The Significance of Variety in Antitrust Analysis
Thomas B. Leary(1)
A recent book called The Experience Economy(2) presents an imaginative view of the way in which a society matures. The authors explain that economies evolve from reliance on the production and marketing of commodities to the sale of products, then to the sale of services, and ultimately to the sale of experiences. At each stage, there is a dramatic increase in the value, and hence the price, of what is offered.
A simple example would be the change in the ways that people buy a child's birthday cake. Fifty years ago, the child's mother might have gone to the neighborhood market and spent a few dollars for sugar, flour, eggs, and other commodities to make a cake. Thirty years ago, the mother might have spent a few dollars more to buy cake mix, which combines many of the commodities into a single product. Ten years ago, she might have paid a bakery fifty dollars for a product and a service, namely preparation of a decorated cake. Today, she might spend over a hundred dollars for the entire birthday party experience, including cake, offered by a chain like Chuck E. Cheese. And, of course, Chuck E. Cheese will earn even more money by selling products that remind the children of their pleasant experience.
The book was written for the edification of people who market products. The message is that businesses can prosper to the extent they can transform their offerings from the sale of relatively simple goods and services to the sale of experiences. But an antitrust lawyer cannot avoid thinking about the implications for antitrust analysis as the economy moves in the direction predicted by the authors.
Traditional antitrust analysis relies on economic models that generally assume commodity-like products. Perfect competition, monopoly, and even many oligopoly models rely on the simplifying assumption that products are homogeneous. The critical variables are cost, price and output. For many markets, these models have enabled us to make predictions at least about the likely direction, and perhaps the magnitude, of the changes likely to result from various business strategies -- even if the realities of the particular market did not precisely match the models' assumptions. However, as the assumption of homogeneous commodity products becomes progressively less realistic in the real world, we need to ask the question whether the traditional models will continue to be so useful. What can be said about non-homogeneous products, services, and experiences, which exist in bewildering "variety"?
One rather ancient dictionary(3) defines "variety" initially as "the quality or state of having numerous forms or types" and goes on to refer to an individual "variety" as "something differing from others of the same general kind." The term "variety," as discussed in this essay, can be understood by collapsing these two definitions; thus, this essay refers to situations in which consumers are offered "numerous forms or types" of things "of the same general kind." Antitrust lawyers, trained to look for "markets," will naturally ask whether the appropriate focus is on the "general kind" or on the individual variations, or on something in between.(4)
Others have already written extensively on market definition issues for non-homogeneous products,(5) and market definition has been the starting point for analysis of many antitrust problems. The question raised here, however, is slightly different. In some areas of commerce, which appear to be rapidly growing in significance, is it appropriate even to think about "markets" in the usual way, much less calculate shares or apply the traditional presumptions? If the satisfaction of individual consumer tastes becomes ever more significant in the economy, and substitutes ever more remote, the standard presumptions of "market power" would be applied to myriad increasingly fragmented markets and the intrusions of antitrust would become intolerable. On the other hand, it is equally unappealing to ignore potentially growing areas of antitrust concern simply because the traditional approaches are inadequate.
I. EXISTING MODELS OF "VARIETY"
Economic models have been developed that explicitly incorporate variety and product differentiation. These models are informative, but do not provide particularly helpful guidance about the appropriate way to evaluate product variety in conjunction with traditional concerns about output, cost and price.
In the 1930s, Joan Robinson and Edward Chamberlin developed the theory of "monopolistic competition" to describe markets in which each firm sells a distinct differentiated product but competes with a few or many other firms.(6) In monopolistic competition, the products are highly substitutable but not perfect substitutes, so each firm faces a downward-sloping demand curve. As a consequence, firms have some ability to price above the perfectly competitive price. In addition, monopolistic competition can lead to misallocation of resources. Because price exceeds marginal cost, firms operate with excess capacity and produce less than the output that minimizes costs.
The theory also recognizes that differentiated products offer variety and that this variety benefits consumers. The model of monopolistic competition does not, however, provide a way to compare the benefits of increased variety with harmful higher prices and costs (or a way to compare the benefits of price reductions with a harmful loss of variety). As the authors of a leading microeconomics textbook point out:
whatever inefficiency there is must be balanced against an important benefit that monopolistic competition provides -- product diversity. Most consumers value the ability to choose among a wide variety of competing products and brands that differ in various ways. The gains from product diversity can be large and may easily outweigh the inefficiency costs resulting from downward-sloping demand curves.(7)
Similarly, Areeda and Turner observe in their antitrust treatise:
[P]roduct differentiation appears to cause both resource misallocation and inefficiency.
