Demand elasticities in antitrust analysis

Antitrust Law Journal

Volumn 66, Issue 2, 1998, Pages 363-413

  Werden, Gregory J ^a  

^a US Department of Justice   (United States)

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EID: 0032363160     PISSN: 00036056     EISSN: None     Source Type: Journal    
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References (217)

1. That introduction occurred in a seemingly unimportant footnote in Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 612 n.31 (1953).
2. It has been routine at least since the market delineation rule of Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962).
3. Nevertheless, some of the legal and economic analysis is novel. For readers interested in a deeper understanding of the relevant economics, derivations of most important results are provided in footnotes and in an Appendix.
4. These topics are discussed in every introductory economics and intermediate microeconomics textbook. Especially useful presentations are MICHAEL L. KATZ & HARVEY S. ROSEN, MICROECONOMICS 82-91 (1991); GEORGE J. STIGLER, THE THEORY OF PRICE ch. 3, 326-36 (3d ed. 1966).
5. These topics are discussed in every introductory economics and intermediate microeconomics textbook. Especially useful presentations are MICHAEL L. KATZ & HARVEY S. ROSEN, MICROECONOMICS 82-91 (1991); GEORGE J. STIGLER, THE THEORY OF PRICE ch. 3, 326-36 (3d ed. 1966).
6. By most modern accounts, the demand schedule was introduced in 1699 by Charles Davenant in his Essay upon the Probable Methods of Making People Gainers in the Balance of Trade. See JOHN GREEDY, DEMAND AND EXCHANGE IN ECONOMIC ANALYSIS: A HISTORY FROM COURNOT TO MARSHALL 7-9 (1992); G. Herberton Evans, Jr., The Law of Demand - The Roles of Gregory King and Charles Davenant, 81 Q.J. ECON. 483 (1967).
7. By most modern accounts, the demand schedule was introduced in 1699 by Charles Davenant in his Essay upon the Probable Methods of Making People Gainers in the Balance of Trade. See JOHN GREEDY, DEMAND AND EXCHANGE IN ECONOMIC ANALYSIS: A HISTORY FROM COURNOT TO MARSHALL 7-9 (1992); G. Herberton Evans, Jr., The Law of Demand - The Roles of Gregory King and Charles Davenant, 81 Q.J. ECON. 483 (1967).
8. By most modern accounts, the demand schedule was introduced in 1699 by Charles Davenant in his Essay upon the Probable Methods of Making People Gainers in the Balance of Trade. See JOHN GREEDY, DEMAND AND EXCHANGE IN ECONOMIC ANALYSIS: A HISTORY FROM COURNOT TO MARSHALL 7-9 (1992); G. Herberton Evans, Jr., The Law of Demand - The Roles of Gregory King and Charles Davenant, 81 Q.J. ECON. 483 (1967).
9. The first expression of a demand curve as a mathematical equation is credited to Pietro Verri in his 1760 Elementi del Commercio. See DONALD W. KATZNER, STATIC DEMAND THEORY 7 (1970); JOSEPH A. SCHUMPETER, HISTORY OF ECONOMIC ANALYSIS 307 n.13 (1954). The first serious mathematical treatment of demand was by Antoine Augustin Cournot in his 1838 Researches into the Mathematical Principles of the Theory of Wealth 44-55 (Nathaniel T. Bacon trans., Augustus M. Kelley 1971), which also introduced oligopoly theory.
10. The first expression of a demand curve as a mathematical equation is credited to Pietro Verri in his 1760 Elementi del Commercio. See DONALD W. KATZNER, STATIC DEMAND THEORY 7 (1970); JOSEPH A. SCHUMPETER, HISTORY OF ECONOMIC ANALYSIS 307 n.13 (1954). The first serious mathematical treatment of demand was by Antoine Augustin Cournot in his 1838 Researches into the Mathematical Principles of the Theory of Wealth 44-55 (Nathaniel T. Bacon trans., Augustus M. Kelley 1971), which also introduced oligopoly theory.
11. The first expression of a demand curve as a mathematical equation is credited to Pietro Verri in his 1760 Elementi del Commercio. See DONALD W. KATZNER, STATIC DEMAND THEORY 7 (1970); JOSEPH A. SCHUMPETER, HISTORY OF ECONOMIC ANALYSIS 307 n.13 (1954). The first serious mathematical treatment of demand was by Antoine Augustin Cournot in his 1838 Researches into the Mathematical Principles of the Theory of Wealth 44-55 (Nathaniel T. Bacon trans., Augustus M. Kelley 1971), which also introduced oligopoly theory.
12. The first expression of a demand curve as a mathematical equation is credited to Pietro Verri in his 1760 Elementi del Commercio. See DONALD W. KATZNER, STATIC DEMAND THEORY 7 (1970); JOSEPH A. SCHUMPETER, HISTORY OF ECONOMIC ANALYSIS 307 n.13 (1954). The first serious mathematical treatment of demand was by Antoine Augustin Cournot in his 1838 Researches into the Mathematical Principles of the Theory of Wealth 44-55 (Nathaniel T. Bacon trans., Augustus M. Kelley 1971), which also introduced oligopoly theory.
13. Marshall's analysis was largely contained in earlier works, but its most complete expression was in the Principles. ALFRED MARSHALL, PRINCIPLES OF ECONOMICS ch. 3-4 (8th ed. 1920, reset and reprinted 1949, Porcupine Press).
14. See, e.g., DAVID M. KREPS, A COURSE IN MICROECONOMIC THEORY 37-62 (1990).
15. For a detailed discussion of the assumption, see Milton Friedman, The Marshallian Demand Curve, 57 J. POL. ECON. 463 (1949), reprinted in MILTON FRIEDMAN, ESSAYS IN POSITIVE ECONOMICS 47 (1953).
16. For a detailed discussion of the assumption, see Milton Friedman, The Marshallian Demand Curve, 57 J. POL. ECON. 463 (1949), reprinted in MILTON FRIEDMAN, ESSAYS IN POSITIVE ECONOMICS 47 (1953).
17. See MARSHALL, supra note 7, at 84. Though referred to sometimes by non-economists, there is no such thing as "the law of supply and demand."
18. Most authorities unreservedly credit Marshall for elasticity of demand. See, e.g., SCHUMPETER, supra note 6, at 992-93; George J. Stigler, The Nature and Role of Originality in Scientific Progress, 22 ECONOMICA (n.s.) 293 (1955), reprinted in GEORGE J. STIGLER, ESSAYS IN THE HISTORY OF ECONOMICS 1, 2 (1965); JOHN M. KEYNES, ESSAYS IN BIOGRAPHY 187 (1951). Precursors are discussed by CREEDY, supra note 5, at 24-32, and Peter Newman, Elasticity, in 2 THE NEW PALGRAVE: A DICTIONARY or ECONOMICS 125 (John Eatwell et al. eds., 1987). Marshall wrote the first drafts of the Principles chapters on demand and its elasticity while on leave in Italy for the academic year 1881-82. See 1 J.K. WHITAKER, THE EARLY ECONOMIC WRITINGS OF ALFRED MARSHALL, 1867-1890, at 85 (1975). He first published on elasticity of demand five years prior to the publication of the Principles. See Alfred Marshall, On the Graphic Method in Statistics, J. [LONDON] STAT. SOC'Y (Supp. 1885), reprinted in MEMORIALS TO ALFRED MARSHALL 175, 187 (A.C. Pigou ed., 1956) (1925).
19. Most authorities unreservedly credit Marshall for elasticity of demand. See, e.g., SCHUMPETER, supra note 6, at 992-93; George J. Stigler, The Nature and Role of Originality in Scientific Progress, 22 ECONOMICA (n.s.) 293 (1955), reprinted in GEORGE J. STIGLER, ESSAYS IN THE HISTORY OF ECONOMICS 1, 2 (1965); JOHN M. KEYNES, ESSAYS IN BIOGRAPHY 187 (1951). Precursors are discussed by CREEDY, supra note 5, at 24-32, and Peter Newman, Elasticity, in 2 THE NEW PALGRAVE: A DICTIONARY or ECONOMICS 125 (John Eatwell et al. eds., 1987). Marshall wrote the first drafts of the Principles chapters on demand and its elasticity while on leave in Italy for the academic year 1881-82. See 1 J.K. WHITAKER, THE EARLY ECONOMIC WRITINGS OF ALFRED MARSHALL, 1867-1890, at 85 (1975). He first published on elasticity of demand five years prior to the publication of the Principles. See Alfred Marshall, On the Graphic Method in Statistics, J. [LONDON] STAT. SOC'Y (Supp. 1885), reprinted in MEMORIALS TO ALFRED MARSHALL 175, 187 (A.C. Pigou ed., 1956) (1925).
20. Most authorities unreservedly credit Marshall for elasticity of demand. See, e.g., SCHUMPETER, supra note 6, at 992-93; George J. Stigler, The Nature and Role of Originality in Scientific Progress, 22 ECONOMICA (n.s.) 293 (1955), reprinted in GEORGE J. STIGLER, ESSAYS IN THE HISTORY OF ECONOMICS 1, 2 (1965); JOHN M. KEYNES, ESSAYS IN BIOGRAPHY 187 (1951). Precursors are discussed by CREEDY, supra note 5, at 24-32, and Peter Newman, Elasticity, in 2 THE NEW PALGRAVE: A DICTIONARY or ECONOMICS 125 (John Eatwell et al. eds., 1987). Marshall wrote the first drafts of the Principles chapters on demand and its elasticity while on leave in Italy for the academic year 1881-82. See 1 J.K. WHITAKER, THE EARLY ECONOMIC WRITINGS OF ALFRED MARSHALL, 1867-1890, at 85 (1975). He first published on elasticity of demand five years prior to the publication of the Principles. See Alfred Marshall, On the Graphic Method in Statistics, J. [LONDON] STAT. SOC'Y (Supp. 1885), reprinted in MEMORIALS TO ALFRED MARSHALL 175, 187 (A.C. Pigou ed., 1956) (1925).
21. Most authorities unreservedly credit Marshall for elasticity of demand. See, e.g., SCHUMPETER, supra note 6, at 992-93; George J. Stigler, The Nature and Role of Originality in Scientific Progress, 22 ECONOMICA (n.s.) 293 (1955), reprinted in GEORGE J. STIGLER, ESSAYS IN THE HISTORY OF ECONOMICS 1, 2 (1965); JOHN M. KEYNES, ESSAYS IN BIOGRAPHY 187 (1951). Precursors are discussed by CREEDY, supra note 5, at 24-32, and Peter Newman, Elasticity, in 2 THE NEW PALGRAVE: A DICTIONARY or ECONOMICS 125 (John Eatwell et al. eds., 1987). Marshall wrote the first drafts of the Principles chapters on demand and its elasticity while on leave in Italy for the academic year 1881-82. See 1 J.K. WHITAKER, THE EARLY ECONOMIC WRITINGS OF ALFRED MARSHALL, 1867-1890, at 85 (1975). He first published on elasticity of demand five years prior to the publication of the Principles. See Alfred Marshall, On the Graphic Method in Statistics, J. [LONDON] STAT. SOC'Y (Supp. 1885), reprinted in MEMORIALS TO ALFRED MARSHALL 175, 187 (A.C. Pigou ed., 1956) (1925).
