Hypothetical Monopolist Test Research Articles

Evolution of the Merger Guidelines: Is This Fox Too Clever by Half?

The 2023 Merger Guidelines make some notable improvements over the 2010 Horizontal Merger Guidelines. They give greater emphasis to the idea that predicting the competitive effects of a proposed merger is inherently difficult and that to block a merger the government need only show a risk that the merger may substantially lessen competition – not that it will do so. They also give greater emphasis to dynamic competition and innovation – especially with regard to acquisitions of potential entrants – and they add useful material on multi-sided platforms. However, the treatment of market definition in the 2023 Merger Guidelines may weaken horizontal merger enforcement by demoting the role of the “hypothetical monopolist test,” which is used to define markets for the purpose of measuring market shares, and by removing extensive material from prior guidelines that explained why market shares measured in narrower markets tend to be more informative than market shares measured in broader markets. The 2023 Merger Guidelines lower the market concentration thresholds that trigger a presumption by the antitrust enforcement agencies that a merger may substantially lessen competition, but the enforcement data suggest that change will have little effect in practice. The 2023 Merger Guidelines also may lead to less effective deterrence of harmful mergers because they are not well targeted at the mergers that are most likely to substantially lessen competition. One cannot prioritize everything.

“Multi-Product Critical Loss: Allowing for Varying Margins, Prices, and Quantities in the Candidate Antitrust Market”

Abstract Critical loss analysis is important in defining antitrust product and geographic markets as it directly implements the hypothetical monopolist test. Traditionally, critical loss analysis assumes all products in the candidate market earn the same margin at current prices. In effect, this approach treats all products as a single, representative product. This is technically incorrect. This paper develops the appropriate measures of critical loss assuming products in the candidate markets have different margins, different current prices, and different initial quantities. We also address issues in the implementation of critical loss analysis. This paper is meant to be accessible to the practitioner.

Assessing the boundaries of the airport services market: Grounds for tariff deregulation

The aviation industry has recently witnessed a series of crises that changed its competitive landscape. In Russia, due to passenger flows redirected to domestic flights and the growing role of large airports as hubs, there are reasons to deregulate tariffs for airport services on domestic flights. Pulkovo (Saint Petersburg, Russia) is among the airports facing this issue. However, deregulation implies sufficient competitive pressure from other airports, in particular those included in the Moscow Aviation Hub (MAH). The article assesses the geographical boundaries of the market where the Pulkovo Airport operates, in order to establish whether it is the same market for the MAH airports. Methodologically, the study relies on the principles of industrial organization theory. Among the research methods are the hypothetical monopolist test and critical loss analysis. Empirical evidence covers data of an online survey conducted in March 2023 with 1,613 respondents who made domestic flights in 2019–2023. The analysis of the market in which Pulkovo provides its services shows that its boundaries extend beyond Saint Petersburg and cover at least Moscow airports, which indicates that Pulkovo is up against strong competition from Moscow airports in terms of domestic destinations. Thus, it seems expedient to deregulate the Pulkovo airport’s tariffs on domestic flights.

Слепые зоны в Порядке проведения анализа состояния конкуренции на товарном рынке

For the implementation of the “fifth antimonopoly package”, FAS Russia has developed a draft amendment to the Procedure for analyzing the state of competition in the commodity market, approved by Order of FAS Russia dated April 28, 2010 No. 220 (Procedure-220). This project is currently going through the stage of public discussion, which makes relevant its analysis in terms of the challenges of the economy of modern digital markets in general, as well as methodological issues raised by the latest amendments to the Federal Law “On the Protection of competition” of July 26, 2006 No. 135-FZ in particular. The article reveals that the provisions of the project under discussion do not address all the main problems that arise in connection with the analysis of competition in digital markets: methods for analyzing market boundaries at zero prices are not proposed, there are no approaches to assessing network effects, problems of market power in conglomerate mergers are not reflected, the concept of a multilateral market and its relationship with the digital platform has not been clarified. The draft also contains inaccurate wording, leaving freedom of interpretation, which will subsequently create risks of incorrect application of antimonopoly legislation and increase the likelihood of enforcement errors. In addition, the article demonstrates that within the framework of the proposed changes, many questions and problems that are also characteristic of the analysis of traditional markets (the second criterion of the hypothetical monopolist test, analysis of the surmountability of entry barriers, limitations in the use of methods) remain unanswered. Economic analysis of law and Industrial organization theory are used as the methodological basis for the study. The result of the analysis is a set of recommendations for the regulator aimed at reducing the likelihood of enforcement errors arising as a result of gaps antimonopoly regulation. The article is of an applied nature and may be of interest to both regulatory authorities and antitrust experts.