Yet, real product differentiation benefits consumers in the form of greater product variety, and that benefit can exceed the higher costs of inefficient production and thereby improve resource allocation. In any event, antitrust policy can do little about product differentiation, which reflects scale economies or entry barriers.(8)
These summary statements pretty well capture the economic learning on variety competition that is accessible to lawyers. Technical economic work continues in this area, but thus far there do not appear to be any useful guides for antitrust policy. For example, recent mathematical models of differentiated product markets make a variety of simplifying assumptions to make the models computationally tractable. The models might assume that there is a "representative consumer" (no purchasing differences among consumers) when firms offer different products,(9) or they might assume that products are in equal competition with one another (no closest substitutes among product offerings).(10) Alternatively, the models might assume that both consumers and products are assigned or distributed at particular locations in "product space."(11) The consequences of the simplifying assumptions, however, is that the models yield conflicting results on the socially optimal level of product variety. Some models conclude that there are too many varieties; other models conclude that there are too few. In the absence of any clear-cut directional signals,(12) product variety is still an irritant, and ignored to the extent possible.
Product variety may necessarily enter antitrust analysis today in the definition of relevant product markets. Traditional market definition involves questions of substitution -- predictions about consumer response to price changes -- and often the answer turns on the degree of product variety. This is an issue with which courts and the enforcement agencies now have considerable experience, even if it is difficult to discern a consistent pattern.(13) It is important to recognize, however, that variety issues vary in complexity and that there are multiple levels that need to be examined, each progressively more remote from the simplistic assumptions about commodity products that heretofore have dominated antitrust analysis.
This essay will address the antitrust analysis of different "levels" of product variety, roughly in order of increasing complexity. It is intended merely as an introduction, not an exhaustive summary, and suggests far more questions than answers. It will become apparent that incorporation of product variety as an independent value can be subjective and frustrating, and that we still know very little about it.
II. VARIETY CONSIDERED ON MULTIPLE LEVELS
A. Level One: Different Product Specifications
First, consider a product that is comprised of numerous components. As the specifications for the components change, the product is no longer homogeneous and variety has been introduced. At this first level, the product heterogeneity may not complicate the antitrust analysis unduly. It still may be possible to adjust for the varied specifications and make meaningful price comparisons.
In the so-called Electrical Cases(14) -- which involved conspiracies covering a wide range of electrical equipment sold primarily to utilities -- there was evidence of competitor price discussions involving particularly complex products, like turbine generators, that were individually tailored for utility customers. The discussions focused on the book prices for various components, discounts from book, or price escalation terms, but the conspirators did not always attempt to standardize the product offerings. There was evidence of extensive cheating, as individual competitors "gave away" excess capacity or additional accessories, but the conspirators apparently believed it was worthwhile to focus on prices and discount terms. Stabilization of these elements alone was competitively significant.(15)
Even at this first level, however, it is not always possible to translate changes in product specifications into changes in perceived consumer value. The value of added product features varies widely with the eye of the beholder. For some people, a microwave with multiple options offers substantially added value, for others the complex controls are simply a nuisance. For some people, sturdy (and expensive) construction that adds to durability is worth a lot; other people do not care. Thus, it may be difficult to generalize consumer preferences. Nevertheless, products with different physical characteristics can be most readily analyzed with the traditional tools that emphasize costs, prices and output.
B. Level Two: Brand Name or Reputation
Now consider a more complex dimension of variety. Suppose there are two products that have the same specifications, and are physically identical, but differ because one of the two carries a highly advertised brand name. The branded product likely commands a price premium. The premium price for a physically identical product reflects a variety of factors. Consumers may believe that a company with a national reputation is unlikely to sponsor a product that does not perform as expected. They actually may have had previous experience with the branded product, and thus can be sure what they are getting. The establishment of this brand identity requires goodwill investment. It may be possible to measure the investment input, even if the quality premium cannot be readily separated in the product's price.(16) The premium price is not a supracompetitive price; the premium reflects the perceived quality difference and goodwill investment.