22. Most authorities unreservedly credit Marshall for elasticity of demand. See, e.g., SCHUMPETER, supra note 6, at 992-93; George J. Stigler, The Nature and Role of Originality in Scientific Progress, 22 ECONOMICA (n.s.) 293 (1955), reprinted in GEORGE J. STIGLER, ESSAYS IN THE HISTORY OF ECONOMICS 1, 2 (1965); JOHN M. KEYNES, ESSAYS IN BIOGRAPHY 187 (1951). Precursors are discussed by CREEDY, supra note 5, at 24-32, and Peter Newman, Elasticity, in 2 THE NEW PALGRAVE: A DICTIONARY or ECONOMICS 125 (John Eatwell et al. eds., 1987). Marshall wrote the first drafts of the Principles chapters on demand and its elasticity while on leave in Italy for the academic year 1881-82. See 1 J.K. WHITAKER, THE EARLY ECONOMIC WRITINGS OF ALFRED MARSHALL, 1867-1890, at 85 (1975). He first published on elasticity of demand five years prior to the publication of the Principles. See Alfred Marshall, On the Graphic Method in Statistics, J. [LONDON] STAT. SOC'Y (Supp. 1885), reprinted in MEMORIALS TO ALFRED MARSHALL 175, 187 (A.C. Pigou ed., 1956) (1925).
23. Most authorities unreservedly credit Marshall for elasticity of demand. See, e.g., SCHUMPETER, supra note 6, at 992-93; George J. Stigler, The Nature and Role of Originality in Scientific Progress, 22 ECONOMICA (n.s.) 293 (1955), reprinted in GEORGE J. STIGLER, ESSAYS IN THE HISTORY OF ECONOMICS 1, 2 (1965); JOHN M. KEYNES, ESSAYS IN BIOGRAPHY 187 (1951). Precursors are discussed by CREEDY, supra note 5, at 24-32, and Peter Newman, Elasticity, in 2 THE NEW PALGRAVE: A DICTIONARY or ECONOMICS 125 (John Eatwell et al. eds., 1987). Marshall wrote the first drafts of the Principles chapters on demand and its elasticity while on leave in Italy for the academic year 1881-82. See 1 J.K. WHITAKER, THE EARLY ECONOMIC WRITINGS OF ALFRED MARSHALL, 1867-1890, at 85 (1975). He first published on elasticity of demand five years prior to the publication of the Principles. See Alfred Marshall, On the Graphic Method in Statistics, J. [LONDON] STAT. SOC'Y (Supp. 1885), reprinted in MEMORIALS TO ALFRED MARSHALL 175, 187 (A.C. Pigou ed., 1956) (1925).
24. Most authorities unreservedly credit Marshall for elasticity of demand. See, e.g., SCHUMPETER, supra note 6, at 992-93; George J. Stigler, The Nature and Role of Originality in Scientific Progress, 22 ECONOMICA (n.s.) 293 (1955), reprinted in GEORGE J. STIGLER, ESSAYS IN THE HISTORY OF ECONOMICS 1, 2 (1965); JOHN M. KEYNES, ESSAYS IN BIOGRAPHY 187 (1951). Precursors are discussed by CREEDY, supra note 5, at 24-32, and Peter Newman, Elasticity, in 2 THE NEW PALGRAVE: A DICTIONARY or ECONOMICS 125 (John Eatwell et al. eds., 1987). Marshall wrote the first drafts of the Principles chapters on demand and its elasticity while on leave in Italy for the academic year 1881-82. See 1 J.K. WHITAKER, THE EARLY ECONOMIC WRITINGS OF ALFRED MARSHALL, 1867-1890, at 85 (1975). He first published on elasticity of demand five years prior to the publication of the Principles. See Alfred Marshall, On the Graphic Method in Statistics, J. [LONDON] STAT. SOC'Y (Supp. 1885), reprinted in MEMORIALS TO ALFRED MARSHALL 175, 187 (A.C. Pigou ed., 1956) (1925).
25. When arithmetic is done on numbers with units, the arithmetic is also done on the units. For example, if 100 barrels of oil (measured in barrels) were sold for $200 (measured in dollars), the average price would be $20 per barrel (measured in dollars/barrel).
26. See Newman, supra note 11, at 126.
27. Elasticities of demand estimated using conventional econometric methods are point elasticities, as are all elasticities in the formulae below. Formally, the point elasticity of demand is defined as _ dq/dp/q/p. The first term in this expression differs from that above in that the symbol Δ has been replaced by "d." The expression dq/dp is the limit of Δq/Δp as Δp becomes arbitrarily small; it is called the "derivative of quantity demanded with respect to price." The derivative of any curve at a given point is the slope of the line tangent to the curve at that point.
28. -1/b, where a and b are positive constants, and b is the elasticity of demand. Demand is unitary elastic if b = 1, so that pq = a. This is the equation of a rectangular hyperbola (a hyperbola with the price and quantity axes as asymptotes). It is also the very first mathematical demand curve ever used. See KATZNER, supra note 6, at 7; SCHUMPETER, supra note 6, at 307 n.13. Since revenue is defined as pq and a is a constant, it is readily apparent that revenue is the same at all points on this demand curve. Isoelastic demand curves are also commonly written in logarithmic form: log(q) = α - βlog(p).
29. A linear demand curve has the mathematical form p = a - bq, where a and b are positive constants. The price axis intercept is a, while the slope of the line is -b.
30. See Marshall, supra note 11, at 187. A simple geometric proof is provided in STIGLER, supra note 4, at 330-31. As Stigler explains, the elasticity of demand for any demand curve can be reckoned in this way, by drawing a tangent at the point of evaluation and applying the same rule to the tangent.
31. One way to see this is to consider the effect on revenue of a small quantity increase. Increasing quantity by Δq would entail reducing price by the corresponding Δp. The effect on revenue of the quantity increase alone is pΔq, while the effect of the price change alone is qΔp. Marginal revenue is the change in revenue divided by the change in quantity that brought it about. Adding the two components (if Δq is very small, ΔpΔq can be neglected as too small to matter) and dividing by Δq, yields (pΔq + qΔp)/Δq, which equals p[1 + (Δp/Δq)(q/p)], which is p(1 - 1/ε).
32. For a detailed discussion of the determinants of the elasticity of the dominant firm's demand, see 2A PHILLIP E. AREEDA ET AL., ANTITRUST LAW 138-42 (1995);
33. William Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 HARV. L. REV. 937, 944-47, 985-86 (1981).
34. AREEDA ET AL., supra note 19, at 86.
35. U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines § 0.1 (1992), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104.
36. U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines § 0.1 (1992), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104.
37. Landes & Posner, supra note 19, at 937.
38. This is a slight overstatement in the case of the dominant firm, for which market power depends on the supply of the competitive fringe. Still, it is only the residual demand curve faced by the dominant firm that determines its market power.
39. JOHN SIMPSON, THE CONCISE OXFORD DICTIONARY or PROVERBS 1 (2d ed. 1992).
40. EDWARD H. CHAMBERLIN, THE THEORY OF MONOPOLISTIC COMPETITION 68-70 (7th ed. 1956) (1933); JOAN ROBINSON, THE ECONOMICS OF IMPERFECT COMPETITION 21 (2d ed. 1969) (1933).
41. EDWARD H. CHAMBERLIN, THE THEORY OF MONOPOLISTIC COMPETITION 68-70 (7th ed. 1956) (1933); JOAN ROBINSON, THE ECONOMICS OF IMPERFECT COMPETITION 21 (2d ed. 1969) (1933).
42. It is named after Joseph Louis François Bertrand, who postulated it in his 1883 review of Cournot's 1838 book (see COURNOT, supra note 6). A modern translation of that review by James W. Friedman appears in COURNOT OLIGOPOLY 73 (Andrew F. Daugherty ed., 1988).
43. Formally, this is termed a Nash, non-cooperative equilibrium to the one-shot, price-setting game. This equilibrium concept was pioneered by mathematician John F. Nash, who shared the 1994 Nobel Memorial Prize in Economics for this and other work in game theory.
44. Abba P. Lerner, The Concept of Monopoly and the Measurement of Monopoly Power, 1 REV. ECON. STUD. 157, 169 (1934).
45. See AREEDA ET AL., supra note 19, at 122-27; George A. Hay, Market Power in Antitrust, 60 ANTITRUST L.J. 807, 814 (1992); Richard Schmalensee, On the Use of Economic Models in Antitrust: The Realemon Case, 127 U. PA. L. REV. 994, 1107-09 (1979).
46. See AREEDA ET AL., supra note 19, at 122-27; George A. Hay, Market Power in Antitrust, 60 ANTITRUST L.J. 807, 814 (1992); Richard Schmalensee, On the Use of Economic Models in Antitrust: The Realemon Case, 127 U. PA. L. REV. 994, 1107-09 (1979).
47. Landes & Posner, supra note 19, at 937.
48. Fortner Enters. v. United States Steel Corp., 394 U.S. 495, 503 (1969).
49. Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 27 n.46 (1984) (citing United States Steel Corp. v. Fortner Enters., 429 U.S. 610, 620 (1977); Fortner Enters, v. United States Steel Corp., 394 U.S. 495, 503-04 (1969)).
50. NCAA v. Board of Regents of the Univ. of Okla., 468 U.S. 85, 109 n.38 (1984). For this definition, Justice Stevens cited his opinion in Hyde, the second Fortner case (see supra note 32), and Cellophane (see infra text accompanying note 37).
51. Eastman Kodak Co. v. Image Technical Servs., Inc. 504 U.S. 451, 464 (1992).
52. See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 235 (1993) (referring to the ability "to exert market power" by raising "prices above a competitive level").
