Market share thresholds: On the conflation of empirical assessments and legal policy judgments

Journal of Competition Law and Economics

Volumn 7, Issue 2, 2011, Pages 243-276

  Kaplow, Louis ^a,b  

^a HARVARD LAW SCHOOL   (United States)

^b NATIONAL BUREAU OF ECONOMIC RESEARCH   (United States)

Author keywords

[No Author keywords available]

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EID: 79851476034     PISSN: 17446414     EISSN: 17446422     Source Type: Journal    
DOI: 10.1093/joclec/nhq031     Document Type: Article

References (118)

1. United States v. Aluminum Co. of Am. (Alcoa), 148 F.2d 416, 424 (2d Cir. 1945). The unusual weight given to this circuit court opinion is due in part to Hand's stature (and that of his fellow panelists) and to the fact that the Second Circuit Court of Appeals heard the case in lieu of the Supreme Court because four justices disqualified themselves, thereby depriving the Court of a quorum.
2. On the prominence of this passage, see, for example, Spencer W. Waller, The Story of Alcoa: The Enduring Questions of Market Power, Conduct, and Remedy in Monopolization Cases, in ANTITRUST STORIES 121, 142 (Eleanor M. Fox & Daniel A. Crane eds., Found. Press 2007) ("However, much of Alcoa remains good law or the subject for contemporary debate. Hand's rule of thumb, that a 90% market share is probably a monopoly, 60% is doubtful, and 33% cannot be, is one of the most quoted aphorisms in antitrust law.").
3. Note that, under some approaches, market share is relevant to the empirical assessment of market power as one factor, just as there are valid approaches to determining a vehicle's speed that use RPMs as one input to the analysis. Even then, it would be an error to treat RPMs as if synonymous with speed.
4. The subject is taken up in Louis Kaplow, Why (Ever) Define Markets?, 124 HARV. L. REV. 437 (2010).
5. See, e.g., U.S. DEP'T OF JUSTICE & FED. TRADE COMM'N, HORIZONTAL MERGER GUIDELINES § 1 (2010) [hereinafter U.S. MERGER GUIDELINES] ("A merger enhances market power if it is likely to encourage one or more firms to raise price, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives.... For simplicity of exposition, these Guidelines generally discuss the analysis in terms of... price effects.").
6. 2B PHILLIP E. AREEDA, HERBERT HOVENKAMP & JOHN L. SOLOW, ANTITRUST LAW: AN ANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION 109 (3d ed., Aspen Publishers, Inc. 2007) ("Market power is the ability to raise price profitably by restricting output.").
7. VALENTINE KORAH, AN INTRODUCTORY GUIDE TO EC COMPETITION LAWAND PRACTICE 119 (9th ed., Hart Publ'g 2007) ("In Continental Can, the ECJ implicitly accepted the Commission's definition of dominant position based on the economists' concept of power over price.").
8. Dennis W. Carlton, Market Definition: Use and Abuse, 3 COMPETITION POL'Y INT'L 3, 5 (2007) ("One standard definition of market power is the ability to set price profitably above the competitive level, which is usually taken to mean marginal cost.").
9. William M. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 HARV. L. REV. 937, 937 (1981) ("The term 'market power' refers to the ability of a firm (or a group of firms, acting jointly) to raise price above the competitive level without losing so many sales so rapidly that the price increase is unprofitable and must be rescinded.").
10. ("A simple economic meaning of the term 'market power' is the ability to set price above marginal cost.").
11. Gregory J. Werden, Demand Elasticities in Antitrust Analysis, 66 ANTITRUST L.J. 363, 373-74 (1998) (tracing the U.S. Supreme Court's acceptance of this economic definition of market power beginning in the 1960s, and further stating that "The courts of appeals have widely used the economic definition of market power.").
12. A commonly cited definition is that "Monopoly power is the power to control prices or exclude competition."United States v. E.I. du Pont de Nemours & Co. (Cellophane), 351 U.S. 377, 391 (1956).
13. Two differences may be noted briefly. Most obviously, this formulation adds the alternative of being able to exclude competition. Some have rationalized this phrasing as indicating that a monopolist (the focus of inquiry in Cellophane) might use its power either to raise price or instead, perhaps in a predatory manner, to exclude competition. Others have interpreted "or"as "and,"emphasizing that the ability to raise prices over a significant period of time requires somehow keeping competitors at bay.