There may also be more intangible values. If the product is of a kind that may require service, consumers may have more confidence in the capabilities of a national brand supplier. There also may be an element of prestige associated with ownership of a branded product, which can be reflected in price. This is not a supracompetitive price either; for some people the prestige associated with certain products genuinely translates into superior value.(17)
At this level, product variety begins to introduce difficulties in market definition, and the outcomes vary by industry. Some courts have found separate markets for high and low quality products; other courts have found a single market. For the most part, the courts in these kinds of cases have tried to determine whether a separate market exists by application of the Supreme Court's relevant product market test in Brown Shoe Co. v. United States.(18) In Brown Shoe, the Supreme Court established that "reasonable interchangeability" and cross-elasticity of demand determine the "outer boundaries" of a product market.(19) Within the "outer boundaries" of a product market, the Court established that there may be relevant submarkets based on one or more "practical indicia" separate and apart from interchangeability and cross-elasticity of demand.(20)
But it is not really possible to glean any practical or consistent standards from the cases that purport to apply these tests.(21) Perhaps, this is inevitable when a decision like Brown Shoe simply lists a number of factors without explaining their underlying rationale and relationship or how to weigh one against the other. Some courts have elaborated in a helpful way on one or more of the Brown Shoe elements,(22) but the results still seem to be highly subjective and outcome-oriented. And this uncertainty exists with respect to product offerings that are far closer to the commodity model than other offerings that will be discussed later in this essay.
One way to avoid the difficulties in defining markets for variable products is to focus instead on the possible unilateral anticompetitive effects of a merger or acquisition. Coordinated effects are obviously more likely to the extent that products are similar; unilateral effects are more likely if the products are different.(23) The latter analysis recognizes that functionally interchangeable products are not necessarily perfect substitutes, and seeks to determine whether the separate products of the merging firms are sufficiently close to make it profitable for the acquirer to raise prices on one product with the expectation that some of the lost customers would switch to the newly acquired substitute product.
In some industries, there is enough data on volumes and prices to calculate these potential unilateral effects with precision and appearance of objectivity. The word "appearance" is appropriate, however, because the calculations do not eliminate the need for subjective judgment. If data are available, it will likely be possible to show a profitable price increase for some identifiable group in any horizontal merger. The relevant question is whether the increase and the group are large enough to matter, for purpose of a judicial determination or of prosecutorial discretion. These are not objective judgments.
C. Level Three: Services
This level introduces the tangential issue of differential services that may be provided along with a product or sold independently. The problems vary in complexity.
The case of products sold with associated warranty services may be relatively simple. Warranties can be broken out of the product price, either because they are priced separately (e.g., in optional service contracts offered with major appliances) or because there is internal financial information available to assign a value. But, there are a lot of services that are much harder to quantify.
The law of vertical restraints recognizes, for example, that pre-sale information about complex products can be valuable to consumers and costly for dealers, and permits suppliers of these products to impose certain restrictions on their dealers in order to avoid misappropriation by "free riders."(24) In fact, the free-rider problem arises because the pre-sale services cannot be priced and sold separately from the associated product. In the present analysis of these situations, courts focus more on the magnitude of harm from the restrictions (resale price restrictions presumed to be the worst) or their practical necessity (analysis of least restrictive alternatives) rather than on the actual value of the services to consumers. Because so little is known about these values, they can be recognized but not actually weighed in the rule of reason balance.
The inability to value services can impose an even greater handicap when services alone are sold. There is no underlying product "price" to adjust, and there obviously can be immense differences in quality and consequent value, particularly if the services are professional or highly technical. Lawyers have a firsthand experience of these differences through their observations of fellow members of their own profession, and they know that presently available rating systems do not fully capture the variations. The same quality variations are most likely present in other professions and trades, and objective standards are probably similarly inadequate.
Antitrust law has generally been hostile to claims that horizontal restrictions with a chilling effect on price competition will improve the overall quality of services in sufficient degree to offset the adverse price effect.(25) Price competition is assumed to be paramount, even though judges and other policymakers may rarely select their own service providers primarily on the basis of price.
This is not to say that the decided cases are wrong. The quality arguments often seem pretextual, benefits are asserted, not proved, and the restrictions appear unnecessarily broad. But, as people become ever more dependent on ever more technical service providers, it is necessary to keep an open mind. For example, it is obvious that lawyers have become more aggressively competitive since the Goldfarb(26) decision invalidated many traditional ethical restrictions, but it is not so obvious that there has been a corresponding increase in client satisfaction.(27) Moreover, the issues may become even more complex if services command a premium because they are provided in the context of a pleasant "experience."
D. Level Four: Products Associated with Experiences
Consider the analysis of variety at the next level of complexity. How should an antitrust practitioner approach the analysis of products that are special because they are associated with one of the experiences that are apparently becoming increasingly important in our economy? For instance, an ordinary sweatshirt with a Super Bowl logo, or a bedspread decorated with characters from the Lion King, may be virtually identical in construction and use to a product without the particular adornments, but they nevertheless command substantial premiums because they are reminders of particularly enjoyable experiences (and may also have some prestige value). From the consumer's perspective, there really are no close substitutes.