53. This is especially true of the Seventh Circuit. See, e.g., United States v. Rockford Mem'l Hosp. Corp., 898 F.2d 1278, 1283 (7th Cir. 1990) (Posner, J.) (market power is the ability "to increase price above the competitive level without losing so much business to other suppliers as to make the price increase unprofitable"); Wilk v. American Med. Ass'n, 895 F.2d 352, 359 (7th Cir. 1990) ("Market power is the ability to raise prices above the competitive level by restricting output."); Flip Side Prods. Inc. v. Jam Prods. Ltd., 843 F.2d 1024, 1032 (7th Cir. 1988) (market power is the "power to raise prices significantly above the competitive level without losing all of one's business"); Ball Mem'l Hosp., Inc. v. Mutual Hosp. Ins., Inc., 784 F.2d 1325, 1335 (7th Cir. 1986) (Easterbrook, J.) (market power is "the ability to raise price significantly higher than the competitive level by restricting output"). It is also true of the First, Third, and Fourth Circuits. See Coastal Fuels of P.R., Inc. v. Caribbean Petroleum Corp., 79 F.3d 182, 196 (1st Cir.) (market power is the power "to raise price by restricting output"), cert. denied, 117 S. Ct. 294 (1996); Grappone, Inc. v. Subaru of New England, Inc., 858 F.2d 792, 794 (1st Cir. 1988) (Breyer, J.) (market power is the power to "raise [ ] [price] above the levels that would be charged in a competitive market"); Orson, Inc. v. Miramax Film Corp., 79 F.3d 1358, 1367 (3d Cir. 1996) (market power is "the ability to raise prices above those that would prevail in a competitive market"); United States v. Brown Univ., 5 F.3d 658, 668 (3d Cir. 1993) (market power is "the ability to raise prices above those that would prevail in a competitive market"); Murrow Furniture Galleries, Inc. v. Thomasville Furniture Indus., Inc., 889 F.2d 524, 528 n.8 (4th Cir. 1989) ("Market power is the ability to raise prices above the levels that would be charged in a competitive market."); Consul, Ltd. v, Transco Energy Co., 805 F.2d 490, 495 (4th Cir. 1986) (market power is "the ability to raise prices above levels that would exist in a perfectly competitive market"). The remaining regional courts of appeals have invoked the economic definition of market power at least once. See K.M.B. Warehouse Distribs., Inc. v. Walker Mfg. Co., 61 F.3d 123, 129 (2d Cir. 1995) (market power is "the ability to raise price significantly above the competitive level without losing all of one's business"); Muenster Butane, Inc. v. The Steward Co., 651 F.2d 292, 298 (5th Cir. 1981) ("[I]f a firm lacks market power, it cannot affect the price of its product"); PSI Repair Servs., Inc. v. Honeywell, Inc., 104 F.3d 811, 817 (6th Cir.) (market power is "the ability of a single seller to raise price and restrict output"), cert. denied, 117 S. Ct. 2434 (1997); Ryko Mfg. Co. v. Eden Servs., 823 F.2d 1215, 1232 (8th Cir. 1987) ("Market power generally is defined as the power of a firm to restrict output and thereby increase the selling price of its goods in the market."); Rebel Oil Co. v. Atlantic Richfield Co., 51 F.3d 1421, 1441 (9th Cir. 1995) ("[t]he ability to control output and prices [is] the essence of market power"); Drinkwine v. Federated Publications, Inc., 780 F.2d 735, 738 n.3 (9th Cir. 1986) ("Market power exists whenever prices can be raised above the competitive market levels."); SCFC ILC, Inc. v. VISA USA, Inc., 36 F.3d 958, 965 (10th Cir. 1994) ("market power is the ability to raise price by restricting output"); Westman Comm'n Co. v. Hobart Int'l, Inc, 796 F.2d 1216, 1225 (10th Cir. 1986) ("Market power is the ability to raise prices above those that would be charged in a competitive market."); Graphic Prods. Distribs., Inc. v. Itek Corp., 717 F.2d 1560, 1570 (11th Cir. 1983) ("Market power is the ability to raise price significantly above the competitive level without losing all of one's business."); Superior Ct. Trial Lawyers Ass'n v. FTC, 856 F.2d 226, 249 (D.C. Cir. 1988) (market power is "the ability profitability to raise price"), aff'd in part, rev'd in part and remanded, 493 U.S. 411 (1990).
54. United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956). See also id. at 393 ("control of price or competition establishes the existence of monopoly power"). The Court reiterated this definition in United States v. Grinnell Corp., 384 U.S. 563, 571 (1966), which is often cited in preference to Cellophane. Since Grinnell, the Court restated this definition in Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 481 (1992); and in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 596 n.20 (1985).
55. See, e.g., Hay, supra note 29, at 819-20 (1992); Landes & Posner, supra note 19, at 977.
56. While many other commentators may share this view, it was most clearly expressed by Thomas G. Krattenmaker et al., Monopoly Power and Market Power in Antitrust Law, 76 GEO. L. REV. 241, 248 (1987).
57. In his famous article written immediately after the case was decided, the late Donald F. Turner indicated that the Court did not intend two alternative definitions. Antitrust Policy and the Cellophane Case, 70 HARV. L. REV. 281, 288 (1956) ("[M]onopoly power is the power to vary one's price within a substantial margin - a choice of profitable alternatives - and, correspondingly, the power to exclude competition entirely or to a substantial extent when it is desired to do so."). A more recent and clearer statement of the point was made by Richard G. Price, Note, Market Power and Monopoly Power in Antitrust Analysis, 75 CORNELL L. REV. 190, 202-03 (1989).
58. In his famous article written immediately after the case was decided, the late Donald F. Turner indicated that the Court did not intend two alternative definitions. Antitrust Policy and the Cellophane Case, 70 HARV. L. REV. 281, 288 (1956) ("[M]onopoly power is the power to vary one's price within a substantial margin - a choice of profitable alternatives - and, correspondingly, the power to exclude competition entirely or to a substantial extent when it is desired to do so."). A more recent and clearer statement of the point was made by Richard G. Price, Note, Market Power and Monopoly Power in Antitrust Analysis, 75 CORNELL L. REV. 190, 202-03 (1989).
59. Cellophane, 351 U.S. at 392.
60. Id.
61. Id. at 393-94.
62. Id. at 401.
63. Id. at 403.
64. Authorities cited by the Court (see id. at 391 n.18), listed in the order cited and noting the most likely relevance, are: Apex Hosiery Co. v. Leader, 310 U.S. 469, 510 (1940) (indicating that "effect on price" is the hallmark of a restraint of trade); Standard Oil Co. v. United States, 221 U.S. 1, 58 (1911) (indicating that "the dread of enhancement of prices and of other wrongs" motivated the Sherman Act); Arthur H. Cole, Twentieth-Century Entrepreneurship in the United States and Economic Growth, 44 AM. ECON. REV. (PAPERS & PROC.) 35, 61 (1954) (using the term "market power"); CLAIR WILCOX, COMPETITION AND MONOPOLY IN AMERICAN INDUSTRY 9 (TNEC Monograph No. 21, 1940) ("Monopoly power is the monopolist's ability to augment his profit either by fixing the price at which he will sell and thus, indirectly, the quantity that will be sold, or by fixing the quantity that he will sell and thus, indirectly, the price at which it will be sold."); Louis B. Schwartz, The Schwartz Dissent, 1 ANTITRUST BULL. 37, 39 (1955) (referring to a "monopoly" "extracting from the public more than a competitive price"); REPORT OF THE ATTORNEY GENERAL'S NATIONAL COMMITTEE TO STUDY THE ANTITRUST LAWS 43 (1955) (Stanley N. Barnes & S. Chesterfield Oppenheim, co-chairs) (indicating that "monopoly power" exists when there is "control over the market price").
65. Authorities cited by the Court (see id. at 391 n.18), listed in the order cited and noting the most likely relevance, are: Apex Hosiery Co. v. Leader, 310 U.S. 469, 510 (1940) (indicating that "effect on price" is the hallmark of a restraint of trade); Standard Oil Co. v. United States, 221 U.S. 1, 58 (1911) (indicating that "the dread of enhancement of prices and of other wrongs" motivated the Sherman Act); Arthur H. Cole, Twentieth-Century Entrepreneurship in the United States and Economic Growth, 44 AM. ECON. REV. (PAPERS & PROC.) 35, 61 (1954) (using the term "market power"); CLAIR WILCOX, COMPETITION AND MONOPOLY IN AMERICAN INDUSTRY 9 (TNEC Monograph No. 21, 1940) ("Monopoly power is the monopolist's ability to augment his profit either by fixing the price at which he will sell and thus, indirectly, the quantity that will be sold, or by fixing the quantity that he will sell and thus, indirectly, the price at which it will be sold."); Louis B. Schwartz, The Schwartz Dissent, 1 ANTITRUST BULL. 37, 39 (1955) (referring to a "monopoly" "extracting from the public more than a competitive price"); REPORT OF THE ATTORNEY GENERAL'S NATIONAL COMMITTEE TO STUDY THE ANTITRUST LAWS 43 (1955) (Stanley N. Barnes & S. Chesterfield Oppenheim, co-chairs) (indicating that "monopoly power" exists when there is "control over the market price").
66. Authorities cited by the Court (see id. at 391 n.18), listed in the order cited and noting the most likely relevance, are: Apex Hosiery Co. v. Leader, 310 U.S. 469, 510 (1940) (indicating that "effect on price" is the hallmark of a restraint of trade); Standard Oil Co. v. United States, 221 U.S. 1, 58 (1911) (indicating that "the dread of enhancement of prices and of other wrongs" motivated the Sherman Act); Arthur H. Cole, Twentieth-Century Entrepreneurship in the United States and Economic Growth, 44 AM. ECON. REV. (PAPERS & PROC.) 35, 61 (1954) (using the term "market power"); CLAIR WILCOX, COMPETITION AND MONOPOLY IN AMERICAN INDUSTRY 9 (TNEC Monograph No. 21, 1940) ("Monopoly power is the monopolist's ability to augment his profit either by fixing the price at which he will sell and thus, indirectly, the quantity that will be sold, or by fixing the quantity that he will sell and thus, indirectly, the price at which it will be sold."); Louis B. Schwartz, The Schwartz Dissent, 1 ANTITRUST BULL. 37, 39 (1955) (referring to a "monopoly" "extracting from the public more than a competitive price"); REPORT OF THE ATTORNEY GENERAL'S NATIONAL COMMITTEE TO STUDY THE ANTITRUST LAWS 43 (1955) (Stanley N. Barnes & S. Chesterfield Oppenheim, co-chairs) (indicating that "monopoly power" exists when there is "control over the market price").
67. Authorities cited by the Court (see id. at 391 n.18), listed in the order cited and noting the most likely relevance, are: Apex Hosiery Co. v. Leader, 310 U.S. 469, 510 (1940) (indicating that "effect on price" is the hallmark of a restraint of trade); Standard Oil Co. v. United States, 221 U.S. 1, 58 (1911) (indicating that "the dread of enhancement of prices and of other wrongs" motivated the Sherman Act); Arthur H. Cole, Twentieth-Century Entrepreneurship in the United States and Economic Growth, 44 AM. ECON. REV. (PAPERS & PROC.) 35, 61 (1954) (using the term "market power"); CLAIR WILCOX, COMPETITION AND MONOPOLY IN AMERICAN INDUSTRY 9 (TNEC Monograph No. 21, 1940) ("Monopoly power is the monopolist's ability to augment his profit either by fixing the price at which he will sell and thus, indirectly, the quantity that will be sold, or by fixing the quantity that he will sell and thus, indirectly, the price at which it will be sold."); Louis B. Schwartz, The Schwartz Dissent, 1 ANTITRUST BULL. 37, 39 (1955) (referring to a "monopoly" "extracting from the public more than a competitive price"); REPORT OF THE ATTORNEY GENERAL'S NATIONAL COMMITTEE TO STUDY THE ANTITRUST LAWS 43 (1955) (Stanley N. Barnes & S. Chesterfield Oppenheim, co-chairs) (indicating that "monopoly power" exists when there is "control over the market price").