14. See, e.g., Richard Schmalensee, Another Look at Market Power, 95 HARV. L. REV. 1789, 1795 (1982) (rationalizing the Cellophane language as distinguishing the short- and long-run exercises of market power).
15. The other, more subtle difference-echoed more sharply in some other versions as well-is the reference to the ability to "control"price; others have referred to a firm having discretion or, in the words of Michelin v. Commission, Case 322/81 [1983] ECR 3461 § 30, in the European Union, "to behave to an appreciable extent independently of its competitors and customers."Most of these alternatives are vague and potentially misleading. A firm with little market power can still control price, although significant elevations would be unprofitable, and a firm with great market power cannot simply ignore competitors and customers and, moreover, if it wishes to maximize profits, will feel compelled to select a single, particular price, just as would its low-power counterpart.
16. See, e.g., PHILLIP AREEDA, LOUIS KAPLOW & AARON EDLIN, ANTITRUST ANALYSIS 485-86 (6th ed., Aspen Publishers, Inc. 2004).
17. Louis Kaplow & Carl Shapiro, Antitrust, in 2 HANDBOOK OF LAW AND ECONOMICS 1073, 1098 (A. Mitchell Polinsky & Steven Shavell eds., N.-Holland 2007).
18. see also European Comm'n, DG Competition Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses ¶ 23 (2005) [hereinafter DG Competition Article 82] (in elaborating that dominance requires the ability to behave independently of competitors and customers, states that "The notion of independence, which is the special feature of dominance, is related to the level of competitive constraint facing the undertaking(s) in question. For dominance to exist the undertaking(s) concerned must not be subject to effective competitive constraints. In other words, it thus must have substantial market power."). These and other differences in definitions of market power will largely be ignored here.
19. For example, in the presence of fixed costs, some would prefer to view market power as encompassing only elevations greater than necessary to recover those costs, particularly to the extent it is thought (feared) that a finding of market power might too readily lead to condemnation, without appropriate inquiry into whether the acts under scrutiny are in fact anticompetitive.
20. Because the denominator is the price rather than marginal cost, the Lerner index has values somewhat different from what one might have expected. For example, suppose that price is 10% above marginal cost (for example, P= 110, MC = 100); then L = 10/110 ≈ 9%. A price 50% above marginal cost (for example, P = 150, MC = 100) yields an L of approximately 33%, and a price 100% above (double) marginal cost (for example, P = 200, MC = 100) yields an L of 50%.
21. In the limit, L= 100% implies an infinite price or a marginal cost of zero, so for finite prices and strictly positive marginal cost, we have L< 100%.
22. One could instead examine, for example, the fraction P/MC (which equals 1/(12 L)), in which case perfect competition would be associated with an index value of 1, a price 10% in excess of marginal cost would result in a value of 1.1, and so forth. Or one could consider (P 2 MC)/MC (which equals L/(1 2 L)), which in turn is equivalent to (P/MC) 2 1, so perfect competition would (as with the Lerner index) have an index value of 0, whereas a price 10% in excess of marginal cost would have a value of 0.1, and so forth. Although these alternatives may seem a bit more straightforward to the uninitiated, all are substantially equivalent (since they are all monotonic transformations of L). The use of the Lerner index is conventional in economic analysis of the subject because it has simpler properties that render its use convenient when it comes to measuring market power.
23. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).
24. ("The unifying theme of these Guidelines is that mergers should not be permitted to create, enhance, or entrench market power or to facilitate its exercise."(market power being defined, as quoted in note 4, in terms of price elevation)).
25. (defining the relevant market as one in which a hypothetical monopolist "likely would impose at least a small but significant and non-transitory increase in price"(referred to as the SSNIP test)).
26. See European Union, Guidelines on the Assessment of Horizontal Mergers, European Commission Regulation 139/2004 (2004).