Consumable products and services may also command a premium price because they are sold directly in association with enjoyable experiences. People will pay far more money for an often tasteless hot dog in a ball park than they will on a street corner. In part, this may be because they are, in a sense, "locked-in," and have no competitive alternatives when they are hungry. But, some will also deliberately avoid eating before the game because the combination is pleasurable in itself -- the game enhances enjoyment of the hot dog and the hot dog enhances enjoyment of the game. This particular example is, of course, trivial, but the principle is not.
The same holds true for services.(28) As indicated above, there also may be a fine line between the perceived quality of services and the experience associated with them. Some people may pay steep premiums for first-class air travel, and they value professionals with a "bedside manner," because potentially unpleasant experiences are made less so.
Does this suggest that products or services associated with pleasurable experiences are in their own relevant product markets or that the sellers have market power? This could have an extraordinary impact on antitrust enforcement. It is not necessary, however, to embrace any such extreme conclusion in order to recognize that the traditional price-based standards employed for market analysis may be hopelessly inadequate.
E. Level Five: Experiences Alone
Take the level of abstraction and complexity one level further and consider the "experience" itself, apart from the goods and services sold in association with or as reminders of the experience. The sale of "experiences" is an immense and growing component of our economy, including not only "theme parks" and "theme restaurants," but athletic events, movies, television and theatrical productions, travel packages, and myriad other amusements available to people with leisure and disposable income. People have as yet only begun to scratch the surface of interactive "experiences" potentially available on the Internet. Consumers can be provided with a package or bundle of experiences that provide uniquely individual consumer satisfaction. What are the appropriate parameters of market definition in these cases, and do conventional market share measurements adequately capture the impact on consumer choice?
When the Supreme Court faced the market-definition issue in NCAA v. Board of Regents,(29) the Court affirmed the district court's finding that college football broadcasts are a separate market, based on the "'generic qualities differentiating' viewers."(30) The Court found that college football broadcasts were unique, largely by focusing on the demographics of consumers and the price premium that advertisers were willing to pay to reach these viewers, rather than on the characteristics of the product itself.(31) Thus, the Court did not address the comparative value of various substitute experiences to the consumers, but rather addressed their value to people who want to sell things to these consumers.
About forty years ago, Walt Disney Productions brought an action to be relieved of an exclusive dealing contract on the ground that it was illegal to obtain a monopoly of Disney television programming. The argument was that Disney programs were unique. The case was settled before trial, and those involved in the defense(32) thought the theory was silly. But was it really all that different from the holding in Associated Press v. United States,(33) that the package of news reports disseminated by the Associated Press was so uniquely desirable that it had to be made available to rivals? Recent expressions of extreme irritation when some people were deprived of Disney programming because of a contract dispute would seem to indicate that it has some unique appeal, but the significance for antitrust analysis is unclear.(34)
At this level, consideration of potential impacts on price becomes not only extraordinarily difficult but also increasingly irrelevant. The demand curve still slopes downward because people prefer to get the experience at a discount if they can, but the demand is highly individualized and the potential for various forms of price discrimination is immense.
There are many other examples. Not many people pay much attention to prices when scanning the movie pages of their local newspaper. Judging by the ads, people seem primarily interested in the identity of the movie and the location of the theater. If prices are mentioned at all, the print is tiny. In fact, if seats for a particular theatrical performance or athletic event are reserved, it is not unusual for people to ask for the most expensive ones available. The experience is qualitatively different, depending on where you sit, and for some the feelings of superiority associated with premier seats add to the perceived value. We are far removed from markets dominated by price and output decisions.
Another variable arises from the fact that some experiences (like attendance at a live performance) are paid for on a per-capita basis and other experiences (like a movie rental or pay-TV) are not. Some parks have entry fees based on the number of people; others may have flat fees per vehicle. The relevant elasticities for a large family or group will be very different than the elasticities for a small one.
To make things even more complicated, public taste in experiences is notoriously fickle and unpredictable. Any predictions of competitive effects must take account of their ephemeral nature. There are, as yet, no signposts for guidance in this territory.
F. Level Six: Variety as an Independent Value
At an even higher level of abstraction, what about a claim that particular conduct will restrict availability not of a particular experience but of the variety of different individual experiences that will be offered? This last level involves issues that are even more abstract than the possible impact on particular products, services, and experiences, which exhibit great variety. The question is whether an increase or decrease in available variety, by itself, merits independent consideration in antitrust analysis.(35) Is it possible to quantify the pros and cons of "monopolistic competition" for the sale of experiences?