68. United States v. Aluminum Co. of Am., 148 F.2d 416, 428, 432 (2d Cir. 1945).
69. American Tobacco Co. v. United States, 328 U.S. 781, 811 (1946).
70. United States v. Aluminum Co. of Am., 91 F. Supp, 333, 342 (S.D.N.Y. 1950).
71. Phil C. Neal, The Clayton Act and the Transamerica Case, 5 STAN. L. REV. 179, 213-14 (1953) (footnotes omitted).
72. See United States v. E.I. du Pont de Nemours & Co., 118 F. Supp. 41, 48-53 (D. Del. 1953).
73. Id. at 195. The court discussed at length du Pont's inability to exclude competitors. See, e.g., id. at 126, 181, 209-13.
74. Id. at 196.
75. George W. Stocking & Willard F. Mueller, The Cellophane Case and the New Competition, 45 AM. ECON. REV. 29 (1955).
76. Id. at 54.
77. This is evident from leading treatises: AREEDA ET AL., supra note 19, at 208-09 & n.6; HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY 99-101 (1994); RICHARD A. POSNER & FRANK H. EASTERBROOK, ANTITRUST 360-62 (2d ed. 1981); LAWRENCE A. SULLIVAN, HANDBOOK OF THE LAW OF ANTITRUST 53-58 (1977).
78. This is evident from leading treatises: AREEDA ET AL., supra note 19, at 208-09 & n.6; HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY 99-101 (1994); RICHARD A. POSNER & FRANK H. EASTERBROOK, ANTITRUST 360-62 (2d ed. 1981); LAWRENCE A. SULLIVAN, HANDBOOK OF THE LAW OF ANTITRUST 53-58 (1977).
79. This is evident from leading treatises: AREEDA ET AL., supra note 19, at 208-09 & n.6; HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY 99-101 (1994); RICHARD A. POSNER & FRANK H. EASTERBROOK, ANTITRUST 360-62 (2d ed. 1981); LAWRENCE A. SULLIVAN, HANDBOOK OF THE LAW OF ANTITRUST 53-58 (1977).
80. See, e.g., Gene C. Schaerr, Note, The Cellophane Fallacy and the Justice Department's Guidelines for Horizontal Mergers, 94 YALE L.J. 670 (1985).
81. 148 F.2d at 426.
82. See Shoppin' Bag of Pueblo, Inc. v. Dillon Cos., 783 F.2d 159, 164 (10th Cir. 1986) ("While the concepts of price and competition are closely connected, it is conceivable that if a company has obtained control over prices that it still may not have the power to exclude other competitors from the market. . . . It seems that in most instances a true evaluation of market power will not ultimately be possible without substantial data presented on both elements. We hold, therefore, that monopoly power is correctly defined in this circuit as the ability to control prices and exclude competition."). The Tenth Circuit most recently reiterated its stance in Biswell Stores Inc. v. Indian Nations Communications of Cushing Inc., 1996-2 Trade Cas. ¶ 71,578, at 78,103 (10th Cir. Oct. 3, 1996). The Tenth Circuit also held: "The Cellophane opinion holds that du Pont had power to control prices in cellophane but that the company lacked the power to exclude competition from the relevant market. Therefore, du Pont was not found to possess the requisite market power even though it possessed one of the elements." Shoppin' Bag, 783 F.2d at 163. This reading of Cellophane, however, conflicts with important language in the opinion (see supra text accompanying notes 41-43).
83. See AREEDA ET AL., supra note 19, at 86. They use only the term "market power" in this discussion, but a sound basis for distinguishing monopoly power from market power is with respect to both its magnitude and durability.
84. Id. at 87.
85. See, e.g., Reazin v. Blue Cross and Blue Shield of Kan., Inc., 899 F.2d 951, 966 (10th Cir. 1990) ("Market and monopoly power only differ in degree - monopoly power is commonly thought of as 'substantial' market power."); Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d 887, 894 (10th Cir. 1991) ("Monopoly power is also commonly thought of as substantial market power."); Deauville Corp. v. Federated Dep't Stores Inc., 756 F.2d 1183, 1192 n.6 (5th Cir. 1985) (monopoly power is an "extreme degree of market power"); see also Levine v. Central Fla. Med. Assocs., 72 F.3d 1538, 1555 (11th Cir. 1995) ("Monopoly power under § 2 requires, of course, something greater than market power under § 1."), cert. denied, 117 S. Ct. 75 (1996). On the other hand, a few cases explicitly state that the terms have the same meaning. See, e.g., U.S. Anchor Mfg., Inc. v. Rule Indus., Inc., 7 F.3d 986, 994 n.12 (11th Cir. 1993); International Dist. Centers, Inc. v. Walsh Trucking Co., Inc., 812 F.2d 786, 791 n.3 (2d Cir. 1987).
86. "Monopoly power under § 2 requires, of course, something greater than market power under § 1." Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 481 (1992).
87. See George A. Hay, Market Power in Antitrust, 60 ANTITRUST L.J. 807, 819 (1992); Richard Schmalensee, Another Look at Market Power, 95 HARV. L. REV. 1789, 1795 (1982); Schmalensee, supra note 29, at 1107-09.
88. See George A. Hay, Market Power in Antitrust, 60 ANTITRUST L.J. 807, 819 (1992); Richard Schmalensee, Another Look at Market Power, 95 HARV. L. REV. 1789, 1795 (1982); Schmalensee, supra note 29, at 1107-09.
89. In the classic work on entry, Joe Bain approached the issue from a long-run perspective, arguing that the "conditions of entry" should be "evaluated roughly by the advantages of established sellers in an industry over potential entrants, these advantages being reflected in the extent to which established sellers can persistently raise their prices above a competitive level without attracting new firms to enter the industry." JOE S. BAIN, BARRIERS TO NEW COMPETITION 3, 6-7, 10-11, 17 (1956). George Stigler also approached entry from a long-run perspective, defining: "A barrier to entry . . . as a cost of producing . . . which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry." GEORGE J. STIGLER, THE ORGANIZATION OF INDUSTRY 67 (1968). Many economists have followed Stigler, defining a "barrier to entry" in terms of differential costs for potential entrants and incumbents.
90. In the classic work on entry, Joe Bain approached the issue from a long-run perspective, arguing that the "conditions of entry" should be "evaluated roughly by the advantages of established sellers in an industry over potential entrants, these advantages being reflected in the extent to which established sellers can persistently raise their prices above a competitive level without attracting new firms to enter the industry." JOE S. BAIN, BARRIERS TO NEW COMPETITION 3, 6-7, 10-11, 17 (1956). George Stigler also approached entry from a long-run perspective, defining: "A barrier to entry . . . as a cost of producing . . . which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry." GEORGE J. STIGLER, THE ORGANIZATION OF INDUSTRY 67 (1968). Many economists have followed Stigler, defining a "barrier to entry" in terms of differential costs for potential entrants and incumbents.
91. Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104, 119-20 n.15 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 591 n.15 (1986). This statement is not correct if the Stiglerian definition of "barriers to entry" (see supra note 65) is used. See AREEDA ET AL., supra note 19, at 61; see also Gregory J. Werden & Luke M. Froeb, The Entry Inducing Effects of Horizontal Mergers, J. INDUS. ECON. (forthcoming) (showing that anticompetitive mergers plausibly would not induce entry when entry is free in the Stiglerian sense). Yet the Ninth Circuit has held: "The disadvantage of new entrants as compared to incumbents is the hallmark of an entry barrier." Los Angeles Land Co. v. Brunswick Corp., 6 F.3d 1422, 1428 (9th Cir. 1993). (The court may have backed away from its Stiglerian position when it later held that entry barriers include any "factors in the market that deter entry while permitting incumbent firms to earn monopoly returns." American Prof'l Testing Serv., Inc. v. Harcourt Brace Jovanovich Legal and Prof'l Publications, Inc., 108 F.3d 1147, 1154 (9th Cir. 1997).) The court in Los Angeles Land Co. added that the "main sources of entry barriers are: (1) legal license; (2) control over an essential or superior resource; (3) entrenched buyer preferences for established brands or company reputations; and (4) capital market evaluations imposing higher capital costs on new entrants." 6 F.3d at 1427 n.4; see also Rebel Oil Co., v. Atlantic Richfield Co., 51 F.3d 1421, 1439 (9th Cir. 1995); American Prof'l Testing Serv., 108 F.3d at 1154.
92. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 226 (1993). 68 See, e.g., American Prof'l Testing Servs., Inc. v. Harcourt Brace Jovanovich Legal and Prof'l Publications, Inc., 108 F.3d 1147, 1154 (9th Cir. 1997) (affirming judgment as a matter of law); Dial A Car, Inc. v. Transportation, Inc., 82 F.3d 484, 487-88 (D.C. Cir. 1996) (affirming dismissal); Advo, Inc. v. Philadelphia Newspapers, Inc., 51 F.3d 1191, 1200 (3d Cir. 1995) (affirming summary judgment); Los Angeles Land Co. v. Brunswick Corp., 6 F.3d 1422, 1425-29 (9th Cir. 1993) (reversing denial of motion for judgment notwithstanding verdict); American Academy Suppliers, Inc. v. Beckley-Cardy Inc., 922 F.2d 1317, 1319 (7th Cir. 1991) (affirming summary judgment).
93. United States v Syufy Enters., 903 F.2d 659, 664 (9th Cir. 1990).
94. Rebel Oil Co v. Atlantic Richfield Co., 51 F.3d 1421, 1439 (9th Cir. 1995) ("To justify a finding that a defendant has the power to control prices, entry barriers must be significant - they must be capable of constraining the normal operation of the market to the extent that the problem is unlikely to be self-correcting."); Reazin v. Blue Cross & Blue Shield of Kan., 899 F.2d 951, 968 (10th Cir. 1990) ("market power, to be meaningful for antitrust purposes, must be durable") (dictum); Colorado Interstate Gas Co. v. Natural Gas Pipeline Co., 885 F.2d 683, 695-96 (10th Cir. 1989) ("If the evidence demonstrates that a firm's ability to charge monopoly prices will necessarily be temporary, the firm will not possess the degree of market power required for the monopolization offense.").
