Buyers, Market Power, and Market Definition

Abstract

In this Chapter, I discuss some important issues relating to the delineation of antitrust markets and analysis of competitive effects under the methodology prescribed by the Merger Guidelines. I argue that since most transactions in our economy are between businesses, and that many, if not most businesses are sophisticated purchasers, the price determination process is often better conceptualized as a bargaining process between sellers and purchasers rather than as a competitive or oligopolistic industry selling to a “demand curve.” The Guidelines methodology does not recognize this issue, with the result that markets may often be defined too narrowly. The Chapter then provides an empirical example of an industry for which the usual methodology for defining Guidelines markets would lead to very narrow markets. Empirical estimates of residual demand elasticities, however, indicate that the relevant markets are broad. I interpret this result as some confirmation of the importance of sophisticated buyers in defining relevant markets under the Guidelines.

The author thanks Doug Zona for a great deal of helpful assistance.