Relevant market definition an approach of the united states regulations and lessons for vietnam

By focusing and analyzing economically of the conceptual approaches, methodologies, input data for relevant market definition, the author has given the resolutions to the question: “How

MINISTRY OF EDUCATION AND TRAINING

HO CHI MINH CITY UNIVERSITY OF LAW

-*** -

MANAGING BOARD OF THE ADVANCED COURSES

NGUYỄN TÀI TUỆ

RELEVANT MARKET DEFINITION:

AN APPROACH OF THE UNITED STATES REGULATIONS AND LESSONS FOR VIETNAM

BACHELOR OF LAW THESIS Faculty: Commercial Law Academic year: 2012 - 2016

Ho Chi Minh City

MINISTRY OF EDUCATION AND TRAINING

HO CHI MINH CITY UNIVERSITY OF LAW

-*** -

MANAGING BOARD OF THE ADVANCED COURSES

NGUYỄN TÀI TUỆ

RELEVANT MARKET DEFINITION:

AN APPROACH OF THE UNITED STATES REGULATIONS AND

LESSONS FOR VIETNAM

BACHELOR OF LAW THESIS Faculty: Commercial Law Academic year: 2012 - 2016

Supervisor: LLD Trần Hoàng Nga

Student in charge: Nguyễn Tài Tuệ

Student Code: 12538101011859

Class: CLC 37A

Ho Chi Minh City

2016

DECLARATION

I hereby declare that this thesis is my own research under the supervisory guidance of Dr Trần Hoàng Nga Apart from my points of view, all of the information which is used or cited in this thesis has been acknowledged by means of complete references The result has yet not been published elsewhere I would bear full responsibility for my protest

Ho Chi Minh city, July 19 th , 2016

Nguyễn Tài Tuệ

TABLE OF CONTENTS LIST OF ABBREVIATIONS

INTRODUCTION 1

1 The rationale of this thesis 1

2 Literature reviews 2

3 Objectives 4

4 Delimitations 4

5 Methodologies 5

6 Structure of the thesis 6

CHAPTER I: GENERAL CONCEPTS FOR RELEVANT MARKET DEFINITION 7

1.1 The concept of relevant market 7

1.2 Basic economic principles for relevant market definition 10

1.2.1 Own-price elasticity of demand 10

1.2.2 Cross-elasticity of demand 11

1.2.3 Market power and the Lerner index 12

1.3 The history of relevant market definition in the United States 13

1.4 The role of relevant market definition 16

1.5 Remarks 19

CHAPTER II: THE RELEVANT MARKET DEFINITION UNDER THE UNITED STATES REGULATIONS 20

2.1 Conceptual approaches to relevant market definition 20

2.1.1 Supply substitution 20

2.1.2 Demand substitution 24

2.2 Relevant product market definition 24

2.2.1 The Hypothetical Monopolist Test as an analytical tool in defining relevant market 24

2.2.1.1 Definition 24

2.2.1.2 Benchmark price and magnitude of price increase (SSNIP size) 27

2.2.2 Relevant product market definition with targeted consumers

(price-discrimination market) 29

2.3 Other Methodologies 30

2.3.1 Critical Loss Analysis 30

2.3.2 Natural Experiment 33

2.3.3 Pattern Analysis 34

2.4 Geographical market definition 35

2.5 Types of evidence in defining the relevant market 36

2.6 Remarks 38

CHAPTER III: THE VIETNAMESE REGULATIONS ON RELEVANT MARKET DEFINITION: CURRENT LEGISLATIONS AND SUGGESTIONS FOR THE IMPROVEMENTS 39

3.1 Current Vietnamese regulations 39

3.1.1 Overview 39

3.1.2 Analytical Insides 40

3.1.2.1 Relevant product market 40

3.1.2.2 Relevant geographical market 44

3.2 Several suggestions for the improvements of Vietnamese regulations on relevant market definition 45

3.2.1 The need of a detailed structure for relevant market definition 45

3.2.2 Reconsidering supply substitution for relevant market definition 46

3.2.3 Implementing the Hypothetical Monopolist Test 46

3.2.4 Consider using other relevant market definition methodologies and types of evidence included 48

3.3 Remarks 49

CONCLUSION 51 BIBLIOGRAPHY

LIST OF ABBREVIATIONS

SSNIP Small but Significant and Non-transitory Increase in Price

INTRODUCTION

1 The rationale of this thesis

In 2007, that the time when Vietnam participating in the WTO marked a milestone for globalization in our country After the depression in 2008, the Vietnamese economy was in the process of recovering, corporations getting over the depression were getting better and better Also, with the efficient criteria place at the utmost, the state-owned enterprises were going to get personalized to grow up from the previous failing Along with histories, the act of expanding their productivity and mechanism by merging with other enterprises is unavoidable when firms want to grow stronger and more durable The process of globalization in Vietnam is going to turn over a new leaf with the several super events such as joining in Trans-Pacific Partnership (hereinafter referred to as TPP), the establishment of ASEAN Economic Community (hereinafter referred to as AEC) and so forth These events would let to the rapid growth in mergers, which become more and more sophisticated nowadays

It would, on the one hand, bring numerous advantages for the economy to quickly bloom while bringing an abundance of problems on the contrary Therefore, there must be improvements in the legal framework for controlling competitive behaviors

to keep pace with the universal moves

Market-structure behaviors (including mergers) always play a significant role

in every economic sector and the relevant market is always an essential part of defining mergers Both concepts are vital and complex The latter issue should take lots of considerations as it is the prerequisite element represents in anti-competitive analysis In the circumstance when our current competition regulations are somehow soft and a bit outdated, dealing with the complexities of Market-structure behaviors might be way too much The need for revising and enhancing our competition regulation on defining the relevant market is as urgent as ever

As a pioneer in controlling the anti-competitive behaviors, the United States (hereinafter referred to as U.S) have experienced over 100 years of regulating the competitive matters since the enactment of the Sherman Act in 1890 Throughout their history, the U.S have experienced six waves of mergers1, their economy has

1 For a summary, see Gaughan, Pattrick A (2011), Mergers, Acquisitions and Corporate Restructurings (5 th ed.), John Wiley & Sons Inc, p.35-73

witnessed unfathomable changes As a result, the U.S have paid a significant number

of resources on analyzing mergers by enacting several antitrust acts, many precedents and Antitrust Agencies' documents In most merger analyses, the relevant market definition is proved to be fundamentally vital and thereby receives numerously careful and detailed analyses from both authorities and legal scholars Thus, the U.S are undeniably the most promising country for collecting information for relevant market definition analyses for improving Vietnamese regulations on delineating relevant market

Therefore, from the above reasons, the author chooses “Relevant Market

Definition: An Approach of the United States Regulations and Lessons for Vietnam” as a bachelor of law graduation thesis

