Antitrust Basics: The Relevant Market Fallacy

This is the second entry in the “Antitrust Basics” series. See below for previous posts.

If a firm is charged with having market power, the question naturally arises: in which market? Does Facebook have a monopoly over social networking, especially now that it owns additional networks such as Instagram and WhatsApp? Or does Facebook compete with other uses of leisure time such as movies, television, books, sports, concerts, and countless other ways people can spend their time? Which is the more relevant market? The answer is subjective—a significant problem for a legal case with multi-billion dollar stakes.

Antitrust regulators often try to make their case appear stronger by using an unrealistically narrow definition of a company’s relevant market. I call this tactic the relevant market fallacy. The relevant market fallacy is one of the easiest mistakes to make in all of antitrust analysis. It is also one of the easiest to avoid. Thinking along the different parts of a spectrum illustrates why.

At one end of the spectrum, every individual product can be seen as its own relevant market. A sandwich at one restaurant is different from a similar sandwich sold at another restaurant next door, even if they are the same price. One restaurant might offer better service, better ambience, or some other nonprice characteristic that differentiates it from its competitor. In that sense, there are two different products operating in different markets appealing to different sets of consumer preferences.

At the other end of the spectrum, the only relevant market is as big as the entire global economy. That sandwich also competes against all other types of food in a global supply chain—and any non-food item a person might spend their money on instead. Whichever point on the spectrum an analyst decides is right for a given case is an arbitrary decision. It is largely a matter of semantics, and often analytically useless in determining consumer benefits.

As with most things in the real world, most relevant markets fall somewhere in between these two extremes. Amazon controls roughly half of online retail, but a much smaller fraction of total retail. Which is the proper relevant market? Amazon’s success with online retail has also caused traditional retailers such as Walmart and Target to massively change their business strategies to match consumer desires. The relevant market is not only debatable in size and scope, but it is constantly changing shape. And that change is happening far faster than the speed of litigation.

When satellite radio companies Sirius and XM merged, critics argued that the combined firm would have a monopoly on satellite radio, and the merger should have been blocked. Once again, they defined the relevant market too small. Satellite radio competes with terrestrial radio, streaming radio, on-demand music streaming, podcasts, audio books, and more.

As political candidates, pundits, and activists tout statistics for this or that company’s market dominance, keep in mind they are often committing the relevant market fallacy. It doesn’t take long to check, and it’s well worth the small effort.

For more, see Wayne Crews’ and my study, “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.” Further resources are at antitrust.cei.org.

Previous posts in Ryan Young’s “Antitrust Basics” series:

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