95. See, e.g., Oahu Gas Serv., Inc. v. Pacific Resources Inc., 838 F.2d 360, 366 (9th Cir. 1988); Ryko Mfg. Co. v. Eden Servs., 823 F.2d 1215, 1232 (8th Cir. 1987); Ball Mem'l Hosp., Inc. v. Mutual Hosp. Ins., 784 F.2d 1325, 1336 (7th Cir. 1986).
96. The 1992 Horizontal Merger Guidelines issued by the U.S. Department of Justice and the Federal Trade Commission state that a "merger is not likely to create or enhance market power . . . if entry into the market is so easy that market participants, after the merger, either collectively or unilaterally could not profitably maintain a price increase above premerger levels." Horizontal Merger Guidelines, supra note 21, § 3.0. Similar language is found in the 1982 and 1984 Merger Guidelines promulgated by the U.S. Department of Justice. See 1982 Merger Guidelines, § II.B., reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,102; 1984 Merger Guidelines, § 3.3, reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,103. Several courts of appeals have permitted mergers on the grounds of easy entry. See United States v. Baker Hughes Inc., 908 F.2d 981, 985-89 (D.C. Cir. 1990); United States v. Syufy Enters., 903 F.2d 659, 664-69 (9th Cir. 1990); United States v. Waste Mgmt., Inc., 743 F.2d 976, 981-84 (2d Cir. 1984).
97. Eastman Kodak Co. v. Image Technical Servs., Inc., 540 U.S. 451, 469 n.15 (1992) (quoting PHILLIP AREEDA & LOUIS KAPLOW, ANTITRUST ANALYSIS 576 (4th ed. 1988)).
98. Allen-Myland, Inc. v. IBM Corp., 33 F.3d 194, 209 (3d Cir. 1994); United States v. Baker Hughes, Inc., 908 F.2d 981, 992 (D.C. Cir. 1990) (Thomas, J., joined by Ruth Bader Ginsburg, J.); Ball Mem'l Hosp., Inc. v. Mutual Hosp. Ins., 784 F.2d 1325, 1336 (7th Cir. 1986) (Easterbrook, J.).
99. Other methods for identifying market power using economic data are discussed by. Jonathan B. Baker & Timothy F. Bresnahan, Empirical Methods of Identifying and Measuring Market Power, 61 ANTITRUST L.J. 3 (1992).
100. A common practice is to infer firm elasticities of demand from accounting price-cost margins; however, difficulties in measuring price-cost margins make this problematic. See infra notes 109-10 and accompanying text.
101. 853 F. Supp. 1454, 1472 (W.D.N.Y. 1994), aff'd, 63 F.3d 95 (2d Cir. 1995). See also New York v. Anheuser-Busch, Inc., 811 F. Supp. 848, 873 (S.D.N.Y. 1993) (citing Anheuser Busch's high estimated elasticity of demand as proof that it did not possess significant market power).
102. 853 F. Supp. at 1462, 1475.
103. Id. at 1472. The former figure is for unit sales, while the latter is for dollar sales.
104. The court agreed, but did not rest on this finding. See id. at 1467-72.
105. Id. at 1472.
106. Id. at 1473.
107. Id.
108. 63 F.3d 95, 108 (2d Cir. 1995).
109. Id. at 109. The court specifically rejected the contention that "the strong preferences of United States customers for Kodak film demonstrates Kodak's market power in the United States." Id. at 108. The only evidence cited by the court was the own elasticity of demand for Kodak's film. Id. The court's logic is elusive, but it arguably held that there was not, in fact, a strong consumer preference for Kodak film. If so, it badly misconstrued the import of the elasticity evidence.
110. Id. at 109.
111. 351 U.S. at 391.
112. Id. at 392.
113. Id. at 401.
114. This linkage was noted by economist Morris A. Adelman, Comment, Economic Aspects of the Bethlehem Opinion, 45 VA. L. REV. 684, 688 (1959) ("No matter how the boundaries may be drawn in terms of products or areas, there is a single test: If, within the purported market, prices were appreciably raised or volume curtailed, would supply enter in such amounts as to restore approximately the old price and output? If the answer is 'yes,' then there is no market, and the definition must be expanded. If the answer is 'no,' the market is at least not wider.").
115. SULLIVAN, supra note 56, at 41.
116. 2 PHILLIP AREEDA & DONALD F. TURNER, ANTITRUST LAW 347 (1978).
117. U.S. Anchor Mfg., Inc. v. Rule Indus., Inc., 7 F.3d 986, 995-96 (11th Cir. 1993).
118. See Israel Travel Advisory Serv. v. Israel Identity Tours, Inc., 61 F.3d 1250, 1252 (7th Cir. 1995) ("[A] market is defined to aid in identifying any ability to raise price by curtailing output."); Consul, Ltd. v. Transco Energy Co, 805 F.2d 490, 495 (4th Cir. 1986) ("The penultimate question, towards which this preliminary inquiry into market definition is directed, is whether the defendant has market power: the ability to raise prices above levels that would exist in a perfectly competitive market."); Weiss v. York Hosp., 745 F.2d 786, 826 (3d Cir. 1984) ("the purpose of market definition is to determine whether market power exists"). In addition, many courts have quoted the first sentence (or more) from the Sullivan passage quoted in the text accompanying note 91 supra. See, e.g., SCFC ILC, Inc. v. VISA USA, Inc., 36 F.3d 958, 966 (10th Cir. 1994); Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 218 (D.C. Cir. 1986); Satellite Television & Associated Resources, Inc. v. Continental Cablevision of Va., Inc., 714 F.2d 351, 356 (4th Cir. 1983); Home Placement Serv., Inc. v. Providence Journal Co., 682 F.2d 274, 280 (1st Cir. 1982); Dimmitt Agri Indus., Inc. v. CDC Int'l Inc., 679 F.2d 516, 526 n.7 (5th Cir. 1982).
119. PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 518.1 (Supp. 1993). Courts have cited the same language from the 1987 edition of the annual supplement. See infra note 97 and accompanying text. After the 1993 annual supplement, the relevant material was deleted from the supplement and incorporated in the replacement volume AREEDA ET AL., supra note 19, at 151 ("a market can be seen as the array of producers that could control price if united in a hypothetical cartel or as a hypothetical monopoly").
120. Horizontal Merger Guidelines, supra note 21, § 1.0.
121. The Guidelines' approach to market delineation is discussed in great detail by Gregory J. Werden, Market Delineation Under the Merger Guidelines: A Tenth Anniversary Retrospective, 38 ANTITRUST BULL. 517 (1993) [hereinafter Werden, Tenth Anniversary Retrospective];
122. Gregory J. Werden, Market Delineation and the Justice Department's Merger Guidelines, 1983 DUKE L.J. 514 [hereinafter Werden, Market Delineation].
123. Perhaps the only important difference between the Areeda-Hovenkamp definition and that of the Guidelines is the benchmark price. While the Guidelines use the prevailing price, Areeda and Hovenkamp use the competitive price. Areeda and Hovenkamp use the competitive price to avoid the Cellophane fallacy, and the Guidelines have been criticized for making the same error as the Supreme Court. The Guidelines' use of the prevailing price, however, generally is appropriate for merger analysis, while the competitive price generally is the proper benchmark for other purposes. See Werden Tenth Anniversary Retrospective, supra, at 552-54;
124. Gregory J. Werden, The History of Antitrust Market Delineation, 76 MARQ. L. REV. 123, 202-04 (1992) [hereinafter Werden, History]. The discussion in this section presumes that market delineation is for the purpose of merger analysis or for some other purpose such that the issue is whether proposed conduct would create market power. As a purely theoretical matter, the discussion also applies when the purpose of market delineation is to determine whether a firm already possesses significant market power, provided that the competitive price is used in place of the prevailing price as the benchmark; however, it may be impractical to follow that approach because the competitive price is not easy to determine. In any event, the analysis described in the text accompanying notes 73-77 supra can be used to address the market power issue directly.
125. Coastal Fuels of P.R., Inc. v. Caribbean Petroleum Corp., 79 F.3d 182, 197 (1st Cir.), cert. denied, 117 S. Ct. 294 (1996); Rebel Oil Co. v. Atlantic Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995); Virtual Maintenance, Inc. v. Prime Computer, Inc., 957 F.2d 1318, 1325 (6th Cir. 1992); H.J., Inc. v. International Tel. & Tel. Corp., 867 F.2d 1531, 1540 (8th Cir. 1989).
126. The Guidelines' approach was applied in United States v. Archer-Daniels-Midland Co., 866 F.2d 242 (8th Cir. 1988). Quoting the Guidelines on market delineation are United States v. Eastman Kodak Co., 63 F.3d 95, 106 (2d Cir. 1995); Olin Corp. v. FTC, 986 F.2d 1295, 1299-300 (9th Cir. 1993). See also Coastal Fuels of P.R., Inc. v. Caribbean Petroleum Corp., 79 F.3d 182, 198 (1st Cir.), cert. denied, 117 S. Ct. 294 (1996) ("The touchstone of market definition is whether a hypothetical monopolist could raise prices.") .Other circuits have approvingly cited the Guidelines' approach. See Superior Ct. Trial Lawyers Ass'n v. FTC, 856 F.2d 226, 250 nn.33-34 (D.C. Cir. 1988), aff'd in part, rev'd in part and remanded, 493 U.S. 411 (1990); Ball Mem'l Hosp., Inc. v. Mutual Hosp. Ins., 784 F.2d 1325, 1336 (7th Cir. 1986). Numerous district courts have quoted or followed the Guidelines on market delineation.
127. The use of estimated demand elasticities in market delineation substantially predates the analysis of critical elasticities of demand. The first case of which I am aware in which a litigant explicitly relied on an estimated demand elasticity to delineate a relevant market was United States v. Mrs. Smith's Pie Co., 440 F. Supp. 220 (E.D. Pa. 1976). "[T]he principal issue in this case [was] whether frozen dessert pies constitute [d] a relevant product market." Id. at 226. In support of this alleged relevant market, the government's expert economist introduced an estimate of the own elasticity of demand for frozen dessert pies (.44). Id. at 228. Although highly relevant to the principal issue in the case, the court found this "testimony completely useless, primarily because we have no basis for evaluating what a particular elasticity coefficient means." Id. at 227-28.
128. Under the Guidelines' approach, market delineation begins with a narrowly defined product and area, to which the next-best substitute is repeatedly added until a hypothetical profit-maximizing monopolist would impose a significant price increase. See Horizontal Merger Guidelines, supra note 21, §§ 1.11, 1.21. Thus, only certain groups of products and areas are candidates for markets. For further discussion on this point, see Werden, Tenth Anniversary Retrospective, supra note 96, at 530-31. On the definition of the next-best substitute, see infra notes 154-60 and accompanying text.
129. The 1982/84 Merger Guidelines' definition did not make this assumption. See 1984 Merger Guidelines, supra note 72, § 1.0; 1982 Merger Guidelines, supra note 72, § I. The implications of the prior assumption are discussed infra at notes 124-32 and accompanying text.