27. See, e.g., Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984).
28. U.S. Steel Corp. v. Fortner Enters., 429 U.S. 610 (1977).
29. See, e.g., Nw. Wholesale Stationers v. Pac. Stationary & Printing Co., 472 U.S. 284 (1985).
30. Note also that the change in market power due, say, to a horizontal merger is the difference between the level of market power after the merger and the level that prevailed beforehand, so statements about increments can be related to statements about levels.
31. For example, there are differences of opinion regarding whether and when one should employ merger simulations, undertake critical loss analysis (including a variant that assesses the existence of upward pricing pressure for mergers), rely on more informal impressions from sophisticated buyers, adjust analysis to incorporate dynamic competition, and so forth.
32. See, e.g., Dennis W. Carlton, Revising the Horizontal Merger Guidelines, 6 J. COMPETITION L. & ECON. 619 (2010).
33. J. Gregory Sidak & David J. Teece, Dynamic Competition in Antitrust Law, 5 J. COMPETITION L. & ECON. 581 (2009).
34. For present purposes, these disagreements are entirely immaterial for the reasons explained in the text.
35. See, e.g., Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 469 n.15 (1992) ("Courts usually have considered the relationship between price in one market and demand in another in defining the relevant market. Because market power is often inferred from market share, market definition generally determines the result of the case.").
36. ("In resolving market or 'monopoly' power issues, the courts have typically relied heavily on market definition and on the defendant firm's market share of the market thus defined.").
37. RICHARD A. POSNER, ANTITRUST LAW 147 (2d ed., Univ. of Chicago Press 2001) ("The importance of concentration ratios in the administration of the antitrust laws makes the definition of the market in which to compute the defendant's market share critical.").
38. Jonathan B. Baker, Market Definition: An Analytical Overview, 74 ANTITRUST L.J. 129, 129 (2007) ("Throughout the history of U.S. antitrust litigation, the outcome of more cases has surely turned on market definition than on any other substantive issue. Market definition is often the most critical step in evaluating market power and determining whether business conduct has or likely will have anticompetitive effects.").
39. ("The standard method of proving market power in antitrust cases involves first defining a relevant market in which to compute the defendant's market share, next computing that share, and then deciding whether it is large enough to support an inference of the required degree of market power.").
40. Robert Pitofsky, New Definitions of Relevant Market and the Assault on Antitrust, 90 COLUM. L. REV. 1805, 1806-07 (1990) ("Definition of [a] relevant market is a critical analytical tool in antitrust enforcement because the legality of business conduct almost always depends upon the market power of the participants.... Knowledgeable antitrust practitioners have long known that the most important single issue in most enforcement actions-because so much depends on it-is market definition.").
41. Although the central question in that article as well as most of the particular arguments differ, there is some connection between the two enterprises, as will be noted periodically below.
42. Regarding Europe generally, see, for example, RICHARD WHISH, COMPETITION LAW 43-47 (6th ed., Oxford Univ. Press 2009) (stating that "it is interesting to consider the large range of situations in which E.C. and U.K. competition law require competition lawyers and their clients to consider market share figures for the purpose of deciding how to handle a particular case,"and presenting a three-page table of market share thresholds followed by forty-four supporting notes).
43. See, e.g., 3B PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW: AN ANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION 392-94 & n.19 (3d ed., Aspen Publishers, Inc. 2007) (collecting cases identifying levels of market share required in a monopolization case).
44. (stating the authors' preferred presumptive requirement of a share exceeding 70-75% for five years).
45. (presenting cases articulating market share thresholds for attempted monopolization cases and offering their own market share recommendations).
46. (summarizing and endorsing pronouncements by U.S. courts favoring strong presumptions of significant market share minimums in monopolization cases).
47. Gregory J. Werden, Assigning Market Shares, 70 ANTITRUST L.J. 67, 71-72 & n.24 (2002) (citing cases in support of the proposition that appellate courts require more than a 50% market share in monopolization cases).
48. "It is very likely that very high market[] shares, which have been held for some time, indicate a dominant position. This would be the case where an undertaking holds 50% or more of the market, provided that rivals hold a much smaller share of the market. In the case of lower market shares, dominance is more likely to be found in the market share range of 40% to 50% than below 40%, although also undertakings with market shares below 40% could be considered to be in a dominant position. However, undertakings with market shares of no more than 25% are not likely to enjoy a (single) dominant position on the market concerned.").