As already discussed, not much is known about the extent to which consumers value variety for its own sake. They obviously do, at least up to a point, but how much is it worth? Supermarkets that offer a wide variety of products can charge more than mass merchandisers that do not, but it is unclear to what extent the premium results from the availability of variety or rather from things like locational advantages, some superior services, or the fact that supermarkets may offer a less unpleasant shopping experience. Similarly, cable systems may charge more for packages with a greater number of channels, but it is unclear to what extent the premium recognizes greater variety for its own sake or rather access to particular desirable programming.
It does not make sense to simply ignore the issue, however, because for many consumers variety may be a more significant issue than price. Consider the example of two chains of bookstores (or video rental stores) that compete in myriad neighborhoods, with a largely local clientele. One of the chains features best sellers or the most popular films, the other chain has a more eclectic offering, including a wider range of special interest and "artistic" selections. If the first chain were to acquire the second, there might well be some local price effects, but the most important effect on most consumers (but, not all) is likely to be the effect on variety if the combined store adopts the buyer's business model.
This reality does not mean that the merger should be attacked on that account. It might well be, for example, that it is a lot easier for a potential new entrant to provide variety competition for the merged enterprise than it would be to provide price competition. What it does mean is that an initial focus on a hypothetical price effect, according to traditional Guidelines analysis, might miss the most important questions.
The purpose of this essay, and the earlier discussions that formed the basis for it, is to stimulate discussion and research, not to provide any answers. Consideration of variety, at all levels of complexity, may suggest new theories for prosecutors, but it is also possible that it will suggest new theories for defendants. The immediately preceding paragraph provides just one illustration of such a two-edged sword. There are other examples.
If the increasingly unrealistic assumption of commodity-type products is discarded or modified, some longstanding tenets of oligopoly theory will be called into question. In the absence of overt agreements, it might be argued that coordinated interaction is much more unlikely and, in any event, the difficulties of cartel enforcement are magnified. On the other hand, if non-price variables are important, it might be useful to pay closer attention to possible collusive arrangements that particularly affect those variables. Agreements on some "rules of the game" might be just as significant as agreements on particular discount levels.(36)
The limitless variety of individual preferences may also help to explain why some seemingly compelling economic theories do not always seem to work in the real world. For example, so-called "experience curve" theory, widely discussed in the 1980s, predicted that latecomers in some sectors would find it extremely difficult to overcome the inherent cost-advantages of an incumbent with substantial volume (a supply-side effect).(37) The more recent theory of "network effects" similarly predicts overwhelming first-mover advantages in sectors where products became increasingly valuable as more and more people buy them (a demand-side effect).(38) There has been, and continues to be, lively controversy about whether these theories have any predictive power, and more extensive examination of the variety issue may shed light on the question.
On the other hand, closer attention to variety issues may suggest that market power or the threat of market power exists in sectors where it has not been perceived before, with consequent impact on the analysis of mergers and vertical restraints. This article has suggested a number of possible areas of inquiry, and the potential for enormous expansion of antitrust if present standards for demand side substitution are applied to highly differentiated products, services and experiences. The establishment of appropriate boundaries will be difficult, but it is not all that easy even with assumptions of homogeneity.
In any event, examination of the real world is unavoidable, even if it may undermine some of the most cherished (and perhaps hard-won) principles of antitrust jurisprudence. Opinions differ about the underlying values that are expressed in the antitrust laws(39) but there is near universal agreement that the welfare of consumers is an important, if not the sole, objective.(40) In fact, this writer has argued elsewhere(41) that it may be more accurate to use the active term "consumer freedom" in preference to the relatively passive term "consumer welfare" because the active term signals greater recognition of individual consumer preferences. If it is true that matters other than price are of prime importance to consumers, in ever growing sectors of the economy, an intelligent antitrust policy should respond accordingly.
Some may raise a concern that expanded consideration of these non-price variables will undercut the objectivity, and hence the perceived legitimacy, of antitrust enforcement. People have worked very hard to develop statistical tools that measure and predict price effects in a seemingly objective way. But present antitrust enforcement still retains large subjective elements, even with more precise measurements.
For example, the test for defining relevant markets under the Merger Guidelines is whether a hypothetical monopolist could profitably increase prices by 5 or 10 percent.(42) There is no theoretical or empirical basis for selection of these percentages. You can calculate the price effects as precisely as you please, but the test is still subjective because the standard is subjective.(43) Similarly, the threshold levels for the Herfindahl-Hirschman Index that create presumptions of anticompetitive effects(44) and the periods for "timely" entry(45) also involve subjective judgments. As mentioned above, the determination of when unilateral effects are important enough to worry about also is necessarily subjective. And finally, the present Merger Guidelines may require a subjective assessment of the overall balance between factors that point in opposite directions.