130. This term was introduced by Frederick I. Johnson, Market Definition Under the Merger Guidelines: Critical Demand Elasticities, in 12 RESEARCH IN LAW AND ECONOMICS 235 (Richard O. Zerbe, Jr. ed., 1989). The related term "critical sales loss" and its break-even calculation were introduced by Barry C. Harris & Joseph J. Simons, Focusing Market Definition: How Much Substitution Is Enough, in 12 RESEARCH IN LAW AND ECONOMICS 207 (Richard O. Zerbe, Jr. ed., 1989). Profit-maximization calculations for critical demand elasticities and critical sales losses were introduced by Gregory J. Werden, Four Suggestions on Market Delineation, 37 ANTITRUST BULL. 107, 119-20 (1992). Further results relating to critical sales loss were contributed by Michael G. Baumann & Paul E. Godek, Could and Would Understood: Critical Elasticities and the Merger Guidelines, 40 ANTITRUST BULL. 885 (1995). The derivations in the Appendix, infra, are more complete yet simpler than those in the published literature.
131. This term was introduced by Frederick I. Johnson, Market Definition Under the Merger Guidelines: Critical Demand Elasticities, in 12 RESEARCH IN LAW AND ECONOMICS 235 (Richard O. Zerbe, Jr. ed., 1989). The related term "critical sales loss" and its break-even calculation were introduced by Barry C. Harris & Joseph J. Simons, Focusing Market Definition: How Much Substitution Is Enough, in 12 RESEARCH IN LAW AND ECONOMICS 207 (Richard O. Zerbe, Jr. ed., 1989). Profit-maximization calculations for critical demand elasticities and critical sales losses were introduced by Gregory J. Werden, Four Suggestions on Market Delineation, 37 ANTITRUST BULL. 107, 119-20 (1992). Further results relating to critical sales loss were contributed by Michael G. Baumann & Paul E. Godek, Could and Would Understood: Critical Elasticities and the Merger Guidelines, 40 ANTITRUST BULL. 885 (1995). The derivations in the Appendix, infra, are more complete yet simpler than those in the published literature.
132. This term was introduced by Frederick I. Johnson, Market Definition Under the Merger Guidelines: Critical Demand Elasticities, in 12 RESEARCH IN LAW AND ECONOMICS 235 (Richard O. Zerbe, Jr. ed., 1989). The related term "critical sales loss" and its break-even calculation were introduced by Barry C. Harris & Joseph J. Simons, Focusing Market Definition: How Much Substitution Is Enough, in 12 RESEARCH IN LAW AND ECONOMICS 207 (Richard O. Zerbe, Jr. ed., 1989). Profit-maximization calculations for critical demand elasticities and critical sales losses were introduced by Gregory J. Werden, Four Suggestions on Market Delineation, 37 ANTITRUST BULL. 107, 119-20 (1992). Further results relating to critical sales loss were contributed by Michael G. Baumann & Paul E. Godek, Could and Would Understood: Critical Elasticities and the Merger Guidelines, 40 ANTITRUST BULL. 885 (1995). The derivations in the Appendix, infra, are more complete yet simpler than those in the published literature.
133. This term was introduced by Frederick I. Johnson, Market Definition Under the Merger Guidelines: Critical Demand Elasticities, in 12 RESEARCH IN LAW AND ECONOMICS 235 (Richard O. Zerbe, Jr. ed., 1989). The related term "critical sales loss" and its break-even calculation were introduced by Barry C. Harris & Joseph J. Simons, Focusing Market Definition: How Much Substitution Is Enough, in 12 RESEARCH IN LAW AND ECONOMICS 207 (Richard O. Zerbe, Jr. ed., 1989). Profit-maximization calculations for critical demand elasticities and critical sales losses were introduced by Gregory J. Werden, Four Suggestions on Market Delineation, 37 ANTITRUST BULL. 107, 119-20 (1992). Further results relating to critical sales loss were contributed by Michael G. Baumann & Paul E. Godek, Could and Would Understood: Critical Elasticities and the Merger Guidelines, 40 ANTITRUST BULL. 885 (1995). The derivations in the Appendix, infra, are more complete yet simpler than those in the published literature.
134. See Luke M. Froeb & Gregory J. Werden, The Reverse Cellophane Fallacy in Market Delineation, 7 REV. INDUS. ORG. 241 (1992).
135. See Werden, Tenth Anniversary Retrospective, supra note 96, at 537-39.
136. This is easy to see, except for the break-even critical elasticity with isoelastic demand. For the others, it suffices to set t = 0. For the remaining formula, the key insight is that limit of the formula as t approaches zero is actually the formal definition of the derivative of log(x) with respect to x evaluated at x = m, divided by the derivative of log(x) with respect to x evaluated at x = 1. Since the derivative of log(x) with respect to x is 1/x, it follows that relevant limit is 1/m.
137. An early attempt to implement the Guidelines' approach to market delineation using estimated demand elasticities suggested critical demand elasticities as high as 20. See David T. Scheffman & Pablo T. Spiller, Geographic Market Definition Under the U.S. Department of Justice Merger Guidelines, 30 J.L. & ECON. 123, 143 n.79 (1987). The reason is that the premerger price-cost margin was assumed to be zero.
138. The Horizontal Merger Guidelines, supra note 21, § 1.0, corrected a small problem with previous versions by asking whether the hypothetical monopolist would impose a price increase "at least" as great as the significance threshold. On the problem with the prior version, see Werden, Market Delineation, supra note 96, at 543-44 & n.94.
139. 695 F. Supp. 1000 (S.D. Iowa 1987), rev'd, 866 F.2d 242 (8th Cir. 1988), on remand, 781 F. Supp. 1400 (S.D. Iowa 1991). The discussion here is based on Froeb & Werden, supra note 103.
140. Predatory pricing litigation often focuses on the determination of average variable cost, and litigated cases demonstrate that plausible alternative interpretations can yield substantially different estimates of average variable costs. See, e.g., Morgan v. Ponder, 892 F.2d 1355, 1360-61 & n.12 (8th Cir. 1989); U.S. Philips Corp. v. Windmere Corp., 861 F.2d 695, 700 (Fed. Cir. 1988); Kelco Disposal, Inc. v. Browning-Ferris Indus. of Vt., Inc., 845 F.2d 404, 407-08 (2d Cir. 1988), aff'd, 492 U.S. 257 (1989); Sunshine Books, Ltd. v. Temple Univ., 697 F.2d 90, 95-96 (3d Cir. 1982); William Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668 F.2d 1014, 1036-38 & n.37 (9th Cir. 1981); AREEDA ET AL., supra note 19, at 96-100.
141. See also AREEDA ET AL., supra note 19, at 96-100; Jonathan B. Baker, Contemporary Empirical Merger Analysis, 5 GEO. MASON L. REV. 347, 358 (1997).
142. 902 F. Supp. 968 (N.D. Iowa 1995), vacated, 107 F.3d 632 (8th Cir. 1997).
143. Id. at 980.
144. See id. at 971-72.
145. See id. at 976.
146. The court did not use the word "hypothetical" because the merger would create a literal monopolist in Dubuque.
147. See 902 F. Supp. at 976-77.
148. See Defendants' Exhibit 447.
149. The profit-maximization critical sales loss would be 7.5% with linear demand and 7.9% with isoelastic demand.
150. 902 F. Supp. at 981.
151. Id. at 981-83.
152. The critical loss analysis in the litigants' briefs contains much the same errors.
153. The margin calculation was predicated on a discount of 15%. See Defendants' Exhibit 447. A larger discount implies a lower price and lower margin.
154. The profit-maximization critical sales loss is 31.5% with linear demand and 42.1% with isoelastic demand. The former probably is the more reasonable estimate, and it is substantially less than the 46.3% produced by the break-even calculation. This highlights the fact that the break-even and profit-maximization calculations are not so close when large price increases are involved.
155. See, e.g., Robinson, supra note 25, at 20; Sidney Weintraub, The Foundations of the Demand Curve, 32 AM. ECON. REV. 538, 543-45 (1942).
156. This terminology was used in the works that first estimated such demand curves. Jonathan B. Baker & Timothy F. Bresnahan, Estimating the Demand Curve Facing a Single Firm, 6 INT'L J. INDUS. ECON. 282 (1988); Jonathan B. Baker & Timothy F. Bresnahan, The Gains from Merger or Collusion in Product-Differentiated Industries, 33 J. INDUS. ECON. 427 (1985).
157. This terminology was used in the works that first estimated such demand curves. Jonathan B. Baker & Timothy F. Bresnahan, Estimating the Demand Curve Facing a Single Firm, 6 INT'L J. INDUS. ECON. 282 (1988); Jonathan B. Baker & Timothy F. Bresnahan, The Gains from Merger or Collusion in Product-Differentiated Industries, 33 J. INDUS. ECON. 427 (1985).
158. This sort of behavior was proposed by HEINRICH VON STACKELBERG, MARKTFORM UND GLEICHGEWICHT (1934). For a discussion of Stackelberg's analysis, see WILLIAM J. FELLNER, COMPETITION AMONG THE FEW ch.3 (Augustus M. Kelley 1965).
159. The residual demand curve considered in the dominant firm context (see supra note 19 and accompanying text) is very similar, except that quantities were the choice variables.
160. See Gregory J. Werden & Luke M. Froeb, Correlation, Causality, and All that Jazz: The Inherent Shortcomings of Price Tests for Antitrust Market Delineation, 8 REV. INDUS. ORG. 329, 331 (1993). The relevant mathematics is sketched in the Appendix below.
161. The Appendix contains a formal analysis of the relationship between the Marshallian own elasticity of demand and the residual demand elasticity.
162. On market delineation under the Merger Guidelines using total, or residual, demand elasticities, see Luke M. Froeb & Gregory J. Werden, Residual Demand Estimation for Market Delineation: Complications and Limitations, 6 REV. INDUS. ORG. 33 (1991); Scheffman & Spiller, supra note 106; Werden & Froeb, supra note 128.
163. The change in policy may have practical advantages. Reliable estimation of residual demand elasticities depends on data for firm-specific costs important to price determination. See Froeb & Werden, supra note 130, at 44-46. The requisite data typically is difficult to obtain, and will not even exist if competing brands have essentially the same input costs.
164. For elaboration on the point and an example, see Werden & Froeb, supra note 128, at 334-38.
165. Economics generally uses more complicated formal definitions of substitutes and complements. The reason is that a price increase can reduce the consumer's purchasing power and thereby cause what are termed "income effects." The effects of a price increase on consumption of other goods involve both substitution effects and income effects.