49. MAHER M. DABBAH, EC AND UK COMPETITION LAW: COMMENTARY, CASES AND MATERIALS 330 (Cambridge Univ. Press 2004).
50. See, e.g., Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 26-27 (1984).
51. PHILLIP E. AREEDA, EINER ELHAUGE & HERBERT HOVENKAMP, ANTITRUST LAW: AN ANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION 55-57, 75-77 (2d ed., Aspen Publishers, Inc. 2004) (discussing required market share in Jefferson Parish and subsequent cases).
52. ("The [U.S.] Horizontal Merger Guidelines... have had an enormous influence not just on how U.S. antitrust agencies conduct merger policy but also on how courts and antitrust agencies throughout the world make decisions about the antitrust consequences of mergers.").
53. PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW: AN ANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION 170-80 (2d ed., Aspen Publishers, Inc. 2006) (summarizing the Merger Guidelines' approach, offering the authors' views thereon, and describing courts' endorsement of the Merger Guidelines' thresholds).
54. "Category mistake"is a term used by philosophers to refer to speaking of one thing in language that is appropriate only for something else that is qualitatively different.
55. A contrasting example would be a question asking the mass of an object and an answer stating its weight. If the questioner presumes that the weight refers to that on the surface of the earth-and taking into account that variation depending on, say, the elevation where the weight was measured is fairly small and probably of trivial importance for many purposes- the answer might well be sufficient. Thus, sloppiness involving answers not even in the proper units of the question is tolerable in some settings.
56. Whether coherent answers of the sort usually imagined really exist in a meaningful sense is challenged in Kaplow, but those arguments or others casting doubt on the market definition process are ignored for present purposes.
57. United States v. General Dynamics Corp., 415 U.S. 486 (1974), is taken to stand for this view, and it in turn cited Brown Shoe Co. v. United States, 370 U.S. 294 (1962), for the proposition that "statistics concerning market share and concentration, while of great significance, [are] not conclusive indicators of anticompetitive effects."415 U.S. at 498.
58. (the supposition "that a given share in a properly defined market conveys the same market power, regardless of the market[,] is emphatically false").
59. ("Most important, it does not necessarily follow that a firm accounting for 90% of sales in a properly defined market has substantial market power, nor that a firm with only 30% of sales in a properly defined relevant market lacks market power.").
60. ("Even if a well-defined market can be identified, a firm's share of such a market may nevertheless give a seriously distorted indication of the firm's market power."). The view that market shares require interpretation is not confined to the United States.
61. ("In any event, the Commission interprets market shares in the light of likely market conditions, for instance, whether the market is highly dynamic in character and whether the market structure is unstable due to innovation or growth.").
62. ("The strength of any indication based on market share depends on the facts of each individual case. Market share is only a proxy for market power, which is the decisive factor. It is therefore necessary to extend the dominance analysis beyond market shares, especially when taking into account the difficulty of defining relevant markets in Article 82 cases....").
63. (column for a market size of $200 million).
64. ("Thus the degree of market power in this example for a firm with an 8% market share is identical to that of a firm with an 80% share in a different market, because of offsetting differences in demand elasticities.").
65. Market Share Thresholds 255.
66. Also, question 2 poses a general standard, whereas question 1 involves a particular application. The more context-specific is the legal standard, however, the smaller this difference would be. Existing legal standards and those generally favored by commentators tend to have a substantial degree of generality, so the gap on this dimension is sizeable. This point receives scant attention here because it is not at the core of what goes wrong when the two questions are conflated.
67. A qualitatively different reason to deviate from the presumptive market share threshold would be that a different practice is under scrutiny, for which it may be optimal to require more or less market power. In that case, we can equivalently suppose that we have a longer, more refined list of market share requirements, perhaps one for each type of practice.
68. For the legal policy question, market share no longer plays any real role. For the empirical question, the answer is no longer in market share terms in any meaningful way; nevertheless, because market share is a fact that feeds into market power inferences and the empirical question is about market power, market share would play whatever factual role is appropriate under the pertinent economic analysis of the situation.
69. (noting the limited prior history of the idea).