Evolving market boundaries and competition policy enforcement in the pharmaceutical industry

Competition investigations start with market definition, which establishes the perimeter of the competitive analysis. In this paper, we focus on the definition of economic markets in the pharmaceutical industry, where the entry of generics in different therapeutic areas provides a sequence of quasi-natural experiments involving a significant competitive shock for the originator producer. We show how generic entry modifies price and non-price competitive constraints over time, generating market-wide effects. Paradoxically, generic entry may soften the competitive pressure for brands other than the originator. We obtain these results by econometrically estimating time-varying price elasticities. We then apply the logic of the Hypothetical Monopolist Test to gauge the strength of competitive constraints under different market structures. Our results provide strong empirical support for an approach that defines relevant markets contingent on the theory of harm. We discuss the relevance of these findings in the context of ongoing cases.

Ten Years of the 2010 HMG: A Perspective from the Department of Justice

Ten years after their release, the 2010 Horizontal Merger Guidelines continue to reflect accurately current legal and economic principles of antitrust. Despite fears to the contrary, the Antitrust Division still relies on market shares and concentration—along with a wide range of other evidence—to determine whether a merger is likely to harm competition substantially. Similarly, market definition remains an essential ingredient to merger analysis, combining the quantitative rigor of the hypothetical monopolist test with the kinds of qualitative evidence that date back to Brown Shoe. The 2010 Horizontal Merger Guidelines have also contributed to courts’ increasing acceptance of the standard economic tools that are used to quantify the potential impact of horizontal mergers, including merger simulation and upward pricing pressure.

Two-sided market definition: some common misunderstandings

ABSTRACT Market definition remains an important step in competition cases. The European Commission is in the process of updating its 1997 Market Definition Notice. One hotly debated topic is defining markets for two-sided platforms. In this article we address some of the main questions and misunderstandings about two-sided market definition, We discuss how the hypothetical monopolist test and critical loss analysis apply to two-sided platforms, and address questions such as: Should there be one market for the platform, or two markets (one for each side)? Is there a distinction in market definition between transaction and non-transaction platforms? What if the externalities flow in only one direction? What if the price is zero on one side of the platform? And can the market include non-platform competitors?

Tailoring critical loss to the competitive process

In 1989, Barry Harris & Joseph Simons developed a quantitative method to implement the Horizontal Merger Guidelines’ hypothetical monopolist test with a market-level “critical loss” analysis. The appeal of Harris & Simons’ framework is that it created a simple, intuitive approach to delineating markets—with relatively parsimonious data requirements. After over a decade of use, however, economists began to propose alternative approaches to the classic critical loss analysis—using theory to impose structure on firm-level demand. This allowed researchers to reformulate the critical loss test in terms of diversion ratios. The purpose of this paper is to discuss when the classic, market-level approach to critical loss is more appropriate and when firm-level critical loss offers an important refinement. We illustrate, with a detailed example, that under certain plausible demand scenarios, a diversion-based firm-level analysis could easily reach the wrong answer on market definition. Thus, the analyst needs to carefully study the competitive environment before deciding on the appropriate analysis. As a bottom line, the choice between market-level and firm-level analysis depends on the specific factual situation.

Расчет границ товарного рынка в антимонопольном расследовании

A method is proposed for calculating the product and geographical boundaries of the commodity market based on the initial data obtained by the Antimonopoly authority from sellers and buyers participating in the survey as part of the Antimonopoly investigation.The method includes special terminology, forms of representation of source data, and an economic and mathematical model of the commodity market designed to calculate the boundaries and composition of market participants.The method provides full computerization of processing of initial data received by the Antimonopoly authority from the survey participants.The main differences between the proposed method and the standard method of SSNIP (hypo thetical monopolist Test) are considered.

Tailoring Critical Loss to the Competitive Process

In 1989, Barry Harris & Joseph Simons developed a quantitative method to implement the Horizontal Merger Guidelines’ hypothetical monopolist test with a market-level “critical loss” analysis. The appeal of Harris & Simons’ framework is that it created a simple, intuitive approach to delineating markets — with relatively parsimonious data requirements. After over a decade of use, however, economists began to propose alternative approaches to the classic critical loss analysis — using theory to impose structure on firm-level demand. This allowed researchers to reformulate the critical loss test in terms of diversion ratios. The purpose of this paper is to discuss when the classic, market-level approach to critical loss is more appropriate and when firm-level critical loss offers an important refinement. We illustrate, with a detailed example, that under certain plausible demand scenarios, a diversion-based firm-level analysis could easily reach the wrong answer on market definition. Thus, the analyst needs to carefully study the competitive environment before deciding on the appropriate analysis. As a bottom line, the choice between market-level and firm-level analysis depends on the specific factual situation.