2 Literature reviews

The author has reviewed a decent number of legal materials, which shall be listed below:

In Vietnam:

Several reports issued by Vietnam Competition Authority (VCA) called

“Report on Economic Concentration” in the year 2009, 2012 and 2014, “Review Report on Vietnamese Regulations on Competition” in 2012 have given several basic

concepts of relevant market and merger contexts in Vietnam

A legal article by Nguyễn Ngọc Sơn (2004) “Defining Relevant Market in

Vietnamese Competition Law of 2004” clarifies some issues of the relevant market

and introduces some legal systems defining the relevant market

A legal bachelor thesis by Lê Trung Nhân “Criteria for relevant market

definition in some countries – experiences for Vietnamese Laws on Competition”

defines the concept of relevant market and introduce the methods of defining the relevant market in the U.S and the E.U law However, due to its huge magnitude in the thesis level (a comparison of three different legislations over relevant market definition concept), those analyses (mostly in relevant market definition methodologies sections) are conducted for general understanding The analytical

insides, mostly for “how the EU and the U.S define relevant market”, has not yet

been given sufficiently Secondly, this thesis paid more attentions on the EU regulations The analysis of the U.S regulations on relevant market definition was

conducted but be not enough Finally, the economic analysis of law is limitedly employed in this thesis

The above Vietnamese studies give several basic overlooks for relevant market definition However, there has yet not been a specific and in-depth study of relevant market definition by using the economic analysis of law, especially under the approach of the U.S Antitrust Law Relevant market definition is themselves a

“law and economics” issue Only by considering the interpretations of economic analysis to those matters could all the competitive matters of which be efficiently controlled at best Therefore, with the knowledge from the below papers, the author has found useful data for conducting this thesis

In Worldwide:

“A practical guide to the Hypothetical Monopolist Test for market definition”

(2008) by Malcolm B Coate gave a thorough explanation of the methods used to define the relevant market in the U.S Coate discretely explained each method, pointed out pros and cons of them in an organized structure

“Market Definition: An Analytical Overview” (2007) by Jonathan Baker

provides an economic analysis of Relevant market definition in the U.S In this paper, Baker has clarified thoroughly all the issues of relevant market definition in the U.S: supply and demand substitution; the Hypothetical Monopolist Test; economic methodologies; input data for delineating relevant market in the U.S Moreover, Baker also explains and questions about the past drawbacks such as Cellophane Fallacy in this paper

“The History of Antitrust Market Delineation” (1992) provided the

development of relevant market definition in the U.S Antitrust Law Along with time frame development, the fundamental doctrines and careful analyses of relevant market definition in the U.S were excellently organized in this paper

The system of case laws as well as Guidelines enacted by Federal Trade Commission (hereinafter referred to as FTC) and Department of Justice (hereinafter referred to as DOJ) – the two competition authority in the U.S controlling competition – are carefully researched

Besides, the author also collected legal materials in HeinOnline, Social Science Research Network, the Internet and other online and offline Library universally

3 Objectives

The author shall discuss the concept and definitions of relevant market in both theory and practice and thereby lighten some following points:

Firstly, Chapter I provides the general concept for relevant market definition

In this Chapter, the author has clarified the concept, rationale, history, economic

principles of the relevant market and thereby answer the questions: “What is a

relevant market?”; “What is the impacts of relevant market?”

Secondly, Chapter II provide the analytical overviews of relevant market in the U.S Law By focusing and analyzing economically of the conceptual approaches, methodologies, input data for relevant market definition, the author has given the

resolutions to the question: “How to define the relevant market under the U.S

Antitrust Law?”

Finally, through briefly summarizing the Vietnamese regulations on identifying the relevant market and comparing to which of the U.S, the author has pointed out several shortcomings in Vietnamese regulations Thereof, the author has selected with discretion the advances of the U.S Antitrust Law in defining the relevant market and suggested several recommendations suitable for the Vietnam to improve Vietnamese Law on competition

4 Delimitations

Owning to the fact that relevant market is very sophisticated element to define

in competition and with the matter of time and material limitations, the author shall delimit the thesis in the below points:

Firstly, the thesis shall focus on analyzing the concept and the methodologies

to define the relevant market Other concepts such as entry, buyer power and so on shall not be discussed

Secondly, the author only analyzes the concept relevant market within the scope of competition regulations, emphasizes that relevant market is a vital matter in competition environment Other sources of law shall not be included

Thirdly, the relevant market in this thesis is the most common relevant market

in the U.S Antitrust Law Other particular types of market such as cluster market, after market and so forth, are excluded from the thesis

Fourthly, relevant market definition is literally a prerequisite in all three type

of market-structure behaviors (agreement on restraint of trades, abusing the dominant position and mergers) Basically, the mechanism of defining the relevant market in all those behaviors is the same For the purpose of emphasizing the indispensable role

of relevant market, the author shall only focus on the relevant market in merger analysis due to the typical role of mergers in every economic sector

Finally, regarding the selection of foreign law for comparison, the thesis would concentrate on the U.S competition regulations This legal system has many advanced experiences of not only building and fortifying Competition law, competition environment in general but also defining the relevant market in particular

5 Methodologies

To reach the objectives of this thesis, the author shall utilize the following methods

- Traditional legal analysis: this method is used to illuminate and systemize

specific regulations in defining the relevant market Some sources of law such as legal regulations, case law and so forth; and doctrines relating to the relevant market will

be discussed and clarified to create underlying grounds for the purpose of solving the market issues One featured characteristic of the Common Law (the U.S law's system)

is the judge can make law In other words, the cases enacted by judges have the same legal values as other sources of law; the judge could rely on the previous cases as legal sources and give decisions based on them Therefore, this thesis shall prioritize the method of traditional legal analysis to define the legal matters in case-by-case approaches This method is mostly used throughout the thesis

- Comparative method: it is by far the most important method used in this

thesis The author uses this method to understand the key elements as well as deal with the similarities and differences between each system of law regulating and explaining the relevant market In the macro perspective, the author shall use this method to compare the spirit, style, and procedure of those legal systems In the micro perspective, the comparative method is for distinguishing the similarities and its

oppositions from the methods used by the U.S law in defining the relevant market

This method is used throughout the thesis

- Law and Economics Analysis: This method not only plays an importance role

in researching Competition policy in general but also is a key method of this thesis

By using the economics methods, theories, and doctrines, this method could solve to the root of the economic connotation issues of the relevant market definition This approach is mainly used throughout the thesis with special focuses of section 1.2 –

Chapter I; Chapter II and section 3.2

- Synthesis method: this method is used to collect data, knowledge from the

first and secondary sources of law These are legal regulations, legal textbook, legal articles and etc for the purpose of perfecting the thesis as well as making a

remarkable conclusion

6 Structure of the thesis

Beside Introduction and Conclusion parts, the thesis is organized in three main Chapters, as defined below:

Chapter I: General Concepts for Relevant Market Definition

Chapter II: Relevant Market Definition under the United States Regulations Chapter III: The Vietnamese Regulations on Relevant Market Definition:

Current Legislations and Suggestions for the Improvements

CHAPTER I: GENERAL CONCEPTS FOR RELEVANT MARKET

DEFINITION 1.1 The concept of relevant market

In economics, the term “market” defines a place in which demand and supply meet each other In other words, buyers could get whichever they want while sellers could sell their products/services2 in the “market” In Antitrust Law3, the concept

"relevant market" is used for assessing competitive effects Heretofore, there has not yet been a united "relevant market" concept Although agreeing with the idea that relevant market is constituted from both product and geographical dimension, different countries clarified different ways of defining those two factors

First, under the European Union (hereinafter referred to as EU) regulations4 The relevant product market is defined based on the interchangeability or substitutability of products and/or services Products and/or services are treated as the same relevant product market if they could be substituted to each other by reason of prices, characteristics and intended uses Meanwhile, the relevant geographical market is the area in which products and/or services, from both demand and supply side, have similar competition conditions, which can be distinguished with competition conditions from other neighboring areas As can be seen, the relevant market concept is stipulated detailedly and specifically in the EU regulations Such concept contributes a valuable reference for a good number of competition authorities

to give their own relevant market concept5

Application of U.S and E.U Antitrust Law, Springer Publishing, p.183-190

3 Most Competition Authorities use the term “Competition Law” as the law to regulate competition The U.S Authority instead uses the term “Antitrust Law” for the same purpose In this thesis, the author shall use both terms similarly and equally as the law to control competition

4 Originally, the relevant market concept is stipulated separately within the commission note Lê, Trung Nhân (2012) summarized adequately all fragments into a united concept His words also included supply-substitution factors to emphasize that the relevant market is defined by both supply and demand

substitution under the EU regulations See: Commission Notice on the definition of relevant market for the

purposes of Community competition law 97C, 372/03; Lê, Trung Nhân (2012), Criteria for Relevant Market Definition in Some Countries - Experiences for Vietnamese Laws on Competition, Bachelor thesis, Ho Chi

Minh University of Law, p 17-18

5 Vietnam Competition Regulations could be seen as a typical example See: Article 3.1, Vietnam Law on Competition 2004; Article 4, Article 7 of the Decree No 116/2005/NĐ-CP

Second, under the U.S regulations, from court's perspectives, the definition of relevant market somewhat shared the resemblance to the EU's concept Werden6(1992), based on the Betty Bock7 (1960)'s study summarized a number of precedents indicating how the court defined the relevant market in Antitrust lawsuits Although the language might be different more or less, in general, the courts recognized the

relevant product market based on “interchangeability or substitutability of product

and/or services… by reason of the products' characteristics, their prices and their

conditions” 9 Along with what ruled in the past, modern Antitrust Law defines relevant market through a particular methodology called Hypothetical Monopolist Test (hereinafter referred to as HMT) The relevant market is defined in the below paragraph:

“a product or group of products and a geographic area in which it is sold such that a hypothetical, profit-maximizing firm, not subject to price regulation, that was the only present and future seller of those products in that area would impose a

"small but significant and nontransitory" increase in price above prevailing or likely future levels 10 ”

This definition is based on the Guidelines’ basic analytical paradigm11 Accordingly, mergers are prone to create or strengthen market power through the cooperative increases in the price above the competitive level by many firms (which conduct the mergers) A merger could not create or enhance the market power if the

6 Werden, Gregory K (1992), "The History of Antitrust Market Delineation", Marquette Law Review,

76(1), p 154-155

Conference Board Inc

8 In fact, the author has found both relevant product and geographic market concept in Horizontal Merger Guidelines 1968 However, the Guidelines were drafted based on the legality of the previous rules Thus, there is no illogical in the author words on "Court’s perspectives" See: Horizontal Merger Guidelines

1968, p.3-5

9 Lê, Trung Nhân (2012), supra note 4, p.17-18

exact concept as the 1994 version do However, such concept is embedded in all over the market definition section in the 2010 version Thus, the author chooses 1994 version concept over the relevant market so as to serve the academic purpose

11 Werden (1983) pointed out the definition of this fundamental paradigm of market power Although his word did not stand for the Antitrust Division in the U.S, he was the lead member who drafted market definition section in all Horizontal Merger Guidelines Thus, it is plausible to rely on his paper on market definition See: Werden, Gregory K (1983), "Market Delineation and the Justice Department's Merger

Guidelines", Duke Law Journal, 514, p.516-524

merger of all firms in the relevant market could not do so The term “Hypothetical Monopolist” thereof stands for the merger of all the firms in the relevant market In other words, firm could not raise their products price above competitive level if their products face competitive constraints from other products in the relevant market Hence, the relevant market is defined as a product or group of products and geographical area where the Hypothetical Monopolist could exercise its market power by raising the price so as to achieve profit maximization Secondly, the Guidelines define a relevant market as “a product or a group of products and a geographic area in which ” instead of a group of sellers or buyer or both It comes from the fact that market power is determined directly by market shares Though sellers produce the products but market shares are measured at the point of buyer

consumption Thus, the sentence "a product or a group of products” could be the

best way to describe the relevant market instead of using a group of buyers or sellers

or both12

As seen, while the EU chooses to the defined their relevant market concept detailedly, the U.S, on the other hand, stipulates the concept based on the root of relevant market as a place to determine the market power of firms conducting the mergers Both Jurisdictions have their own reasons for stipulating the concept of relevant market in such ways In personal view, the author would like to combine both definitions as these two concepts aid our understanding adequately of the relevant market The U.S definition gives us the root of the relevant market concept while the EU definition directly helps us to have a deeper understanding of the relevant market In short, the relevant market is the place where firms exercise their market power over the products they produce, which are bound in identified geographical areas It seems that UNCTAD definition on the relevant market concept could be satisfied all these elements, the author shall quote this definition as below:

“Relevant market” refers to the line of commerce in which competition has been restrained and to the geographic area involved, defined to include all

reasonably substitutable products or services, “and all nearby competitors, to which

12 Werden (1983) also gave more explanations on the concept of the relevant market in the U.S

detailedly See Werden, Gregory K (1983), supra note 11, 524-530

consumers could turn in the short term 13 ” if the restraint or abuse increased prices

by a not insignificant amount 14 ”

1.2 Basic economic principles for relevant market definition

1.2.1 Own-price elasticity of demand

The demand substitution presents the ability of customers to pose competitive constraints to firms in response to the price increase of firms' products by switching

to buy other products In economic senses, the demand substitution could be described in two general economic concepts: own-price and cross-elasticity of demand of the product