70. see also Louis Kaplow, The Accuracy of Traditional Market Power Analysis and a Direct Adjustment Alternative, 95 HARV. L. REV. 1817, 1819-21 (1982) (employing such a notion as a basis for criticizing Landes and Posner's claim that the use of market shares to infer market power systematically involves the overstatement of such power).
71. It should be clear that, although criticism is directed at these sorts of statements, they are notably superior to the more typical discussions under which there is not even a suggestion of what might be imagined by comments about the degree of market power supposedly conveyed by some market share.
72. Obviously, to be complete, the table would need to include all omitted values; more precisely, since any real number between 0 and 100% (inclusive) is possible for market share, we would need a two-dimensional graph to depict a curve relating market share and market power.
73. There are complications concerning, for example, whether to measure market shares using the number of units sold or their value, but they are set to the side for present purposes.
74. (discussing alternatives to the Lerner index, including P/MC).
75. It is also necessary that the market power column has sufficient range. For example, if a 100% market share was associated with a market power of 60%, there would be no market share to assign when market power is 70%. (The solution is to have market power approach infinity, which corresponds to a Lerner index of 1.0.
76. In practice, a finite bound will suffice as long as it is at least as high as the greatest level of market power we would ever wish to require, for once past that point, any truncation would be unimportant, at least for this particular task.).
77. For this case or the preceding one in which a particular market is selected, one could instead collect data on the market elasticity of demand and on the elasticity of supply for each market in question and use that to compute the Lerner index that corresponds to each market share (setting to the side the complication that there is no single value for either elasticity in a given market since the elasticities depend on price and output, which in turn are influenced by market share).
78. ACTUAL that just happened to equal (or be close to) the pertinent MSSRM in our table.
79. ACTUAL would no longer be an actual market share in a so-called relevant market in any conventional sense.
80. This Part can be viewed as a formal, logical, semantic enterprise, attempting to determine what must be assumed in order to render coherent ordinary competition law discourse- which answers two types of market power questions with market shares, a category mistake. Not only does the standard reference market construct succeed, but it seems clear that there is really no other way to do so (that is not essentially equivalent to the one presented here).
81. Similar questions can be put more in the language of question 2, on the legal threshold: "Suppose that the market power threshold for monopolization or dominance is that market share must be at least 80%. What is the minimal price elevation that would meet this test?"Or: "Suppose that the profitable price elevation by the dominant firm is shown to be 30%. What is the highest market share threshold that would be satisfied?".
82. No doubt, many would resist answering, insisting that more facts and circumstances would need to be known. But one could demand a best guess, ask the respondent to assume that all else is at typical or average levels, or simply ask what one thinks others would say if forced to guess.
83. As a suggestive illustration, consider David T. Scheffman & Pablo T. Spiller, Econometric Market Delineation, 17 MANAGERIAL & DECISION ECON. 165 (1996).
84. In their econometric analysis of margarine and butter, they find that the elasticity for margarine is -3.5, which they deem "high... indicating that margarine is not a relevant market,".
85. Yet they do not explain why this elasticity should be viewed as high rather than low or medium, or why it indicates that the relevant market is broad rather than narrow (just margarine). Indeed, if one applies the hypothetical monopolist test (so the share is 100%) and uses the standard formula, the Lerner index (equal to one divided by the market elasticity of demand; setting to the side supply responses) is approximately 0.29 and the implied degree to which price would exceed marginal cost is 40%. They implicitly view this degree of elevation as reflecting insubstantial market power, whereas we might suppose that many would take this to be quite substantial market power.
86. PHILLIP AREEDA, LOUIS KAPLOW & AARON EDLIN, TEACHER'S MANUAL-ANTITRUST ANALYSIS: PROBLEMS, TEXT, CASES 189-90 (6th ed., Aspen Publishers, Inc. 2004).
87. United States v. Aluminum Co. of Am. (Alcoa), 148 F.2d 416, 424 (2d Cir. 1945). On the prominence of this statement, see note 1.
88. As an aside, this point casts a new and rather different light on decades of debate about the correctness of Hand's market definition in Alcoa. Market definition is supposed to be about assisting the process of making market power inferences. Since we have no clue what market power inference Hand implicitly made, it seems difficult (impossible) to say whether it was too high or too low. Hand could readily have understated market power by choosing the market definition with the 90% share and he might have overestimated market power if he had chosen the market definition yielding the 33% share, depending on how much market power he thought such shares implied.
