Horizontal Merger Guidelines Review Project
This comment addresses whether the Guidelines would benefit from a discussion of the role that price-based tests can play in market definition to complement the hypothetical monopolist test. Since the release of the Guidelines, a body of literature has developed concerning the various "price tests" routinely used to delineate markets in competition analysis. These empirical tests include price correlations, Granger causality, cointegration and stationarity analysis, and econometric models of price responses based on natural experiments. In instances where reliable price data are available, and the economic evidence indicates that price tests are appropriate, price tests can assist with market definition while the basic aspects of the Guidelines are retained. Price-based tests can provide empirical evidence that, together with other economic evidence for the merger under review, can narrow, broaden, or affirm candidate markets based upon the hypothetical monopolist test. Competition authorities and economists have recognized the benefit that price-based tests can bring to the market delineation process. For example, in the Blackstone / Acetex merger, price tests submitted by the merging parties were favorably cited by the European Commission in their review, and resulted in a broadening of the European Commission's initially contemplated geographic market. The strengths and weaknesses of the price tests used in market definition are well documented in the literature. One weakness is that the results of price tests may be driven in part (or in full) by the effect of common factors/influences affecting the prices under study. If so, then a finding that prices from different regions are related, for example, might not necessarily show that these regions are part of the same market, but might merely reflect parallel movements of common influences in each region over time. Unless the influence of common factors is controlled for, one cannot be sure whether the results of price tests are spurious or valid. A recognized benefit to using price tests is that they can be conducted with information only on prices. These data often are more readily available in a time-constrained merger investigation than are data on firms' quantities, which would be necessary (along with prices) for estimating a demand system from which own-price and cross-price elasticities could be obtained. Another more fundamental issue about price tests is whether they are able to define antitrust markets in which competitive effects and market power can be analyzed. Even if price tests cannot delineate antitrust markets per se, many commentators nonetheless recognize the utility of using such techniques to assist in the market-definition process. Despite these issues, price tests do appear in merger analysis typically as a component of a broader antitrust market-delineation study. While certain price tests might be more informative than others in assisting with market definition, no single one is sufficient to define a market for antitrust analysis. However, when properly used as a complement to the hypothetical monopolist test and other traditional inputs to the market definition exercise, price tests can aid in setting the framework for defining markets in which to analyze the competitive effects of a merger. For example, as in Blackstone / Acetex, price tests can be used to empirically "check" whether a contemplated geographic market is too small (i.e., supply shocks appear to transmit more widely than expected under the candidate market definition). They also can check if a proposed geographic market is too large (i.e., price effects are confined to a regional market and do not propagate to the larger proposed area). Price tests can also inform the analysis on how to expand a market if a proposed market is believed to be too narrow. If shocks appear to propagate to prices more widely than expected given an initial market definition, price tests might reveal where to look for substitution. For example, suppose two additional markets (A and B) are believed to belong in a candidate market. If price tests reveal that supply shocks transmit from the candidate market to B (and perhaps vice versa) but not A, then B is the next best alternative. Used in this way, price tests could result in a more accurate and efficient merger review process. As a result, the Guidelines would benefit from a discussion about price tests and how they might inform the market definition process. I have attached a more detailed discussion of this topic for those interested.