The own-price elasticity presents the change in the percentage of quantity for each 1% price increase The own-price elasticity is often presented in negative numbers due to the inverse relationship between price and quantity in demand function (when the price rise, buyers would tend to buy fewer products and vice versa):

𝑂𝑤𝑛 − 𝑝𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 Under this equation15, for example, -3 own-price elasticity of demand means that for each 1% price increase would lead to 3% fall in quantity demanded Similarly,

if the 1% price increase would result in 0.2% fall in quantity demanded, the price elasticity would be -0.2 and so forth

own-The own-price elasticity plays a central role in the market definition and competitive analysis Indeed, own-price elasticity serves as a cornerstone for the HMT, profit-maximization calculation and so forth The margin of own-price elasticity -1 to 0, which 10% price increase would lead to the less than 10% fall in demand, indicates that the demand is inelastic Therefore, firms can raise the price so

as to achieve profit-maximization in this margin On the other side, The own-price

13 This phrase means to including supply substitution in relevant market definition stage The U.S regulations exclude the supply substitution from the relevant market definition stage, which could be discussed later in this thesis

Article 2, http://unctad.org/en/docs/tdrbpconf5d7.en.pdf (last retrieved on 09/07/2016), p.3

https://cobe.boisestate.edu/lreynol/WEB/PDF/Elasticity.pdf (last retrieved on 13/07/2016)

elasticity is -2, -3 or more indicates that the demand is elastic, which make it less enjoyable for firms to raise the price Determine the own-price elasticity must be conducted and interpreted with discretion Each starting price point has different own-price elasticity, the more increase in price, the more difficult to determine the own-price elasticity figures16

1.2.2 Cross-elasticity of demand

The cross-elasticity of demand describes the changes in the product price of one firm would result in the change in the quantity demanded of the other firms’ products It denotes in the below equation:

𝑐𝑟𝑜𝑠𝑠 − 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑

=%𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑋

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑌 The cross-elasticity plays vital roles in economics Indeed, if two products are substitutes, let say product X and Y, the increase in price product X will lead to the growth in quantity demanded of product Y, the figure would be normally positive

On the other hand, if two product are complements, let say product A and B, the incline in price of product A would result in the fall in the quantity demanded of product B, the figure now is normally negative17 To illustrate, coffee and tea are substitutes, in response to the coffee price increase, buyers would switch to buy the tea and thus increase the quantity demanded of tea On the other hand, coffee and sugar are complements, the increase in the price of coffee would lead to the decrease

in its quantity demanded As Coffee sellers sell less coffee, the sales of sugar would subsequently fall In Antitrust Law perspective, cross-elasticity is vital in determining the next-best substitutes in the HMT; identifying the diversion ratio in Critical Loss Analysis and so forth

17 For more analysis of both own-price and cross-elasticity of demand by model, data, detailed

http://scholar.cu.edu.eg/?q=mahmoudarafa/files/elasticity6.pdf (last retrieved on 13/07/2016)

1.2.3 Market power and the Lerner index

In the simplest antitrust sense, the market power often refers to the ability to raise the price above competitive price In practice, the competitive price is treated equally to marginal cost (or increment cost)18 which denotes the change in total cost that comes from making or producing one additional item The purpose of marginal cost is to determine at which point firms could achieve the economies of scale19

The relation between price and marginal cost is called price-cost margin, which Abba Lerner20 presented in his historical equation (the Lerner index or gross-margin index):

𝐿 = 𝑃 − 𝑀𝑐

𝑃L: Lerner index (gross-margin)

P: price

Mc: Marginal cost

Under this equation, if the price is $100, Marginal cost is $40, we have margin equal to 60% In perfect competition, the price is often equal to marginal cost, which means the gross margin is 0%21 The relations between the Lerner Index and own- price elasticity of demand could be denoted through the below equation:

gross-𝐿 =𝑃 − 𝑀𝑐

1𝐸𝑜Eo: own-price elasticity of demand

As seen, the gross-margin has the inverse relation with the own-price elasticity

of demand In other words, the higher in the own-price elasticity of demand, the lower gross-margin (the profit earn on each product) that firms can earn In other words, this equation indicates the ability of firms to raise their products' prices if demand is inelastic, firms could find more opportunities to find profit if they raise the price On other hands, if demand is elastic, firms could have fewer chances to find profit when

(last retrieved on 14/07/2016)

19 Economies of scale is an economic term refer to the state at which firms maximize their efficiency

distributions Economies of scale, http://www.investopedia.com/terms/e/economiesofscale.asp (last retrieved

on 17/07/2016)

20 Lerner, Abba (1934), "The Concept of Monopoly and the Measurement of Monopoly Power", the

Review of Economic Studies, 1(3), p.157-175

21 Katz, Michael L and Shapiro, Carl (2003), “Critical Loss: Let’s Tell The Whole Story”,

http://faculty.haas.berkeley.edu/shapiro/critical.pdf (last retrieved on 17/07/2016), p.50

they raise the price In practice, the gross-margin played numerous roles, one of them

is the key point to conduct Critical Loss Analysis, which would be discussed in Chapter II of this thesis

1.3 The history of relevant market definition in the United States

In the U.S, the concept of relevant market was defined quite different than

what it is today In fact, the U.S antitrust statutes used the terms “line of commerce” for relevant product market and "section of the country" for relevant geographical

market22 Since the Alcoa23, the court had drawn hard boundaries for the market with the unique detail for product market The court first used the term "relevant market"

in the case of United States v Columbia Steel 24

Before 1950, relevant market definition and its importance did not receive sufficient considerations25 This could be explained for two reasons Firstly, in this era, with the dominance of the economic concept "monopolistic competition26”, most economists showed their hostilities toward the reliance on market shares to determine market power and thus, they rejected the idea of relevant market delineation in antitrust cases Edward Chamberlin went further in assaulting the relevant market

definition by regarding the relevant market as “a snare and a delusion 27 ” Though

there were still economists disagreed with those underestimating relevant market, they just merely or even make no contributions to relevant market delineation in this era28 Secondly, due to the shortage of appropriate methodologies together with the fact that the current Antitrust Law could not provide adequate backgrounds for

relevant market definition, the court, in merger cases, recognized “the difficulty of

22 The Sherman Act (1890), section 1 and section 2; The Clayton Act (1914) (modified by The

Celler-Kefauver Act 1950), section 7 There were some precedents supported the author’s view: United States v

Philadelphia National Bank (1962), 374 U.S 321, 356; United States v Brown Shoe Co (1962), 370 U.S 294; United States v Bethlehem Steel Corp (1958), 168 F Supp 576, 588 See also Werden, Gregory K (1992), supra note 6, p.130

