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

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NGUYỄN TÀI TUỆ

MINISTRY OF EDUCATION AND TRAINING
HO CHI MINH CITY UNIVERSITY OF LAW
-----------***-----------MANAGING BOARD OF THE ADVANCED COURSES

U.S ANTITRUST LAW ON MARKET DEFINITION

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

NĂM 2016

Ho Chi Minh City
2016


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 19th, 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.
market

The Hypothetical Monopolist Test as an analytical tool in defining relevant
....................................................................................................................... 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 (pricediscrimination 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

AEC

ASEAN Economic Community

CLA

Critical Loss Analysis

DOJ


Department Of Justice

EU

European Union

FTC

Federal Trade Commission

HMT

Hypothetical Monopolist Test

SSNIP

Small but Significant and Non-transitory Increase in Price

TPP

Trans-Pacific Partnership

US

United States


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 (5th ed.), John Wiley & Sons Inc, p.35-73.

1


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
2


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.

3


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.

4


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
5



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

6



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.

2

The author would not mention the market concept any further as it is discussed in many papers.
Trần, Lệ Loan (2012) gave an overlook of the concept of the market through its definition, characteristics and
so forth. In his book, Markovit, Richard S. (2014) provided both classic and alternative concept on the

economic market concept. He added the criteria to define economic market and gave the definition of economic
market of his own. See: Trần, Lệ Loan (2012), Relevant Market – Theories and Practices, Bachelor thesis, Ho
Chi Minh University of Law, p.3-8; Markovits, Richard. S (2014), Economics and the Interpretation and
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.

7


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

intended use” and the relevant geographical market8 Based on “competition
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 levels10”.
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.
7
Book, Betty (1960), Mergers and markets: an economic analysis of case law, National Industrial
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.
10

Horizontal Merger Guidelines 1994, p.6. The 2010 Horizontal mergers Guidelines do not give an
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.

8


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.

9


consumers could turn in the short term13” if the restraint or abuse increased prices
by a not insignificant amount14”.
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 ownprice elasticity would be -0.2 and so forth.
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.
14
UNCTAD (2000), Model Law on Competition, United Nations, section I.c, possible Elements for
Article 2, http://unctad.org/en/docs/tdrbpconf5d7.en.pdf (last retrieved on 09/07/2016), p.3.
15
Principle
of
Micro
Economics
Econ202,
https://cobe.boisestate.edu/lreynol/WEB/PDF/Elasticity.pdf (last retrieved on 13/07/2016).

10


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.

16
As the limitation in the thesis context, the author thus highly suggests reading Niels (2011) for more
economic explanations and measurements of own-price elasticity. See: Niels, Gunnar, Jenkins, Helen and
Kavanagh James (2011), Economics for Competition Lawyers, Oxford University Press, p.32-37; Werden,
Gregory K. (1998), "Demand Elasticities in Antitrust Analysis", Antitrust Law Journal, 66(2), p364-367.
17
For more analysis of both own-price and cross-elasticity of demand by model, data, detailed
information,
see:
Chapter
6:
Demand

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

11


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 grossmargin index):
𝐿=

𝑃 − 𝑀𝑐
𝑃

L: Lerner index (gross-margin)
P: price
Mc: Marginal cost
Under this equation, if the price is $100, Marginal cost is $40, we have grossmargin 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:
𝐿=


𝑃 − 𝑀𝑐
1
=
𝑃
𝐸𝑜

Eo: 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
18

Marginal Cost of production, http://www.investopedia.com/terms/m/marginalcostofproduction.asp
(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.

12



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 Steel24.
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 delusion27”. 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 CellerKefauver 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.

13


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 anticompetitive merger cases. As a result, relevant market definition turned into a whole
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 Steel35, 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 Shoe39 – 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.
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.
30

14


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.

15


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 deemphasis 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.
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
48


16


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 service56”. 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.
57
For basic market power paradigm, see: Werden, Greogory K. (1983), supra note 11, p.516-534.
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).

17


has served as a procedural models for estimating the effects on trade between EU
member states and has served as a procedural model for other areas of law60”. The
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 power61” 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 definition65”. 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
counterproductive66”. 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.
62
For more about the Antitrust goal of the U.S in the Vietnamese language. See: Nguyễn, Tài Tuệ
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.

18


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).

19



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