Anticompetitive Effects and Market Definition in Platform (and Non-Platform) Markets

Abstract

Market definition is a highly contested topic in antitrust. Courts’ approaches to market definition are admittedly flawed, and the case originating modern market definition, the Cellophane case, is best known in antitrust circles as the name of an economic blunder: the “Cellophane fallacy.” Yet market definition finds itself center-stage in antitrust regulation of modern platform markets and was the central issue in the Supreme Court’s first case explicitly addressing platforms, Ohio v. American Express. Justice Breyer’s dissent in that case went beyond challenging the majority’s market definition to challenge the need to engage in market definition at all. He argued that market definition was unnecessary because the district court had found actual anticompetitive effects. That notion has found purchase in both scholarship and legislative proposals that would eliminate market definition in antitrust cases if the plaintiff can show anticompetitive effects. This paper interrogates both modern criticisms of market definition and Justice Breyer’s assertion that market definition is not necessary if a court finds anticompetitive effects through direct evidence. That claim is mistaken on both economic and normative grounds. As an economic matter, the price increases the court observed in American Express are not probative of anticompetitive effect absent an understanding of their effects on the broader market, which cannot be determined without a market definition. American Express (and platform markets) present a particularly strong case against relying on market observations to infer anticompetitive effects, but the point holds for non-platform markets as well. As a normative matter, Justice Breyer’s presumption ignores that, in order to determine whether a particular practice is “anticompetitive,” it is necessary to define what are and are not legitimate sources of market power. A similar error is present in most criticisms of market definition. Market definition is usually performed in service of measuring market power, and most criticisms relate to its accuracy in doing so. But market definition not only measures market power, it characterizes it. As informed by the content of antitrust law, market definition distinguishes between permissible and impermissible accumulations of market power. Instead of something to be avoided because of its economic fallibility, market definition should be embraced as a way to give meaning to antitrust inquiries. Debates over market definition have been had largely along economic lines, but the market definition inquiry is inherently normative. That has always been the case. Donald Turner’s original identification of the Cellophane fallacy was based not on abstract economics but on his views on what the antitrust law should permit. Recognizing market definition as a step in both identifying and defining legitimate forms of competition resituates market definition from being a step in an algorithm to informing the competition that antitrust law seeks to protect.