23 United States v Alcoa (1945), 148 F.2d 416

24 United States v Columbia Steel Co (1948), 334 U.S 495

25 In this section, the author would substantially rely on the excellent work of Gregory J Werden – a

leading economist in Antitrust Division at the DOJ See Werden, Gregory K (1992), supra note 6, p.123 –

215

26 For a basic concept of this theory, see: Ho Chi Minh University of Law (2012), Textbook on

Regulations of Competition and Commercial Dispute and Settlement, Hong Duc publishing, p 18-21

27 Chamberlin, Edward H (1950), "Product Heterogeneity and Public Policy", The American

Economic Review, 40(2), p.86-87

28 Werden, Gregory K (1992), supra note 6, p.127

laying down a rule as to what areas or products are competitive, one with another29” and ultimately made no attempt in delineating relevant market and omitted many merger cases which lessened the competition in practice

To address such problem, the Congress passed the Celler-Kefauver Act in

1950, which substantially strongarmed the Clayton Act 1914 in challenging competitive merger cases As a result, relevant market definition turned into a whole

anti-new page Beginning with Times-Picayune30 case, the court first introduced the concept of cross-elasticity of demand31 in delineating market In 1953, the government challenged the acquisition of Du Pont32, which constituted one of the most important market definition cases in the U.S Antitrust Law This landmark case, while laid the first stones for the Hypothetical Monopolist Test33 and many valuable criteria for drawing boundaries for the relevant market, also created the antitrust paradox called “Cellophane Fallacy34” The relevant market definition had been more

and more heightened from 1955 In fact, lots of cases such as Bethlehem Steel 35 , Du

Pont General Motor36, Philadelphia National Bank37 so forth38 were ruled on the ground of relevant market definition Perhaps, the most fundamental pillar in the U.S

relevant market definition was Brown Shoe 39 – The first case that the court was mindfully aware of vertical merger and its competitive effects In this rule, the conflict of cases around relevant market definition40 were all settled The market

29 United States v Columbia Steel Co (1948), 334 U.S 495

30 Times-Picayune Publishing Co v United States (1953), 345 U.S 594

31 See the discussion in section 1.2.2 of this thesis

32 United States v E I du Pont de Nemours & Co (1956), 351 U.S 377

33 This test is the most useful analytical tool in defining the relevant market The author shall discuss this issue in Chapter II of this thesis

34 This term referred to the situation in which the price of a product sold by a firm was currently a monopoly price If the court raised the price to test the substitutability of this product, customers would immediately switch to other products, which broadened the relevant market too much It would ultimately lead

to the erroneousness in defining the relevant market

35 United States v Bethlehem Steel Corp (1958), F.Supp 576

36 United States v E I du Pont de Nemours & Co (1957), 353 U.S 586

37 United States v Philadelphia Nat'l Bank (1963), 374 U.S 321

38 Crown Zellerbach Corp v FTC (1962), 370 U.S 937; Reynolds Metal Co v FTC (1962), 309 F.2d 223; A.G Spalding & Bros Inc v FTC (1962), 301 F.2d 585; United States v Koppers Co (1962), 371 U.S 856; United States v Columbia Picture Corp (1963), 374 U.S 321 See more at Werden, Gregory K (1992),

supra note 6, p.146-156

39 United States v Brown Shoe Co (1962), 370 U.S 294

40 The conflict was about the application of defining the relevant market in Cellophane case and Du Pont General Motor case The former case ruled to apply broad market while the latter proceeded a narrow

market in its decision See: United States v E I du Pont de Nemours & Co (1956), 351 U.S 377; United

States v E I du Pont de Nemours & Co (1957), 353 U.S 586

definition criteria from the previous precedent were accumulated into a historical and valuable relevant market concept41 Moreover, this case also made numerous valuable contributions market definition such as practical indicia42 as criteria for drawing market boundaries; submarket concept and other vital merits43 After Brown Shoe,

there are numerous rules contributing to relevant market definition, which mostly interpreted the Brown Shoe principles on relevant markets44

The 1968 Merger Guidelines, which was the first Merger Guidelines in the U.S antitrust history, was enacted at the time when “high” environment for cases

against mergers existed Justice Steward even said: “in litigation under section 7 (of the Clayton Act), the Government always wins (in market delineation cases) 45 ”

Against this background, the Merger Guidelines drafters aimed to provide a solid foundation for market delineation and eliminate result-oriented cases Indeed, these Guidelines lightened up on principles for market delineation and shed light for the Antitrust Enforcements on determining relevant market However, the Guidelines did little in changing the antitrust environment in this period and somehow received criticisms from other antitrust economists on various issues46

The shift in market definition was significantly made when the Antitrust Agencies drastically reviewed their Merger Guidelines on 1982 (horizontal Merger Guidelines 1982) Indeed, the Guidelines first time introduced the Hypothetical Monopolist Test in defining the relevant market As a result, it had lead to the change

in the concept of relevant market from detailed and lengthy sentences into a tease and short test to draw relevant market boundaries in both product and geographical

41 “The outer boundaries of a product market are determined by the reasonable interchangeability of

use or the cross-elasticity of demand between the product itself and substitutes for it ” In term of the relevant

geographical market, the same criteria were applied by the court Due to length limitation of the thesis, the

author would highly suggest reading the full text for a sufficient understanding See: United States v Brown

Shoe Co (1962), 370 U.S 294

42 For practical indicia explanation and its applications, see Werden, Gregory K (1992), supra note

6, p 172-179

43 For the discussion of the merits of Brown Shoe case See: Hovenkamp, Herbert (2012), "Market in

Merger Analysis", University of Iowa Legal Studies Research Paper, 12(26), p.1-10

44 For the summary and discussion, see: Slesinger, Reuben E (1995), "The Use of Economic Analysis

by the Supreme Court in Applying the Concept of the Relevant Market", European Journal of Law and

Economics, (2)

45 U.S v Von's Grocery Co (1966), 384 U.S 270, 301

46 For the criticisms, see: Stigler, George and et al (1969), "Report of the Task Force on Productivity

and Competition", Antitrust Law and Economics Review; Posner, Richard A (1968), "Oligopoly and the Antitrust Laws: A Suggested Approach", Stanford Law Review

dimension Secondly, supply substitution was excluded47 from delineating relevant market Finally, more insights and methodologies in defining relevant market were also stipulated in the 1982 Guidelines48 DOJ and FTC continued to review their Guidelines in the year of 1984, 199249 and 2010 From market delineation perspectives, not many changes in their reviews were captured except the de-emphasis of market definition role in the latest revision in 201050

