2 Market Definition

Subject(s):

SSNIP test — Demand-side substitution — Temporal market — Price elasticity — Critical loss analysis

This chapter explains the principles of market definition, which remains a key intermediate step in many competition cases. It gives an overview of the dimensions of a relevant market and of the basic economic principles of demand (including substitution and elasticities). The chapter explains the hypothetical monopolist (SSNIP) test and critical loss analysis, and discusses specific aspects of market definition such as the cellophane fallacy, supply-side substitution, price discrimination markets, and chains of substitution. It explains how market definition works for aftermarkets, bundles, different layers of the vertical supply chain, product migration, and features other than price (quality and innovation). The chapter also describes the main quantitative tools for market definition—regression and price-correlation analysis—and discusses situations in differentiated-product markets where market definition may be less informative.