ................... 24 CALIFORVIA LAW PEVIEWV [Vol. 72:1 b. Relations Between Buyers and Sellers .......... 24 c. Transaction Costs............... ......... 25 . Buyers ..................................... 25 &. Sellers ..................................... 25 d Interconnectedness ............................. 26 B. Behavior of Buyers and Sellers in Markets ............ 27 1. The "Satisficing" Model ........................... 28 2 Market Defnition, Satiqfcing, and the Transaction Problem .......................................... 29 C. Use of TransactionalOrientation in Market D o nition ............................................. 31 IV. BURDEN-SHIFTING ORIENTATION IN MARKET D EFIN ITION ............................................... 34 A. The Stages of Burden Shifting ........................ 35 B. Just4cationfor Burden Shifting ....................... 37 1. Policies in Support of Burden Shifting ............. 37 2 Cases Employing the Burden-ShiftingApproach .... 39 C The Government as Plaintiff........................... 41 V. IMPLEMENTATION OF THE INTEGRATED APPROACH TO MARKET DEFINITION ..................................... 42 A. The Plaint~i(sPrima Facie Market Defnition ......... 42 L Identfcation of ProtectedInterests ................ 43 2 Identftation of RelatedMarkets and Market Particpants....................................... 45 3. Definition of a Relevant Product or Geographic M arket ........................................... 46 a. The Product Market ........................... 46 b. The Geographic Market ........................ 47 4. Calculation of Relevant Market Share ............. 51 B. The Defendant's Rebuttal Burden ..................... 53 1. Rebutting the Prima Facie Case Directly ........... 54 2 Proofof Potential Competition ..................... 56 a. Diversion ofAdditional Supply .................. 57 b. Expansion ofAdditional Supply ................ 59 c. New Production Sources of Additional Supply 61 C. The Plaintiff's Response ............................... 62 D. Special Problems Related to InternationalTrade ...... 62 E Applicability of the IntegratedApproach to Market Defnition ............................................. 64 L Consistent Application of the Approach ............ 64 2. Market Defnition and Market Power .............. 65 CONCLUSION ................................................... 66 1984] ANTITRUST MARKET DEFINITION Antitrust Market Definition: An Integrated Approach Robert G. Harrist and Thomas M. Jordet I INTRODUCTION A. The Importance of Market Defnition in Antitrust Congress enacted the antitrust laws to promote and preserve com- petition, based on the belief that an economic system organized around competitive markets is most likely to further several important objec- tives. Buyers receive fair prices and an adequate range of product and service choices. Sellers obtain entrepreneurial opportunity and a mar- ketplace that supports competition on the merits. Allocative and pro- ductive efficiency, and democratic values advance as a result of the dispersion of economic, social, and political power.1 To promote the process of competition and these objectives, the antitrust laws prohibit aggregations and exercises of horizontal market power and vertical ar- t Professor of Business Administration, University of California, Berkeley. B.A. 1965, M.A. 1973, Michigan State University; Ph.D. 1977, University of California, Berkeley. t Professor of Law, Boalt Hall School of Law, University of California, Berkeley. B.A. 1969, J.D. 1972, Yale University. * The authors gratefully acknowledge the helpful comments of Alan A. Fisher, Daniel Furniss, Robert H. Lande, Howard Latin, Mark LeHocky, Joel Linzner, and Lawrence A. Sullivan. 