1.4 The role of relevant market definition

In anti-competitive litigations, the role relevant market definition is indispensable51 The latest Merger Guidelines 2010 specified two key roles of relevant market: first to specify the line of commerce and the section of the country

in which the competitive concerns arise (or determine the industries and geographical areas affected by mergers) and second to identify market participants, measure market shares and market concentration52 In practice, relevant market definition indeed plays more prominent roles

First, by delineating the relevant market and then calculating and assigning the market shares, the competition authorities based on the market shares to determine the market power of firms, which is the core in understanding the competitive effects

If the relevant market is defined too broadly – the situation in which the relevant market includes distant product or geographic substitutes would lead to the mislead for assigning market shares and market power For example, in Du Pont53, the court included cellophane and other wrapping materials in the same relevant product market and ultimately let the merger happened despite the fact that Du Pont itself had monopoly power over cellophane and the merger of Du Pont increased its market

47 This element would be discussed in Chapter 2 of this thesis

48 For detailed analysis in the Horizontal Merger Guidelines 1982, see Werden, Gregory K (1992),

supra note 6, p.190-205

49 The revision of the Horizontal Merger Guidelines in 1992 tended to rely less on market concentration ratio, and improve the structure and efficientcy of the Guidelines For an overlook, see: Garza,

A Deborah (2010), "Market Definition, the New Horizontal Merger Guidelines, And the Long March Away

from Structural Presumptions", the Antitrust source

50 For the changes in Horizontal Merger Guidelines 2010, see: Coate, Malcolm B & Simons, Joseph

J (2010), "Continuity and Change in the 2010 Merger Guidelines", CPI Antitrust Journal

51 Turner, Donald F (1980), "The Role of the "Market Concept" in Antitrust Law”, Antitrust Law

Journal, 49(3), p.1146 The role of relevant market definition is even regarded as a cornerstone of competition

policy See: Monti, Mario (2001), "Market Definition as a Cornerstone of EU Competition Policy", Workshop

on Market Definition

52 Horizontal Merger Guidelines 2010, p 7

53 United States v E I du Pont de Nemours & Co (1956), 351 U.S 377

power and harmed the competition On the other hand, defining a relevant market too narrowly would place the firm without significant monopoly power as a monopolist

In this circumstance, other substitutes from both geographical and product dimensions which could pose competitive constraints to merging firms would be omitted As a result54, the merger would be averted even though it might promote the competition55 Thus, drawing an accurate relevant market is crucial as it gives a thorough overlook for merger context

Second, the relevant market definition "is not an end in itself but an essential

step in identifying the competitive constraints acting on a supplier of a given product

or service 56 ” Indeed, the relevant market definition is accounted for several purposes

in determining the scope of competition as well as providing the framework for competition analysis Firstly, The ultimate goal of market definition is to assess whether mergers between firms could create or strengthen the market power, which grants firms ability for uplifting the price above competitive price57 Market shares

of firms in the relevant market directly provide significant background for indicating market power58 Secondly, Defining relevant market could facilitate the determination of other competitive issues such as market participants, potential barrier and entry59 and thus be useful in evaluating the risk of potential collusive effects in mergers

Final, the relevant market definition does even go beyond its role in the

competitive analysis Indeed, “relevant market concept is used as a basis for

calculating fines, for estimating the effects on trade between EU member states and

54 As for more explanations for both too narrow and too broad relevant market, see: Hylton, Keith N

(2010), Antitrust Law and Economics 2nd, Edward Elgar Publishing Limited, p.76-77

55 Not all mergers could pose harmful effects to competition Mergers, especially in vertical and conglomerate forms, are sometimes vital and unavoidable for the development of firms as well as enhance the

competitive environment For more detail, see: Nguyễn, Tài Tuệ and et.al (2015), Vertical and Conglomerate

Mergers: An Approach of the United States Regulations and lessons for Vietnam, Scientific Research, Ho Chi

Minh University of Law

56 Office of Fair Trading (2004), Market Definition: Understanding Competition Law, p.3

58 Eastman Kodak Co v Image Technical Servs., Inc (1992), 504 U.S 451, 469 This rule gave the

legality for the relationship between market shares and market power

59 Entry or entry barrier in participating a market is an Antitrust concept It identifies the likelihood or the possibility of firms from different industries want to jump into a relevant market The author would not discuss such concept further due to the thesis delimitation For basic understanding see: Weil, Gotshal &

Manges LLP (2010), “How Antitrust Agency analyzes M&A", Practice Law Journal, available at:

http://www.weil.com/~/media/files/pdfs/101810October2010PracticeNote.pdf (last retrieved on 09/07/2016)

has served as a procedural models for estimating the effects on trade between EU

relevant market definition is undeniably the most cost-effective and the most effective methodology as a tool to identify market power and satisfy the ultimate purpose of Antitrust Law In fact, the ultimate goal of Antitrust Law is to protect the competition

environment and boost up the economic efficiency, "preventing imbalances in

political power by preventing increases in seller concentration that increase such imbalances even in a world in which there are other imperfections in the distribution

of political power 61 ” and so forth62 Thus, the Relevant market is by far dispensable

as well as the best methodology in drawing radical view for analyzing the competitive effects of mergers

Recently, the Post-Chicago-School economists have again63 raised the attack against relevant market definition and its role64 Even the 2010 Merger Guidelines

de-emphasize the role of relevant market definition as it states "The Agencies’

analysis need not start with market definition 65 ” Professor Louis Kaplow, a leading

opponent economist against relevant market definition concepts, states that merger

analysis does not need relevant market definition as it is “impossible and

counterproductive 66” In his papers67, Kaplow drops the relevant market definition stage, directly assessing the market power, market behaviors and unilateral price effects by offering market models and economic equations In defending of relevant market definition, Coate, Werden and other antitrust enforcers pointed out a

60 Apart from the above quotation, the author second reason entirely based on the OECD paper See:

OECD Policy Roundtables (2012), Market Definition, p.11

61 Markovits (2014) also explains in detail the goal of Antitrust and the inevitable role of relevant market His paper also contains the economic perspectives about the relevant market role See: Markovits,

Richard S (2014), supra note 2, 165-181

and et.al.(2014), supra note 55, tr.13-24

63 The hostility about the market definition in anti-merger cases did not just happen The author has conducted some basic views about this story in section 1.3 of this Chapter

64 In this section, the author could only introduce the attack against market definition without researching the work of Kaplow and other anti-market definition economist papers However, the reasons why these papers mentioned are that these papers could be useful sources for those who want to take a look on the opposite sides rejecting the relevant market definition stage in the merger analysis

65 Horizontal Merger Guidelines 2010, p.7

66 Kaplow, Louis (2013), "Market Definition: Impossible and Counterproductive", Antitrust Law

Journal, 79(361)