A more focused objection to expanded consideration of non-price factors might be not that there is risk in trading present objective standards for subjective ones, but rather that there is risk in trading standards that are familiar and somewhat predictable for standards that are -- for the moment, at least -- highly unpredictable. This is a serious criticism and raises fundamental issues about the appropriate tradeoffs between the values of accuracy and of predictability. Carried to its logical extreme, however, the criticism would freeze current law in place indefinitely, regardless of changes in the real world. In fact, it would suggest that it is inappropriate even to inquire about the disparities. For this writer, at least, persistent ignorance is simply not an acceptable alternative.
With all the discussion of variety, in a number of different contexts over the years, it is noteworthy that we still know very little about it as an independent element of competition. The issue will be increasingly important as our economy shifts progressively further away from the assumptions of traditional economic models, and there is need for a lot more research and discussion. This essay is simply a modest start.
1. Commissioner, Federal Trade Commission. This essay is based on a speech delivered at the Steptoe & Johnson 2000 Antitrust Conference, on May 18, 2000, as well as other informal discussions over the last several months. I would like to particularly acknowledge the assistance of Thomas J. Klotz, one of my attorney advisors, in the preparation of this written version, but many others have also made significant contributions. The views expressed are my own, and not necessarily shared by any other Commissioner.
2. B. Joseph Pine et al., The Experience Economy (1999).
3. Webster's Third New International Dictionary: Unabridged 2534 (1976).
4. This essay focuses on "variety" rather than "quality" because some of the relevant factors for consumers cannot fairly be characterized as quality differences. It will be apparent, however, that there is considerable overlap between the terms and that even "quality" is by no means a simple concept that can be objectively quantified.
5. See, e.g., James A. Keyte, Market Definition and Differentiated Products: The Need for a Workable Standard, 63 Antitrust L.J. 697 (1995).
6. Joan Robinson, The Economics of Imperfect Competition (1933); Edward Chamberlin, The Theory of Monopolistic Competition (1933).
7. Robert S. Pindyck & Daniel L. Rubinfeld, Microeconomics 438 (4th ed. 1998). (Daniel Rubinfeld is a former Deputy Assistant Attorney General for Economic Analysis at the Antitrust Division of the Department of Justice.)
8. 2A Phillip Areeda et al., Antitrust Law ¶ 409, at 43-44 (1995).
9. See, e.g., Michael Spence, Product Differentiation and Welfare, 66 Am. Econ. Rev. 407 (1976); Avinash K. Dixit & Joseph E. Stiglitz, Monopolistic Competition and Optimum Product Diversity, 67 Am. Econ. Rev. 297 (1977).
10. See, e.g., Jeffrey M. Perloff & Steven C. Salop, Equilibrium with Product Differentiation, 52 Rev. Econ. Stud. 1207 (1985); Oliver D. Hart, Monopolistic Competition in the Spirit of Chamberlin: Special Results, 95 Econ. J. 889 (1985).
11. See, e.g., Kelvin Lancaster, Variety, Equity and Efficiency (1979); Steven C. Salop, Monopolistic Competition with Outside Goods, 10 Bell J. Econ. 141 (1979).
12. See B. Curtis Eaton & Richard G. Lipsey, Product Differentiation, in 1 Handbook of Industrial Organization 723, 759-61 (Richard Schmalensee & Robert D. Willig eds., 1989).
13. See, e.g., United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377 (1956) (relevant market either cellophane or all flexible packaging material); Eastman Kodak Co. v. Image Technical Servs., 504 U.S. 451 (1992) (a single company's branded products can be a relevant market); Brown Shoe Co. v. United States, 370 U.S. 294 (1962) (relevant markets are men's, women's and children's shoes, but no further divisions based on price or quality); New York v. Kraft Gen. Foods, Inc., 926 F. Supp. 321, 333 (S.D.N.Y. 1995) (ready-to-eat "cereals are so highly differentiated, and compete with one another along so many different dimensions, that there is no clear break in the chain of substitutes among cereals that would permit definition of a market smaller than all [ready-to-eat] cereals").
14. E.g., United States v. General Elec. Co., 1962 Trade Cas. (CCH) ¶ 70,488 (E.D. Pa. 1962) (consent judgment); United States v. Westinghouse Elec. Corp., 1962 Trade Cas. (CCH) ¶ 70,487 (E.D. Pa. 1962) (consent judgment).
15. Compare the quality adjustments to various price indices. The automotive component of the Producer Price Index, for example, modifies changes in selling prices to reflect the mandated changes (and product heterogeneity) in cars for safety and environmental features over time. U.S. Bureau of Labor Statistics, Handbook of Methods ch. 14 (1997) (cost of mandated equipment subtracted from nominal price increase). The adjustment attempts to interject uniformity (and product homogeneity) in the calculation of prices and costs.