TRANSACTION VERSUS NON-TRANSACTION PLATFORMS: A FALSE DICHOTOMY IN TWO-SIDED MARKET DEFINITION

Abstract When it comes to market definition in two-sided markets, an idea that has gained traction—among academics, competition authorities and even the US Supreme Court—is the distinction between transaction and non-transaction platforms. However, this distinction has no theoretical underpinning in the context of the hypothetical monopolist test (HMT). The hypothetical monopolist sets profit-maximising prices on both sides, as a function of own-price elasticities and externalities between the sides, regardless of whether the platform is transaction or non-transaction. I address the various theoretical and practical arguments put forward in support of the distinction between transaction and non-transaction and explain why none of these justify a different approach to market definition. I also discuss why some of the policy suggestions made by proponents of the distinction—for example, that a single market should be defined for transaction platforms but separate markets for non-transaction platforms—reflect some confusion about how the HMT works.

Transaction versus Non-Transaction Platforms: A False Dichotomy in Two-Sided Market Definition

When it comes to market definition in two-sided markets, an idea that has gained traction — among academics, competition authorities and even the US Supreme Court — is the distinction between transaction and non-transaction platforms. However, this distinction has no theoretical underpinning in the context of the hypothetical monopolist test (HMT). The hypothetical monopolist sets profit-maximising prices on both sides, as a function of own-price elasticities and externalities between the sides, regardless of whether the platform is transaction or non-transaction. I address the various theoretical and practical arguments put forward in support of the distinction between transaction and non-transaction, and explain why none of these justify a different approach to market definition. I also discuss why some of the policy suggestions made by proponents of the distinction — e.g. that a single market should be defined for transaction platforms but separate markets for non-transaction platforms — reflect some confusion about how the HMT works.

The role of judicial review in developing evidentiary standards: The example of market analysis in Russian competition law enforcement

Despite the fact that judicial review is an important part of competition law enforcement under the administrative system, in which courts decide on claims to annul infringement decisions made by competition authorities, its role in the development of evidentiary standards of economic analysis is understudied. This paper attempts to fill this gap by analyzing the impact of judicial review on the application of market analysis in competition investigations by the Russian competition authority during 2008–2015. Although the guidelines for the assessment of competition are mandatory for many types of anticompetitive conducts and they require application of the Hypothetical Monopolist Test to delineate antitrust market, competition authority does not always do that. We test hypotheses on the impact of legal requirements, experience of application, and the outcomes of the judicial review on the probability to present either an informal market analysis or market delineation using the Hypothetical Monopolist Test in a particular decision. We find that positive outcomes of the judicial review of infringement decisions significantly increase the probability of undertaking a particular analysis in future investigations. The pressure of judicial review under the presence of mandatory standards of evidence is an important determinant of the development of evidentiary standards in competition law.

A Quantitative Methodology for Determining Relevant Geographic Markets in Higher Transportation Cost Industries

The U.S. Department of Justice/Federal Trade Commission Horizontal Merger Guidelines describes the hypothetical monopolist test (HMT) and significant and nontransitory increase in price (SSNIP) as tools to define antitrust markets. However, the discussion leaves some ambiguities with regards to the implementation of such tools. In this article, we present a methodology for quantitatively delineating geographic markets that is consistent with the Guidelines. In particular, for geographic markets that are based on the locations of customers, the market boundaries encompass the region into which sales are made from the merging parties’ plants, and competitors in the market are firms that sell to customers in the specified region. We use two approaches to identify the competitive reach of a plant—one based on actual shipping distances, which reflect the areas where the plant actually sells; and the other based on distances at which the plant’s product can be shipped profitably, which reflect all areas where the plant can potentially compete for customers. These distances are used to “draw circles” around plants to identify areas where one merging party plant’s competitive reach overlaps with the reach of another plant belonging to the merging partner, thus identifying the overlap customers. For each identified overlap customer area, the HMT is implemented using the critical loss analysis following a SSNIP by the hypothetical monopolist. We explain how to calculate the critical loss as well as the likely actual loss from the SSNIP.

Analysis of Intermodal and Intramodal Competition in Freight Transport Market between Turkey and Europe

In this paper, we investigate the degree of competition between alternative ro-ro lines operating between Turkey and Europe (intramodal competition). We also aim to analyze whether the land (road) transport is a significant substitute for the ro-ro transport for the trade between Turkey and Europe (intermodal competition). This paper is a part of the economic analysis which we carried out for defining the relevant market in a case in which the Turkish Competition Authority (TCA) investigated the predatory pricing behavior of UN Ro-Ro Isletmeleri A.S. (UN Ro-Ro) in 2012. The analysis consists of two stages: We first estimate price elasticities of demand for ro-ro lines by using a logit demand model with firm-level data. Then, ‘full equilibrium relevant market’ (FERM) test which is a more developed version of the hypothetical monopolist test (HMT) is used in order to run several hypothetical merger simulations for measuring intramodal and intermodal competition. The results show that the relevant market incorporates only seven ro-ro lines, not land transport.