67 Kaplow, Louis (2010), "Why (Ever) Define Markets?", Havard Law review, 437(124); Kaplow, Louis (2013), supra note 66

significant number of flaws in Kaplow and others' studies and again emphasize the pivotal role of relevant market definition68 Under the author perspective and from the above analysis, the author does agree with the indispensable role of market definition, especially in mergers and relevant market definition should always be a prerequisite step in merger enforcements

1.5 Remarks

In the Chapter I, the author has clarified several following points:

- Comparing the definition of relevant market concept between the E.U and the U.S Both Jurisdictions use different ways to define relevant market concept but agree with the ideas – the relevant market concept as a place which is bound to both product and geographic dimension; the place in which firms could exercise the market power

- Providing some basic economic principles on relevant market definition about the own-price and cross-elasticity of demand Those principles serve underpinning stones in understanding the relevant market definition methodologies and how relevant market is defined

- Providing an overlook of the history of relevant market definition in the U.S

- Pointing out the indispensable role of relevant market definition as a first step

in merger analysis

The above analyses could be some first steps in understanding the relevant market and could be the bedrocks for figuring out the contents in the Chapter II and the Chapter III of this thesis

68 Coate, Malcolm B & Simons, Joseph J (2012), "In Defense of Market Definition",

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1967208 (last retrieved on 09/07/2016); Werden, Gregory

K (2014), "The Relevant Market: Possible and Productive", Antitrust Law Journal Online; Werden, Gregory

K (2012), "Why (Ever) Define Markets? An Answer to Professor Kaplow", SSRN Journal Online, 78(3)

CHAPTER II: THE RELEVANT MARKET DEFINITION UNDER THE

UNITED STATES REGULATIONS 2.1 Conceptual approaches to relevant market definition

2.1.1 Supply substitution

Recognized as an economic force accounted for market delineation, side substitution had been employed by the U.S courts since the mid-1970s69 To figure out, supply-side substitution describes the extent to which the suppliers exert the competitive constraints to the merging firms in response to the price increase by the latters In other words, supply substitutability (and entry) both indicate the ability

supply-of producers not currently selling a particular product to begin doing so70 The below example could be used to explain the supply-side substitution:

Example 71 : There is a prospective merger between sellers of the insulated

copper conductor which is used to carry electric current There are still sellers of insulated aluminum conducts which could be used to carry electrical current too However, under the differences of physical characteristics and utilities: the copper insulated conductor is used in above-ground electric wiring whereas insulated aluminum conductor is clear-choice for underground electric wiring, they could not

be substituted for each other Thus, under demand-side substitutions, the insulated copper conductor along with several other substitutes of itself would constitute a relevant product market without including insulated aluminum conductor Now suppose further that entry barrier to insulated copper conductor market is minimal: other producers, such as insulated aluminum conductor manufacturers, could quickly and inexpensively jump into insulated copper conductor market without including any substantial costs Under supply-side constraint, in the response to insulated copper conductor's price increase, insulated aluminum conductor manufacturers would switch to produce the insulated copper conductor too as they smell the

69 For a summary, see: Baker, Jonathan (1988), "The Antitrust Analysis of Hospital Mergers and the

Transformation of the Hospital Industry", Law and contemporary Problems, 51(2) in Baker, Jonathan (2007),

"Market Definition: An Analytical Overview", Antitrust Law Journal, (1), p.133

70 Werden, Gregory K (1992), supra note 6, p.190

71 This example originally comes from Baker (2007) study The author would like to use this originality as to serve the entire analysis on supply-side substitution describes in this section See: Baker,

Jonathan (2007), "Market Definition: An Analytical Overview", Antitrust Law Journal, (1), p.134-135

potential profit of producing such product As a result, the insulated copper conductor producers would now face more competitive constraints from insulated aluminum conductor producers and might even find it unprofitable when raising the price of the insulated copper conductor to higher levels Thus, if supply-side substitution is considered, the insulated copper conductor relevant product market would include the insulated aluminum conductor72

Morden Antitrust Law, at least under the view of Antitrust Enforcement Agencies73 exclude the supply substitution element out of relevant market definition stage They instead use this element for further steps such as identifying market participants and entry It could be explained due to several reasons74

Firstly, suppose that insulated aluminum conductor manufacturers are divided into different levels Only tier-one insulated aluminum conductor manufacturers could quickly and inexpensively switch to produce insulated copper conductor in the response of the latter price incline Tier-two, tier-three and so forth insulated aluminum conductor producers are incapable of doing such activities In this circumstance, only tier-one insulated aluminum conductor manufacturers have the ability to pose the competitive constraints to insulated copper conductor producers, other insulated aluminum conductor producers could not be able to do so If product relevant market includes insulated aluminum conductor, it would lead to the misleading in defining market shares, market power of the insulated copper conductor producers and the merger of those firms might be treated as harmless to competition (though in reality, it does harm the competition)

Secondly, suppose that some insulated aluminum conductor producers may have the ability to quickly and inexpensively switch to produce insulated copper conductor but they find it unprofitable to so due to the fact that they have to break the long-term profitable contract with their customers in order to produce insulated

72 Other example could lead to the same result with the author’s example See: Blumenthal, William,

http://www.kslaw.com/imageserver/KSPublic/library/pdf/blummerger.pdf (last retrived on 15/07/2016)

73 Horizontal Merger Guidelines 2010, p.7

74 Werden, Gregory K (1992), supra note 6, p.190-192; Werden, Gregory K (1993), "Market Delineation Under the Merger Guidelines: A Tenth Anniversary Retrospective", Antitrust Bulletin, 38(517), p.269-271 Baker, Jonathan (2007), supra note 74, p.135-138 Of those three papers, Baker (2007) provide a

clear-cut and detailed explanation of supply substitution exclusion while two Werden papers give quite a general analysis on dropping supply substitution from the market definition stage

copper conductor This situation again results in the failure in determining market shares if the relevant product market includes insulated aluminum conductor

Thirdly, suppose that there are other substitutes of insulated aluminum conductor, for instance: insulated zinc conductor which is the best substitute for the insulated aluminum conductor, but such electric-transition conductors could not be treated the same market with insulated copper conductor due to the poor substitutability in the demand side In this instance, it would be difficult, in practice,

to draw relevant market boundaries with the only insulated copper conductor (with its substitutes in the demand-side) and insulated aluminum conductor without including insulated zinc conductor The reason lies on the ground that insulated aluminum conductor is a good substitute in the supply side for insulated copper conductor, it would be unconscientious if excluding insulated aluminum conductor substitutes in its demand-side out of insulated copper conductor relevant product market75 Hence, relevant product market should include the insulated copper conductor, insulated aluminum conductor and zinc conductor This result again would potentially lead to the erroneousness in assign market shares and market power

of insulated copper conductor producers conducting mergers

Finally76, suppose that the process of producing insulated aluminum conductor and the insulated copper conductor is quite similar, but not totally the same Insulated aluminum conductor manufacturers could produce Insulated copper conductors but their characteristics are not as good as insulated copper conductor produced by specializing firms As a result, the first group of buyers could happily buy insulated copper conductor produced by insulated aluminum conductor firms but the second of buyers could not buy such products even though the specializing firms producing insulated copper conductor raise their product price Thus, if including insulated aluminum conductor into insulated copper conductor market, the insulated aluminum conductor producer could only constrain the ability to raise price of insulated copper