166. JOE S. BAIN, PRICE THEORY 25-26, 50-53 (1952); FRITZ MACHLUP, THE ECONOMICS OF SELLERS COMPETITION 213-14 (1952).
167. JOE S. BAIN, PRICE THEORY 25-26, 50-53 (1952); FRITZ MACHLUP, THE ECONOMICS OF SELLERS COMPETITION 213-14 (1952).
168. 345 U.S. 594, 612 n.31 (1953). The phrase "to which . . . only a limited number of buyers will turn" seems to relate more to diversion than cross elasticity. See text accompanying note 155-57 infra.
169. ATTORNEY GENERAL'S COMMITTEE REPORT, supra note 46, at 322 (invoking the concept but not using the term); Note, The Market: A Concept in Anti-Trust, 54 COLUM. L. REV. 580, 585-86 (1954); David Macdonald, Product Competition in the Relevant Market Under the Sherman Act, 53 MICH. L. REV. 69, 82-84 & nn.61, 63-67 (1954).
170. ATTORNEY GENERAL'S COMMITTEE REPORT, supra note 46, at 322 (invoking the concept but not using the term); Note, The Market: A Concept in Anti-Trust, 54 COLUM. L. REV. 580, 585-86 (1954); David Macdonald, Product Competition in the Relevant Market Under the Sherman Act, 53 MICH. L. REV. 69, 82-84 & nn.61, 63-67 (1954).
171. ATTORNEY GENERAL'S COMMITTEE REPORT, supra note 46, at 322 (invoking the concept but not using the term); Note, The Market: A Concept in Anti-Trust, 54 COLUM. L. REV. 580, 585-86 (1954); David Macdonald, Product Competition in the Relevant Market Under the Sherman Act, 53 MICH. L. REV. 69, 82-84 & nn.61, 63-67 (1954).
172. 351 U.S. at 394.
173. Id.
174. The second formulation was "reasonable interchangeability": "In considering what is the relevant market . . . no more definite rule can be declared than that commodities reasonably interchangeable by consumers for the same purpose make up" the relevant market. Id. at 395. In the conclusion of the opinion, the Court restated this formulation to hold that the relevant market "is composed of products that have reasonable interchange-ability for the purposes for which they are produced - price, use and qualities considered." Id. at 404.
175. Id. at 394.
176. Id. at 400 (footnote omitted). Interestingly, the Court focused on the aggregate substitution to other flexible packaging materials, which is directly related to the own elasticity of demand, and not to the cross elasticity of demand.
177. United States v. E.I. du Pont de Nemours & Co., 353 U.S. 586, 593-94 (1957).
178. Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962) (citations and footnotes omitted). While once the primary basis for decision in most market delineation cases, the "practical indicia" are rarely actually applied these days. Notable anachronisms are FTC v. Warner Communications Inc., 742 F.2d 1156, 1163 (9th Cir. 1984); Moore Corp. Ltd. v. Wallace Computer Servs., Inc., 907 F. Supp. 1545, 1575-79 (D. Del. 1995), vacated in relevant part as moot (3d Cir. Aug. 20, 1996); Ansell, Inc. v. Schmid Lab., Inc. 757 F. Supp. 467, 472-74 (D.N.J.), aff'd without opinion, 941 F.2d 1200 (3d Cir. 1991). For a discussion of the origin, application, and utility of the "practical indicia," see Werden, History, supra note 96, at 146-51, 154-55, 172-79;
179. Lawrence C. Maisel, Submarkets in Merger and Monopolization Cases, 72 GEO. L.J. 39, 59-69 (1983).
180. United States v. Grinnell Corp., 384 U.S. 563, 573 (1966).
181. See, e.g., United Farmers Agents Ass'n v. Farmers Ins. Exch., 89 F.3d 233, 236 n.3 (5th Cir. 1996); Allen-Myland, Inc. v. IBM Corp., 33 F.3d 194, 201 n.8 (3d Cir. 1994); U.S. Anchor Mfg., Inc. v. Rule Indus., Inc., 7 F.3d 986, 995 (11th Cir. 1993); Olin Corp. v. FTC, 986 F.2d 1295, 1298 (9th Cir. 1992); Murrow Furniture Galleries, Inc. v. Thomasville Furniture Indus., Inc., 889 F.2d 524, 528 (4th Cir. 1989); H.J., Inc. v. International Tel. & Tel. Corp., 867 F.2d 1531, 1537 (8th Cir. 1989); Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 218 (D.C. Cir. 1986).
182. New York v. Kraft Gen. Foods, Inc., 926 F. Supp. 321 (S.D.N.Y. 1995). Preliminary relief was denied twice. New York v. Kraft Gen. Foods, Inc., 862 F. Supp. 1030 (S.D.N.Y.), aff'd without opinion, 14 F.3d 590 (2d Cir. 1993); 862 F. Supp. 1035 (S.D.N.Y. 1994).
183. 926 F. Supp. at 333-35, 356-57.
184. Id. at 333.
185. Id. Each pair of products has two different cross elasticities of demand, and there is no indication as to which she relied on.
186. For comparable views, see AREEDA & KAPLOW, supra note 73, at 576; Louis Kaplow, The Accuracy of Traditional Market Power Analysis and a Direct Adjustment Alternative, 95 HARV. L. REV. 1817, 1829 n.52 (1982); Werden, Market Delineation, supra note 96, at 572-75.
187. For comparable views, see AREEDA & KAPLOW, supra note 73, at 576; Louis Kaplow, The Accuracy of Traditional Market Power Analysis and a Direct Adjustment Alternative, 95 HARV. L. REV. 1817, 1829 n.52 (1982); Werden, Market Delineation, supra note 96, at 572-75.
188. Furthermore, only one of the two cross elasticities for a product pair is directly relevant.
189. The own elasticity of demand for a product normally also can be estimated with greater precision than can cross elasticities.
190. This is not the normal outcome when courts invoke cross elasticities to delineate markets for branded products only because courts use cross elasticities as a mantra rather than a systematic mode of analysis.
191. Perhaps the first both to recognize and to reject this approach was GEORGE J. STIGLER, THE THEORY OF PRICE 281 (2d ed. 1946). The case law generally has not undertaken the ranking of substitutes, but one court that did so used cross elasticities of demand for the purpose. See New York v. Kraft Gen. Foods, Inc., 926 F. Supp. 321, 356 (S.D.N.Y. 1993).
192. The latter is favored by the Horizontal Merger Guidelines, which state that "the term 'next-best substitute' refers to the alternative which, if available in unlimited quantities at constant prices, would account for the greatest value of diversion of demand in response to a 'small but significant and nontransitory' price increase." Horizontal Merger Guidelines, supra note 21, § 1.11 n.9. The phrase "if available in unlimited quantities at constant prices" serves to eliminate any effect of supply conditions for the substitutes and assure that only demand substitution is considered.
193. This term appears to have been introduced by Carl Shapiro, Mergers with Differentiated Products, ANTITRUST, Spring 1996, at 23.
194. The diversion ratios for a product need not sum to one. One reason is that the units in which the products are measured are not necessarily compatible. Another is that the price increase tends to make consumers poorer in real terms, in that less can be consumed.
195. The IIA property states that the relative odds of any two choices is independent of the presence or absence of other possible choices. See Gregory J. Werden, Luke M. Froeb & Timothy J. Tardiff, The Use of the Logit Model in Applied Industrial Organization, 3 INT'L J. ECON. BUS. 83, 86-87 (1996). The IIA property was termed the "choice axiom" by psychologist R. Duncan Luce, who found it consistent with behavior in some choice experiments and constructed a choice theory using it. R. DUNCAN LUCE, INDIVIDUAL CHOICE BEHAVIOR 9, 12-15 (1959).
196. The IIA property states that the relative odds of any two choices is independent of the presence or absence of other possible choices. See Gregory J. Werden, Luke M. Froeb & Timothy J. Tardiff, The Use of the Logit Model in Applied Industrial Organization, 3 INT'L J. ECON. BUS. 83, 86-87 (1996). The IIA property was termed the "choice axiom" by psychologist R. Duncan Luce, who found it consistent with behavior in some choice experiments and constructed a choice theory using it. R. DUNCAN LUCE, INDIVIDUAL CHOICE BEHAVIOR 9, 12-15 (1959).
197. The IIA property implies that all of the cross elasticities of the quantity demanded with respect to the price of a given product are the same.
198. Indeed, one can imagine a map in which distance separating points is travel time or travel cost.
199. See FTC v. University Health, Inc., 938 F.2d 1206, 1222-23 (11th Cir. 1991); United States v. United Tote, Inc., 768 F. Supp. 1064, 1084-85 (D. Del. 1991). The new guidelines on merger efficiencies issued by the federal enforcement agencies (reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104, at 20,573-11-13) lean in the direction of consumer welfare but do not exclude alternatives. See Gregory J. Werden, An Economic Perspective on the Analysis of Merger Efficiencies, ANTITRUST, Summer 1997, at 12, 13-14.
200. For the general results, see Gregory J. Werden, A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers of Differentiated Products, 44 J. INDUS. ECON. 409 (1996); Gregory J. Werden & Luke M. Froeb, A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers of a Homogeneous Product, 58 ECON. LETTERS 367 (1998).
201. For the general results, see Gregory J. Werden, A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers of Differentiated Products, 44 J. INDUS. ECON. 409 (1996); Gregory J. Werden & Luke M. Froeb, A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers of a Homogeneous Product, 58 ECON. LETTERS 367 (1998).
202. For a concise statement of the analysis, see Gregory J. Werden, Simulating Unilateral Competitive Effects from Differentiated Products Mergers, ANTITRUST, Spring 1997, at 27. More complete statements of the analysis are found in Jerry A. Hausman & Gregory K. Leonard, Economic Analysis of Differentiated Products Mergers Using Real World Data, 5 GEO. MASON. L. REV. 321 (1997); Jerry Hausman, Gregory Leonard & J. Douglas Zona, Competitive Analysis with Differentiated Products, 34 ANNALES D'ECONOMIE ET DESTATISTIQUE 159 (1994); Gregory J. Werden, Simulating the Effects of Differentiated Products Mergers: A Practical Alternative to Structural Merger Policy, 5 GEO. MASON. L. REV. 363 (1997); Gregory J. Werden, Simulating the Effects of Differentiated Products Mergers: A Practitioners' Guide, in STRATEGY AND POLICY IN THE FOOD SYSTEM: EMERGING ISSUES (Julie A. Caswell & Ronald W. Cotterill eds., 1997) [hereinafter, Werden, Practitioners' Guide]; Gregory J. Werden & Luke M. Froeb, Simulation as an Alternative to Structural Merger Policy in Differentiated Products Industries, in THE ECONOMICS OF THE ANTITRUST PROCESS 65 (Malcolm B. Coate & Andrew N. Kleit eds., 1996). The prediction accuracy of merger simulation is not known, but that is also true of every other methodology. Merger simulation has two major virtues: It yields quantitative predictions, which are essential in making welfare trade-offs, and it clearly focuses the debate on the assumptions or estimates that matter.