89. And one might have further supposed that he chose (manipulated) the market definition to match this benchmark as closely as possible. "[M]ost critics have simply assumed that Hand picked the market share percentages he needed to proceed onto the next stage of the analysis and then worked backwards, gerrymandering the market definition until it produced the desired result.".
90. A difficulty with viewing Hand as playing fast and loose with market definition in order to meet a legal test is that he essentially made up the test himself, and he could instead have just moved the bar accordingly (although, for the reason noted in Part VI, it may have been difficult to announce a standard for monopolization that could be met by a low market share).
91. Among other reasons, if he had actually determined Alcoa's market power, it would have been one figure, and that figure would be correct regardless of which market definition he thought best.
92. Consider the implications for a litigated case that seeks to apply Alcoa. One party might argue that the market share under Alcoa's test favors its bottom line. To do so, however, it would have to offer evidence and argument about market power not only in the case at hand but also in the aluminum industry before the court in Alcoa. Then, the other side might, in addition to challenging the market power claims in the present case, challenge its opponents' analysis of the historical aluminum industry, perhaps arguing that the market elasticity of demand was different so that the market shares in Alcoa convey a different degree of market power than asserted.
93. The immediately preceding paragraph on the aluminum industry would apply, mutatis mutandis, to such pronouncements if they concerned a particular case, but not to an abstract pronouncement of a market share requirement. Of course, that criticism was of an attempt to make sense of such pronouncements, and, indeed, of the most plausible (however implausible) of the two possibilities, so it is hardly a virtue to be exempt from this problem.
94. This article raises another question about expert evidence: whether U.S. courts should allow into evidence conventional expert opinions on extant market power that are couched in market shares terms. Rule 702 of the Federal Rules of Evidence, as amended in light of Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), and subsequent cases, requires that an expert's "testimony is the product of reliable principles and methods."FED. R. EVID. 702.
95. The problem is that market share is not an answer to the empirical market power question as a matter of principle. Of course, it would be difficult for a court both to exclude such evidence and to apply a market power test denominated in market share terms, under which such evidence seems essential.
96. To a large extent, it is inapt to respond to this lacuna by stating that one might need to know more about the facts and circumstances, because the ordinary reason we may need to consider additional information is to refine our inference from market share to market power, whereas in this example we have already made that inference, and it is uncontested.
97. ("Suppose we knew that a given defendant could price 25 percent above the competitive level. Is that enough?... You will see that the courts have emphasized power over price without indicating how much power we should be concerned about.").
98. ("The starting point is the lay intuition that a firm with 100 percent of a market possesses market power. It almost surely has the power to restrict output and to charge more than the perfectly competitive firm. But how much more? Five or 500 percent? Such answers, never supplied, are essential if one is to infer market power from market share.").
99. ("But even if such problems are overcome, the power implications of any particular market share remain obscure. The courts have not stated how much power they believe to be associated with given market shares.").
100. Instead, ordinarily the factual material is presented and analyzed to provide an answer not about market power but instead about market definition. From there, one measures the market share and then makes further inferences about market power, most of which are qualitative.
101. This jumbling of the order and relationships among the key concepts indicates serious problems with the market definition/market share paradigm.
102. Hand's pronouncement, even if ipse dixit, does not strike readers as strange-which helps to explain why its emptiness has largely escaped notice. By contrast, suppose that Hand had declared that an elevation of price above marginal cost of 26% is enough, 14% is doubtful, and 6% is insufficient. Presumably, the court would have found it difficult to select such numbers and would imagine that subsequent courts and commentators would be skeptical. (If the Alcoa court had first made a quantitative market power finding, on question 1, the choice of some figure for a statement on question 2 would have been natural, but there would still be the problem of defending the first, empirical assessment; moreover, explaining why, say, a 26% price elevation was enough might have been far more difficult than simply asserting that a firm with a 90% market share looks like a monopolist.).
103. (explaining that the view has superficial appeal but involves self-deception).
104. Given a market definition, determining the market share is often viewed as a mechanical exercise, but (noting some complications), whereas coming up with a quantitative estimate of market power is regarded to be a difficult task.