75 This sentence is based on Baker (2007) originality as quoted: “… may be hard-press to define

anything short of an all-conductor market, including copper, aluminum and nickel conductor” See: Baker,

Jonathan (2007), supra note 74, tr.136

76 Actually, Baker (2007) provided several other reasons for excluding supply substitution However, those reasons need some specific contexts to understand their meanings Therefore, the author would not use

those reasons though they are indeed useful and meaningful See: Baker, Jonathan (2007), supra note 74,

p.136-137

conductor producers over the first buyer group (as they could buy the insulated copper conductor produced by the insulated aluminum conductor firms) but not the second group of buyers who would like to buy insulated copper conductor by specializing firms Again, it would lead to the faulty in assessing market power of insulated copper conductor firms It is easy to presume that all buyers of insulated copper conductor could switch to buy insulated copper conductor produced by insulated aluminum conductor firms77 As a result, the market power of insulated copper conductor produced might be underrated and the analysis of their merger would be incorrect

Under the author perspective, the relevant market concept should be based purely on demand substitution when it is feasible In other words, if there are sufficient conditions78, the relevant market should be based solely on demand substitution In contrast, when it is not suitable for relevant market definition by entirely assessing the demand substitution, the supply substitution in turn could be assessed for delineating relevant market

Although the language of the Merger Guidelines states that “Market definition

rely on supply substitution for determining the relevant market For example, the Natural Experiment80 assessing the substantial shocks from entry and exist; competitive strategies and input price change for relevant market definition Those significant shocks are based on the assessment supply substitution Secondly, some types of evidence81 for relevant market definition could also rely on supply substitution such as past buyer responses and seller behaviors in buyer side Thus, it would be reasonable for the concept of the relevant market definition should be based purely on the demand-side when it is feasible

The real issue needs avoiding here is defining the relevant market by both demand and supply substitution at the same time even when demand substitution is readily available If doing so, those above problems (four reasons relating to the example of insulated copper conductor) could be theoretically addressed with

77 Baker, Jonathan (2007), supra note 74, p.136-137

78 For example, there is enough data for conducting the HMT or Critical Loss Analysis

79 The Horizontal Merger Guideline 2010, p.7

80 See section 2.3.2, Chapter II of this thesis

81 See section 2.5, Chapter II of this thesis

discretion analysis However, as the first stage in merger analysis, relevant market delineation serves as an overall picture of antitrust context for merger analysis It need not be defined in a way too complicated Adding supply substitution in the delineating relevant market might lead to potentially fatal errors but for the extremely careful analysis Moreover, if paying too many resources in defining the relevant market, it would give rise to the inefficient and time-consuming issues In the Example and the analysis above, if the relevant market definition is solely based on the demand substitution, all the problems would be avoided Thus, supply substitution should be considered in further steps when demand assessment is expedient, at least after the relevant market is determined, in identifying market participants and entry

2.1.2 Demand substitution

There are two economic forces of the relevant market Along with supply-side substitution, demand-side substitution is the other economic force constituting the relevant market Demand-side substitution describes the extent to which the ability

of consumers to switch to other products in response to the price increase of the merging firms' products For example, When Coca-Cola price is increased, customers may choose other soft-drink such as Sprite, Revive and so forth

Under the current U.S regulations on defining relevant market, the relevant market is solely defined by demand-side substitution82 In the remain analyses include market definition methodologies, the HMT and evidence to define the relevant market, the author would use those analyses with respect to the demand-side substitution

2.2 Relevant product market definition

2.2.1 The Hypothetical Monopolist Test as an analytical tool in defining relevant market

2.2.1.1 Definition

First introduced in 1982 with the enactment of Horizontal Merger Guidelines

1982, the HMT (or SSNIP83 test) has been a cornerstone in competition analysis not only in the U.S but also in a great number of competitions authorities84 The core of

82 Horizontal Merger Guidelines 2010, p.7

83 The SSNIP stands for small but significant and non-transitory increase in price The SSNIP price level is normally set as 5-10%

84 For example: EU, Japan, United Kindom and so forth

the HMT is based on cross-elasticity of demand concept By creating a Hypothetical Monopolist (the entity that is on behalf of all firms in the relevant market) and asking

what would happen if this entity raises its products price in a level of “small but

significant and non-transitory increase in price” (hereinafter referred to as SSNIP),

the relevant market is gradually defined

To illustrate, the HMT starts with each product of the merging firms to make

up a candidate market Secondly, the Hypothetical Monopolist raises its products price in SSNIP level If the Hypothetical Monopolist finds it profitable with the price increase – in other words, consumers has no choice but to continue to buy the products

of the Hypothetical Monopolist regardless the price increase, the relevant market is immediately defined as the candidate market due to the fact that there are no competitive constraints (from other products) to the products of the merging firms Thirdly, On the other hand, if the Hypothetical Monopolist find it unprofitable as consumers switch to buy other products posing competitive constraints over merging firms products (or substitutes of merging firm product) in responses of price increase, The candidate market is then expanded to include next-best substitutes85, one by one respectively and cumulatively, and the process is started over Finally, as soon as the Hypothetical Monopolist find it profitable when this entity raises the price in SSNIP level over its products, the relevant market is thereby defined The Competition Agencies apply the HMT twice: first, apply to the product chains to constitutes relevant product market and second apply to geographical area to define the relevant geographic market

85 The next-best substitutes are discussed in “Critical Loss Analysis” section later

The HMT could be picturized in the below image:

Source: Davis and Garces (2010)86

Example: Suppose that there is a merger between A and B who both sell

normal beer87 Next, the Competition Agencies raise the price of normal beer in SSNIP level, let say 5% If the Hypothetical Monopolist finds it profitable with such price increase, the relevant market is defined as a normal beer market itself On the other hand, with such price increase, the Hypothetical Monopolist does not find it profitable, the Competition Agencies would add next-best substitutes – for instance, dark beer, barley and so forth – one product respectively for each rotation and start over the process till the Hypothetical Monopolist (now sells normal beer, dark beer,

86 Davis, Peter and Garces, Eliana (2010), Quantitative Techniques for Competition and Antitrust

Analysis, Oxford Press, Princeton University Press, p.203

87 The normal beer in this context is the beer with a high percent of barley in its ingredients