203. For a concise statement of the analysis, see Gregory J. Werden, Simulating Unilateral Competitive Effects from Differentiated Products Mergers, ANTITRUST, Spring 1997, at 27. More complete statements of the analysis are found in Jerry A. Hausman & Gregory K. Leonard, Economic Analysis of Differentiated Products Mergers Using Real World Data, 5 GEO. MASON. L. REV. 321 (1997); Jerry Hausman, Gregory Leonard & J. Douglas Zona, Competitive Analysis with Differentiated Products, 34 ANNALES D'ECONOMIE ET DESTATISTIQUE 159 (1994); Gregory J. Werden, Simulating the Effects of Differentiated Products Mergers: A Practical Alternative to Structural Merger Policy, 5 GEO. MASON. L. REV. 363 (1997); Gregory J. Werden, Simulating the Effects of Differentiated Products Mergers: A Practitioners' Guide, in STRATEGY AND POLICY IN THE FOOD SYSTEM: EMERGING ISSUES (Julie A. Caswell & Ronald W. Cotterill eds., 1997) [hereinafter, Werden, Practitioners' Guide]; Gregory J. Werden & Luke M. Froeb, Simulation as an Alternative to Structural Merger Policy in Differentiated Products Industries, in THE ECONOMICS OF THE ANTITRUST PROCESS 65 (Malcolm B. Coate & Andrew N. Kleit eds., 1996). The prediction accuracy of merger simulation is not known, but that is also true of every other methodology. Merger simulation has two major virtues: It yields quantitative predictions, which are essential in making welfare trade-offs, and it clearly focuses the debate on the assumptions or estimates that matter.
204. For a concise statement of the analysis, see Gregory J. Werden, Simulating Unilateral Competitive Effects from Differentiated Products Mergers, ANTITRUST, Spring 1997, at 27. More complete statements of the analysis are found in Jerry A. Hausman & Gregory K. Leonard, Economic Analysis of Differentiated Products Mergers Using Real World Data, 5 GEO. MASON. L. REV. 321 (1997); Jerry Hausman, Gregory Leonard & J. Douglas Zona, Competitive Analysis with Differentiated Products, 34 ANNALES D'ECONOMIE ET DESTATISTIQUE 159 (1994); Gregory J. Werden, Simulating the Effects of Differentiated Products Mergers: A Practical Alternative to Structural Merger Policy, 5 GEO. MASON. L. REV. 363 (1997); Gregory J. Werden, Simulating the Effects of Differentiated Products Mergers: A Practitioners' Guide, in STRATEGY AND POLICY IN THE FOOD SYSTEM: EMERGING ISSUES (Julie A. Caswell & Ronald W. Cotterill eds., 1997) [hereinafter, Werden, Practitioners' Guide]; Gregory J. Werden & Luke M. Froeb, Simulation as an Alternative to Structural Merger Policy in Differentiated Products Industries, in THE ECONOMICS OF THE ANTITRUST PROCESS 65 (Malcolm B. Coate & Andrew N. Kleit eds., 1996). The prediction accuracy of merger simulation is not known, but that is also true of every other methodology. Merger simulation has two major virtues: It yields quantitative predictions, which are essential in making welfare trade-offs, and it clearly focuses the debate on the assumptions or estimates that matter.
205. For a concise statement of the analysis, see Gregory J. Werden, Simulating Unilateral Competitive Effects from Differentiated Products Mergers, ANTITRUST, Spring 1997, at 27. More complete statements of the analysis are found in Jerry A. Hausman & Gregory K. Leonard, Economic Analysis of Differentiated Products Mergers Using Real World Data, 5 GEO. MASON. L. REV. 321 (1997); Jerry Hausman, Gregory Leonard & J. Douglas Zona, Competitive Analysis with Differentiated Products, 34 ANNALES D'ECONOMIE ET DESTATISTIQUE 159 (1994); Gregory J. Werden, Simulating the Effects of Differentiated Products Mergers: A Practical Alternative to Structural Merger Policy, 5 GEO. MASON. L. REV. 363 (1997); Gregory J. Werden, Simulating the Effects of Differentiated Products Mergers: A Practitioners' Guide, in STRATEGY AND POLICY IN THE FOOD SYSTEM: EMERGING ISSUES (Julie A. Caswell & Ronald W. Cotterill eds., 1997) [hereinafter, Werden, Practitioners' Guide]; Gregory J. Werden & Luke M. Froeb, Simulation as an Alternative to Structural Merger Policy in Differentiated Products Industries, in THE ECONOMICS OF THE ANTITRUST PROCESS 65 (Malcolm B. Coate & Andrew N. Kleit eds., 1996). The prediction accuracy of merger simulation is not known, but that is also true of every other methodology. Merger simulation has two major virtues: It yields quantitative predictions, which are essential in making welfare trade-offs, and it clearly focuses the debate on the assumptions or estimates that matter.
206. For a concise statement of the analysis, see Gregory J. Werden, Simulating Unilateral Competitive Effects from Differentiated Products Mergers, ANTITRUST, Spring 1997, at 27. More complete statements of the analysis are found in Jerry A. Hausman & Gregory K. Leonard, Economic Analysis of Differentiated Products Mergers Using Real World Data, 5 GEO. MASON. L. REV. 321 (1997); Jerry Hausman, Gregory Leonard & J. Douglas Zona, Competitive Analysis with Differentiated Products, 34 ANNALES D'ECONOMIE ET DESTATISTIQUE 159 (1994); Gregory J. Werden, Simulating the Effects of Differentiated Products Mergers: A Practical Alternative to Structural Merger Policy, 5 GEO. MASON. L. REV. 363 (1997); Gregory J. Werden, Simulating the Effects of Differentiated Products Mergers: A Practitioners' Guide, in STRATEGY AND POLICY IN THE FOOD SYSTEM: EMERGING ISSUES (Julie A. Caswell & Ronald W. Cotterill eds., 1997) [hereinafter, Werden, Practitioners' Guide]; Gregory J. Werden & Luke M. Froeb, Simulation as an Alternative to Structural Merger Policy in Differentiated Products Industries, in THE ECONOMICS OF THE ANTITRUST PROCESS 65 (Malcolm B. Coate & Andrew N. Kleit eds., 1996). The prediction accuracy of merger simulation is not known, but that is also true of every other methodology. Merger simulation has two major virtues: It yields quantitative predictions, which are essential in making welfare trade-offs, and it clearly focuses the debate on the assumptions or estimates that matter.
207. For a concise statement of the analysis, see Gregory J. Werden, Simulating Unilateral Competitive Effects from Differentiated Products Mergers, ANTITRUST, Spring 1997, at 27. More complete statements of the analysis are found in Jerry A. Hausman & Gregory K. Leonard, Economic Analysis of Differentiated Products Mergers Using Real World Data, 5 GEO. MASON. L. REV. 321 (1997); Jerry Hausman, Gregory Leonard & J. Douglas Zona, Competitive Analysis with Differentiated Products, 34 ANNALES D'ECONOMIE ET DESTATISTIQUE 159 (1994); Gregory J. Werden, Simulating the Effects of Differentiated Products Mergers: A Practical Alternative to Structural Merger Policy, 5 GEO. MASON. L. REV. 363 (1997); Gregory J. Werden, Simulating the Effects of Differentiated Products Mergers: A Practitioners' Guide, in STRATEGY AND POLICY IN THE FOOD SYSTEM: EMERGING ISSUES (Julie A. Caswell & Ronald W. Cotterill eds., 1997) [hereinafter, Werden, Practitioners' Guide]; Gregory J. Werden & Luke M. Froeb, Simulation as an Alternative to Structural Merger Policy in Differentiated Products Industries, in THE ECONOMICS OF THE ANTITRUST PROCESS 65 (Malcolm B. Coate & Andrew N. Kleit eds., 1996). The prediction accuracy of merger simulation is not known, but that is also true of every other methodology. Merger simulation has two major virtues: It yields quantitative predictions, which are essential in making welfare trade-offs, and it clearly focuses the debate on the assumptions or estimates that matter.
208. The central role of demand elasticities in merger simulation may be demonstrated most powerfully by the observation that the use of merger simulation eliminates the need for market delineation because the predictions of merger simulations are not sensitive to the make-up of the product group used in the simulations. The prices of products included in merger simulations are allowed to respond to those of the merging firms, while prices of the excluded products are held constant. The prices of all included substitutes increase in response to price increases by the merged firm, and that stimulates further price increases by the merged firm. Thus, the exclusion of substitutes from a simulation biases downward the price increases from a merger. The bias is very slight, however, unless excluded products are individually very important substitutes for a product of the merged firm.
209. I do not currently advocate any one demand system. For a general discussion of alternatives, see Werden, Practitioners' Guide, supra note 163, which also presents details on simulation with linear demand. For details on simulation with logit demand, see Werden & Froeb, supra note 163. For details on simulation with AIDS demand, see Hausman & Leonard, supra note 163. The implications of alternative demand assumptions are explored by Philip Crooke, Luke M. Froeb, Steven Tschantz & Gregory J. Werden, Effects of the Assumed Demand System on Simulated Postmerger Equilibria (August 14, 1997) (Economic Analysis Group Discussion Paper 97-3).
210. I do not currently advocate any one demand system. For a general discussion of alternatives, see Werden, Practitioners' Guide, supra note 163, which also presents details on simulation with linear demand. For details on simulation with logit demand, see Werden & Froeb, supra note 163. For details on simulation with AIDS demand, see Hausman & Leonard, supra note 163. The implications of alternative demand assumptions are explored by Philip Crooke, Luke M. Froeb, Steven Tschantz & Gregory J. Werden, Effects of the Assumed Demand System on Simulated Postmerger Equilibria (August 14, 1997) (Economic Analysis Group Discussion Paper 97-3).
211. The assumption of linear demand yields a smaller price increase than any of the alternative assumptions that have been used in merger simulation. See Crooke, Froeb, Tschantz & Werden, supra note 165.
212. See Werden, Froeb & Tardiff, supra note 158, at 86-87, and sources cited therein.
213. See Werden & Froeb, supra note 128, at 331.
214. Cross elasticities of demand are formally defined and explained in the text accompanying note 133 and in the balance of this Appendix.
215. This analysis concerns the allocation of income among commodities at a given point in time. Adding allocation over time, through saving or borrowing, does not materially alter the result.
216. 1. This is justified if a very small price increase is considered. Using calculus, this term would not have existed in the first place.
217. Other works present this formula without the 1 on the right-hand side of the equation. See AREEDA ET AL., supra note 19, at 105 n.4; Landes & Posner, supra note 19, at 961 n.43. Landes and Posner assume that "real income [is] constant." Id. This assumption means that the elasticities are not Marshallian demand elasticities, since the Marshallian assumption is that nominal income is held constant. AREEDA ET AL. do not explain the result.