105. This view is quite misleading since the market definition process implicitly requires that one first do all the work necessary to formulate a quantitative market power estimate.
106. Having speculated earlier in this Part about how the current predicament of using market shares to answer market power questions came about and linking this phenomenon to a desire to avoid quantitative pronouncements, it is interesting to conjecture further on the hypothetical monopolist test and the five percent SSNIP threshold. The modern version of the U.S. Merger Guidelines had its genesis in the 1980s, when the enforcement agencies attempted to ground the merger review process more solidly in economics. Market definition was a particular soft spot, and it seems very difficult to provide any sort of solid foundation for a choice between markets that is not quantitative. The hypothetical monopolist test has appeal since a market definition might be thought independent of the particular setting (merger, monopolization; low concentrations or high); five percent seems to be as good an arbitrary figure as any; and the use of HHIs had some appeal because then-existing tests were all in terms of concentration ratios and market shares (not market power) and the HHI seemed to have better economic grounding than other concentration measures in some respects (and also had more of a technical feel). By contrast, announcing market power thresholds would have seemed radical: out of sync with prevailing law and thus less likely to be adopted by courts and more likely to elicit a hostile reaction from traditionally minded practitioners and the legislature.
107. For a criticism of the focus on HHIs rather than on price elevation, see, for example, Jerry A. Hausman & J. Gregory Sidak, Evaluating Market Power Using Competitive Benchmark Prices Instead of the Herfindahl-Hirschman Index, 74 ANTITRUST L.J. 387 (2007).
108. These calculations use pre-merger market shares, abstracting from how they would adjust in the post-merger equilibrium. To illustrate the index, if there are ten firms each with a 10% share, the HHI is 1000 (ten times 102). A merger of two firms would increase the index by 200 (two times 10 times 10) to 1200-which can be verified by summing eight times 102 (800) and one times 202 (400). To illustrate the application of the Guidelines more concretely, consider the upper range, and in particular the rule: "Mergers resulting in highly concentrated markets [that is, with an HHI above 2500] that involve an increase in the HHI of more than 200 points will be presumed to be likely to enhance market power.".
109. Note that four equal-sized firms implies an HHI of 2500; five, 2000. Regarding an increase of 200, this increment would arise, say, from a merger of two 10% firms, as in the above example.
110. See the illustration in the preceding note about how much of an increase in the HHI is required to be in the zone of highest danger under the Guidelines. More broadly.
111. Louis Kaplow, Market Definition and the Merger Guidelines, REV. INDUS. ORG. (forthcoming 2011), discussing how the Merger Guidelines' amalgam of price elevation and market definition/market share analysis, despite its scientific air, in fact achieves determinacy at the expense of coherence.
112. In defining the market, the Merger Guidelines' approach begins with the narrow, homogeneous goods market. But if there is a very low elasticity of demand and supply in that market, the hypothetical monopolist's market power could be tremendous. A merger in a rather unconcentrated market (post-merger HHI under 1500) could enable price increases of more than 5% through the unilateral exercise of market power. For example, under Cournot competition, the industry-wide, output-weighted price-cost margin equals the HHI divided by the elasticity of market demand.
113. Therefore, any increase in the HHI would suffice as long as that elasticity is sufficiently small.
114. (For a more rigorous analysis of mergers under Cournot competition, see Joseph Farrell & Carl Shapiro, Horizontal Mergers: An Equilibrium Analysis, 80 AM. ECON. REV. 107 (1990).).
115. This characterization largely encompasses the present revision cycle, judging from the questions proposed for commentary and the comments submitted.
116. See Fed. Trade Comm'n, Horizontal Merger Guidelines Review Project, http://www.ftc.gov/bc/workshops/hmg/index.shtml.
117. To remind, for empirical assessment, market share can be relevant-but as one factor bearing on market power, not as a substitute for what one is trying to determine in the first place. For purposes of this article, it is irrelevant how and how often market share should play an important role in market power measurement.
118. Arguing that market shares can be useful in assessing a dominant firm's market power, but only when analysis focuses on the homogeneous goods market rather than on broader, redefined markets-an implication of which is that the market power associated with a given share will vary even more widely than discussed in Part III.A.