1. See W. SHEPHERD, THE TREATMENT OF MARKET POWER 3, 5, 183-224 (1975); L. SULLI- VAN, HANDBOOK OF THE LAW OF ANTITRUST § 1, at 10 (1977); id § 5, at 20-21; Dougherty & Davidson, Limitation Without Regulatiox The FTC'S Bureau of Competition Approach to Con- glomerate Mergers, 1980 UTAH L. Rev. 95; Flynn, Antitrust Jurisprudence: Symposium on the Economic, Politicaland Social Goals of Antitrust: Introduction, 125 U. PA. L. REv. 1182 (1977); Joffe, BeyondAntitrust, 28 CATH. U.L. REv. 1 (1978); Jorde, The Seventh Amendment Right to Jury TrialofAntirust Issues, 69 CALIF. L. REv. 1, 36 (1981); Pitofsky, The PoliticalContent of.4ntitrust, 127 U. PA. L. REv. 1051, 1066 (1979); Schwartz, "Justice"andOther Non-Economic Goals ofAnti- trust, 127 U. PA. L. Rev. 1076 (1979); Sullivan, Economics andMore HumanisticDisciplines: What Are the Sources of WisdomforAntitrust?, 125 U. PA. L. REv. 1214 (1977). Brodley, Book Review, 24 STAN. L. REv. 1155 (1972) (reviewing J. McGEE, IN DEFENSE OF INDUSTRIAL CONCENTRA- TION (1971)); Dewey, Book Review, 87 YALE LJ. 1516 (1978) (reviewing R. BORIC, THE ANTI- TRUST PARADOX: A POLICY AT WAR WITH ITSELF (1978)); First, Book Review, 52 N.Y.U. L. REv. 947 (1977) (reviewing R. POSNER, ANTITRUST LAW: AN ECONOMIC PERSPECTIVE (1976)); Scher- er, Book Review, 86 YALE L.J. 974 (1977) (reviewing R. POSNER, ANTITRUST LAW: AN Eco- NOMIC PERSPECTIVE (1976)). CALIFORNIA LAW REVIEW[o [Vol. 72:1 rangements that may foreclose markets.2 Certain antitrust offenses, such as horizontal price fixing3 and market division,4 as well as vertical price fixing,5 are considered so pernicious that they are deemed per se unreasonable restraints of trade, and require no proof of market power or market foreclosure. In all other cases, however, horizontal market power or vertical market restraints must be proved to establish liability. In such cases, to provide a basis for measuring market power or fore- closure,6 it is necessary to define the "relevant market."' 7 Market definition in antitrust is thus not an end in itself. The pur- pose of defining a market is to help measure a firm's power over price and output, or its power to foreclose markets. If it were possible to prove such power directly, definition of the relevant market would not be necessary. Theoretically at least, market power could be proved solely by evidence of predatory conduct,' excessive profits,9 price-cost margins,10 price discrimination,1" or elasticities of supply and de- mand.12 However, practical problems of acquiring and presenting proof of these alternative indicators of market power have caused liti- gants and courts alike generally to abandon such efforts.13 In most cases, therefore, market definition is a necessary step in the measure- ment of market power. To facilitate proof and to provide a rough approximation of mar- ket power in an adversarial system, courts have adopted a market structure method of analysis. First, the court defines a relevant market in terms of product and geographic space. The court then measures individual firm shares and industry concentration levels in that market. Courts have discussed and used this method of relevant market defini- tion and market power inference in antitrust cases involving monop- 2. Sherman Antitrust Act, ch. 647, §§ 1-7, 26 Stat. 209, 209-10 (1890) (codified as amended at 15 U.S.C. §§ 1-7 (1982)); Clayton Act, ch. 323, 38 Stat. 730 (1914) (codified as amended at 15 U.S.C. §§ 12-27 (1982)); Federal Trade Commission Act, ch. 311, 38 Stat. 717 (1914) (codified as amended at 15 U.S.C. §§ 41-58 (1982)). 3. See, ag., United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 218 (1940). 4. See, eg., United States v. Topo Assocs., 405 U.S. 596, 608 (1972). 5. See, ag., Albrecht v. Herald Co., 390 U.S. 145 (1968). 6. See Jorde, supra note 1, at 43-52. 7. See, e.g., Brown Shoe Co. v. United States, 370 U.S. 294, 324 (1962). 8. See, e.g., United States v. American Tobacco Co., 221 U.S. 106 (1911); Standard Oil Co. v. United States, 221 U.S. 1 (1911); L. SULLIVAN, supra note 1, § 6, at 23-24; id. § 9, at 33; Flynn, Monopolization Under the ShermanAct: The Third Wave andBeyond, 26 ANTITRUST BULL. 1, 31- 32 (1981). 9. 2 P. AREFDA & D. TURNER, ANTITRUST LAW g 508, 512 (1978). 10. Id. 1 509, 513. 11. Id. 514. 12. See, ag., Landes & Posner, Market Power in Antitrust Cases, 94 HARV. L. Rnv. 937 (1981). 13. See Jorde, supra note 1, at 40-41.
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