16. Cf. United States v. Gillette Co., 828 F. Supp. 78, 83 (D.D.C. 1993) ("premium" writing instruments are still in a separate market, even though they are discounted).
17. It has been suggested that these "prestige" products are an exception to the normal laws of economics and have upward-sloping demand curves because consumers seemed to be attracted by the premium prices. This analysis not only ignores the possibility that consumers may interpret the premium price as a signal of quality, but also the fact that they may derive added satisfaction from showing off their expensive acquisitions. Consumers buy a bundle comprised of the product and the prestige. The demand curve is still downward-sloping; more people will buy a prestige product if they can get it at a (preferably secret) price.
18. 370 U.S. 294 (1962).
19. Id. at 325.
20. "Practical indicia" recognized by the Court included industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors. Id.
21. Compare, e.g., In re Super Premium Ice Cream Distrib. Antitrust Litig., 691 F. Supp. 1262, 1268 (N.D. Cal. 1988) (rejecting premium ice cream market), aff'd mem., 895 F.2d 1417 (9th Cir. 1990); United States v. Jos. Schlitz Brewing Co., 253 F. Supp. 129, 134 (N.D. Cal.) (rejecting premium beer market), aff'd, 385 U.S. 37 (1966); Murrow Furniture Galleries, Inc. v. Thomasville Furniture Indus., 889 F.2d 524, 528 (4th Cir. 1989) (rejecting definition of name brand high quality furniture market); Tasty Baking Co. v. Ralston Purina, Inc., 653 F. Supp. 1250, 1258 (E.D. Pa. 1987) (rejecting premium snack cake and pie market in favor of overall snack cake and pie market); Frank Saltz & Sons, Inc. v. Hart Schaffner & Marx, 1985-2 Trade Cas. (CCH) ¶ 66,768 (S.D.N.Y. 1985) (rejecting better quality suit market); Mesirow v. Pepperidge Farm, Inc., 1981-2 Trade Cas. (CCH) ¶ 64,292 (N.D. Cal. 1981) (rejecting premium cookie market), aff'd, 703 F.2d 339 (9th Cir. 1983) with A.G. Spalding & Bros., Inc. v. FTC, 301 F.2d 585, 601, 603 (3d Cir. 1962) (finding that high-priced athletic goods constitute a distinct market from low-priced athletic goods); United States v. Federal Co., 403 F. Supp. 161, 167 (W.D. Tenn. 1975) (private-label and premium branded flour are separate markets where premium brands sell for a higher price and a premium brand competitor made no effort to track private-label prices as it did with premium brand prices); Photovest Corp. v. Fotomat Corp., 606 F.2d 704, 713-14 (7th Cir. 1979) (drive-thru photo processing constitutes a separate market from other retail photo processing where distinct premium pricing and low cross elasticity shown). For a review of the cases in this area, see James A. Keyte, supra n.4; David J. Dadoun & Diana L. Dietrich, After Gillette: An Analysis of Premium Product Markets Under the 1992 Merger Guidelines, 17 Harv. J.L. & Pub. Pol'y 567 (1994).
22. For example, although some courts have found distinct product markets based on existing price level differentials with no further showing of low cross elasticity required, see, e.g., Donald B. Rice Tire Co. v. Michelin Tire Corp., 483 F. Supp. 750, 755 (D. Md. 1980) ($30 price differential between radial and non-radial tires supported separate product markets), aff'd, 638 F.2d 15 (4th Cir. 1981) (per curiam); United States v. Black & Decker Mfg. Co., 430 F. Supp. 729, 739 (D. Md. 1976) (lightweight chain saws priced below $170 were a distinct submarket, notwithstanding absence of low cross-elasticity evidence), the more prevalent approach is to require evidence of low cross-elasticity in addition to price differentials. See, e.g., Nifty Foods Corp. v. Great Atl. & Pac. Tea Co., 614 F. 2d 832, 840 (2d Cir. 1980) (separate markets for private-label and branded waffles was not supported where low cross-elasticity was not shown); Beatrice Foods Co. v. FTC, 540 F.2d 303, 310 (7th Cir. 1976) (no separate product markets for do-it-yourself and professional paint brush items where evidence of distinct price groupings or low cross-elasticity between differently priced items was not shown); Avnet, Inc. v. FTC, 511 F.2d 70, 77 (7th Cir. 1975) (25-50% price differential between new and rebuilt part lines, combined with evidence of low cross-elasticity, supported finding of two distinct product markets).