Methodological Problems of Relevant Market Definition in Implementa‑ tion of Competition Policy

The article examines the quality of a procedure of defining product and geographic boundaries of a market during realisation of competition policy by antitrust authorities and territorial subjects of the Russian Federation. The scientific and professional communities recognize the existence of methodo? logical problems of relevant market definition in the practice antitrust regulation, further confirmed by the judicial practice. The consequences of mistakes in definition of relevant market can be significant, because they exert a direct impact on economy of both particular markets and regions in general. The author proposes to establish uniform standards for application of the hypothetical monopolist test in antitrust research, justifies the need for the development of an institution for relevant market definition during implementation of competition policy by the constituent entities of the Russian Federation, and validates the procedure for researching markets for this purpose

Resources and market definition: Rethinking the “hypothetical monopolist” from a resource‐based perspective

We reassess the concept of the hypothetical monopolist as a device for relevant market definition. The hypothetical monopolist test (also known as the Small but Significant Non‐transitory Increase in Price test) is a clever, intuitive way of thinking the relevant market in antitrust, and is gaining ground in strategic management. The test, however, implicitly disregards resource characteristics in relevant market delineation, focusing exclusively on demand side substitutability. In reassessing the hypothetical monopolist, we make 2 general contributions to the strategy literature. First, using cooperative game theory, we advance a precise resource‐based definition of the hypothetical monopolist. Second, we demonstrate how this definition broadens our conventional understanding on 2 important topics: resource complementarities and disruptive innovations. In doing so, we complement and strengthen the hypothetical monopolist test as a device for management (strategic) and public policy (antitrust) analysis.

CAN ONE (EVER) ACCURATELY DEFINE MARKETS?

The ongoing debate about the role of market definition in antitrust cases addresses the usefulness and correct application of the Hypothetical Monopolist Test (HMT) as defined by the U.S. Department of Justice and the Federal Trade Commission in the Horizontal Merger Guidelines. These guidelines intend to identify the techniques that those agencies use to evaluate the potential anticompetitive effects of a merger. In this article, I examine the accuracy of the HMT. In applying the HMT, I consider two separate models. In each model, one knows the true extent of the product market. First, I apply the HMT in a linear differentiated demand model with n firms that each produce one symmetrically differentiated product, and derive conditions whereby m products would be considered to comprise a product market. I find that the test consistently underestimates the number of products in the relevant market in that setting, and the resulting relevant product markets are arbitrary subsets of the actual product market. The second model uses a quasi-linear utility specification, where the products enter the utility function additively. The only interaction between the two products occurs through the income effects of the budget constraint. Under certain conditions, the smallest possible product market as defined by the HMT must include at least one producer of the other product. Therefore, depending on the underlying parameters of the utility function, the HMT might either overestimate or underestimate the size of the relevant product market, sometimes producing purely arbitrary results.

TESTING JUSTIFICATION FOR SEGMENT BASED RELEVANT PRODUCT MARKET DEFINITION IN MERGER CONTROL: EVIDENCE FROM TURKEY

In this paper, we aim to investigate whether different segments of beer products can constitute a separate relevant product market within the framework of competition law. This question gained importance when the merger between Anheuser-Busch InBev and SABMiller became subject to a Phase II investigation by the Turkish Competition Authority in March 2016, which ultimately ended with an unconditional clearance decision, based on an intact “beer” market, recognizing that the relevant product market regarding beer brands in Turkey must be wider than the premium segment. To answer the research question above concerning relevant product market definition, we implement a Hypothetical Monopolist Test in two steps. In the first step, the aggregate price elasticity of demand for the premium segment is estimated econometrically by using a nested logit demand model. This model tests whether products in the same group are closer substitutes than products in different groups. We conclude that the correlation of beers within the same group is not statistically significant. Since the data in our study are obtained at the retail level, the price elasticity of demand at the brewer level is derived from the estimate at the retailer level by using very conservative assumptions with regard to the pass-through rates. In the second step, the hypothetical monopolist test is implemented by using the critical elasticity which is calculated by using the profit margins for the premium beer segment at brewer/supplier level under both 5 percent and 10 percent SSNIP. It is seen that the actual elasticity of demand for the premium segment is larger than the critical elasticity (in absolute value) under both scenarios. These findings show that the relevant product market regarding beer brands in Turkey must be wider than the premium segment.

THE HYPOTHETICAL MONOPOLIST TEST INSYSCO: A LITIGATION MUDDLE NEEDING ANALYTIC CLARITY

The Sysco case demonstrates both significant confusion on the application of the hypothetical monopolist test (HMT) and systemic flaws in the way experts provide evidence. I first explain how the HMT actually works, and then show how the expert testimony on the HMT in Sysco was confusing and possibly misunderstood. I conclude by proposing three structural reforms to merger litigation that would make technical matters like the HMT much clearer to generalist judges.