In cases involving products differentiated by price and quality along a continuum, cases consistently follow Brown Shoe's edict that where no determinable gap exists in the continuum, a meaningful submarket cannot be found. 370 U.S. at 326. See, e.g., In re Super Premium Ice Cream Distrib. Antitrust Litig., 691 F. Supp. at 1268; Pennsylvania v. Russell Stover Candies, Inc., 1993-1 Trade Cas. (CCH) ¶ 70,224, at 70,091 (E.D. Pa. 1993); Donald B. Rice Tire Co. v. Michelin Tire Corp., 483 F. Supp. at 755; United States v. Black & Decker Mfg. Co., 430 F. Supp. at 739. But cf. United States v. Gillette Co., 828 F. Supp. at 83.
23. Unilateral effects may also exist for homogeneous products if there are locational advantages or the creation of a dominant firm.
24. See, e.g., Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 55 (1977).
25. See, e.g., National Soc'y of Prof'l Eng'rs v. United States, 435 U.S. 679 (1978). But see California Dental Ass'n v. FTC, 224 F.3d 942 (9th Cir. 2000) (a case where the outcome may have been heavily influenced by its procedural history), rev'g, 128 F.3d 720 (9th Cir. 1997), aff'd in part, rev'd in part and remanded, 526 U.S. 756 (1999).
26. Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975).
27. There are numerous surveys that show lawyers are less respected today than they used to be. Of course, this may be because of a lot of reasons that have nothing to do with the fallout from Goldfarb, and public esteem is not the same thing as client satisfaction. But, it does give one pause.
28. The line between "services" and "experiences" is blurred. At any restaurant, the decor and the service are part of the eating experience. In some restaurants, the service (e.g., fawning headwaiters) may be for some the most significant part. In dinner theaters or restaurants at Disney World, the food may be only an incidental part of the entertainment experience. The precise characterization does not matter; the point is that the appeal of the overall package can be a much more significant competitive variable than the price of the food.
29. 468 U.S. 85 (1984).
30. Id. at 112 (quoting Times-Picayune Publ'g Co. v. United States, 345 U.S. 594, 613 (1953)).
31. Id. at 111-12. See also International Boxing Club v. United States, 358 U.S. 242, 249-52 (1959) (championship boxing events are a market separate from nonchampionship events because of greater revenue potential and higher television ratings). James L. Seal, Market Definition in Antitrust Litigation in the Sports and Entertainment Industries, 61 Antitrust L.J. 737 (1993), argues that appropriate market determinations depend on the nature of the claim asserted. For example, events that are unique from the perspective of consumers are not necessarily unique for advertisers.
32. I was part of the defense team, in a very junior capacity.
33. 326 U.S. 1 (1945).
34. Joe Flint, Disney-Time Warner Cable Dispute Turns Many TV Screens Blank,
Wall St. J., May 2, 2000, at B1.
35. The issue is somewhat analogous to consideration of possible effects on innovation, without regard to an individual invention. The question of whether it is meaningful to talk about "innovation markets" has been considered by others at length. See Symposium: A Critical Appraisal of the "Innovation Market" Approach, 64 Antitrust L.J. 1 (1995).
36. See Robert H. Lande & Howard P. Marvel, The Three Types of Collusion: Fixing Prices, Rivals and Rules, 2000 Wis. L. Rev. 941 (2000).
37. See, e.g., James E. Hodder & Yael A. Ilan, Declining Prices and Optimality When Costs Follow an Experience Curve, 7 Managerial & Decision Econ. 229 (1986); A. Michael Spence, The Learning Curve and Competition, 12 Bell J. Econ. 49 (1981).
38. See, e.g., David S. Evans & Richard Schmalensee, A Guide to the Antitrust Economics of Networks, 10 Antitrust, Spring 1996, at 36; Michael L. Katz & Carl Shapiro, Systems Competition and Network Effects, 8 J. Econ. Persp. 93 (1994).
39. Thomas B. Leary, Freedom as the Core Value of Antitrust in the New Millennium,
68 Antitrust L.J. 545 (2000).
40. Consideration of variety may be affected by the debate between those who believe the primary focus of antitrust should be on efficiency (total welfare) and those who would focus on consumer welfare. This debate is here merely noted, not elaborated on.
41. Leary, supra note 38.
42. U.S. Dep't of Justice and Federal Trade Comm'n Horizontal Merger Guidelines,
§§ 1.1, 1.2 (1992, revised 1997), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104.
43. It would be equally subjective to modify the 5 - 10 percent price test upward in an effort to address some of the market definition issues discussed in this essay.
44. Horizontal Merger Guidelines, supra note 41, at § 1.51.
45. Id. at § 3.2.