Glossary
Market
Definition
In QCMA the Tribunal defined market as the field of rivalry between firms in which there is 'substitution between one product and anotehr, and between one source of supply and another, in response to changing prices.'
Section 4E of the Competition and Consumer Act 2010 states that:
For the purposes of this Act, unless the contrary intention appears, market means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first‑mentioned goods or services.
This adopts the 'substitutability' approach to market definition applied by the Tribunal in QCMA.
Case law
[from ALR 517]: '... the identificaiton of markets must be the essential first step in assessment of present competition and likely competitive effects. In our view the usefulness of the "market" con cept goes beyond the determination of market concentration ot the identificaiton of rivarous relationships between sellers. ...
[518] We take the concept of a market to be basically a very simple idea. A market is the area of close competition between firms or, putting it a little differently, the field of rivalry between them (if there is no close competition there is of course a monopolistic market). Within the bounds of a market there is substitution - substitution between one product and another, and between one source of supply and another, in response to changing prices. So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive. ...
It is the possibilities of such substitution which set the limits upon a firm's ability to "give less and charge more". Accordingly, in determining the outer boundaries of the market we ask a quite simple but fundamental question: If the firm were to "give less and charge more" would there be, to put hte matter colloguially, much of a reaction? And if so, form whom? In the language of economics, the question is this: From which products and which activities could we expect a relatively high demand or supply response to price change, ie a relatively high cross-elasticity of demand or cross-elasticity of supply?'
In the Matter of Fortescue Metals Group Limited [2010] ACompT 2
Justice FInkelstein (president), Grant Latta and Professor Round[1009] ... to a businessperson, a market is a place or area where goods may be sold or, more broadly, where there are people who are sufficiently aware of a firm’s product to consider buying it. This concept of a market concentrates its attention on buyers rather than sellers.
[1010] We are not here concerned with the businessperson’s understanding of a market but rather with the analytical definitions developed by economists. Several classical economists have offered definitions. Cournot defined a market as: “The entire territory of which parts are so united by the relations of unrestricted commerce that prices there take the same level throughout, with ease and rapidity” ...
[1011] This economic (or relevant) market, then, consists of groups of buyers and groups of sellers in a geographic region who seek each other out as a source of supply of, or as customers for, products. The interaction of the buyers and sellers determines the price for the products.
[1012] We have not referred to a “group” of products because implicit in the classic economists’ definition of a market is the assumption that there is only a single homogeneous product and that the firms in the market produce perfect substitutes.
[1013] In the real world it is not only homogeneous products of rival sellers that affect price; price is also affected by the products of rival sellers that are close substitutes. Hence it is necessary to expand the definition of a market to include not only identical goods but also close substitutes.
[1014] The output of the process of defining the relevant market – the identification of the participating firms, a description of the products exchanged and the borders within which the exchange occurs – is critical to an assessment of the behaviour of firms in the market (ie whether or not they impose competitive constraints upon one another) and, importantly, whether or not a firm has, or a group of firms have, power to control price or reduce competition (ie to shift the price away from that which would be obtained in a competitive market, namely the marginal cost of the product).
[1015] In QCMA (at 517), the Tribunal defined a market to be a "field of rivalry" between firms in which there is "substitution between one product and another, and between one source of supply and another, in response to changing prices."
[1016] Section 4E was introduced in 1977 to give statutory recognition to the concept of substitution. It provides that "for the purposes of this Act, unless the contrary intention appears, 'market' means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services."
[1017] It is often difficult, and sometimes impossible, to define with any precision the relevant dimensions (product, geographic, functional and temporal) of a market. On occasion, it can be particularly difficult to describe the relevant product market and its geographic borders. The process often involves judgments as to matters of degree that can be difficult to measure.
[1018] As regards the product market, the notion of substitution refers on the demand side, to a customer’s practical ability to switch from one product to another and, on the supply side, to the capacity of a supplier to switch production from one product to another. There are various conventional approaches to determining substitutability. [emphasis added]
[1019] The first significant approach developed by the courts and leading economists in the US is the “reasonable interchangeability of use or the cross-[price] elasticity of demand between product itself and substitutes for it”: Brown Shoe Co. v United States 370 US 294 (1962) at [15]. Cross-price elasticity of demand measures the extent to which consumers will change their consumption of a product in response to a price change in another product. A high cross-price elasticity value suggests that products are good substitutes and are probably in the same product market.
[1020] Reasonable interchangeability of use is established by looking at actual and potential buyer substitution patterns. Relevant evidence will include product characteristics (including differences in grade or quality), price differences (including price trends), past buyer responses, the views of firms regarding who their competitors are, and the existence or absence of different distribution channels. [emphasis added]
[1021] On the supply side, cross-price elasticity is also relevant. Products will be in the same market if a firm can readily switch production from one product to another. What is important is the ease with which the switch can take place. It may be immaterial that consumers do not regard the products as substitutes, that a price difference exists, or that the prices are not closely correlated. [emphasis added]
[1022] The geographic market is the area of effective competition in which sellers and buyers operate. What is relevant, as a starting point, are actual sales patterns, the location of customers and the place where sales take place, and any geographical boundaries that limit trade. But it is not sufficient to measure only historical and current market behaviour. It is also necessary to consider whether customers would readily turn to more remote suppliers in response to a price increase by local suppliers or whether remote suppliers would choose to enter the local market.
[1023] In the United States, geographic markets are occasionally defined based on shipment flows. ...
[1024] A more recent (and increasingly popular) approach is to define a market as a group of products and a corresponding geographic area within which a hypothetical monopolist would be able to raise prices profitably. ...
[1026] The hypothetical monopolist test has been adopted by the ACCC. ... [emphasis added]
[1027] The test works this way. One looks at the effect of a price increase on a single product. If so many buyers would shift to alternative products that the monopolist would find the price increase to be unprofitable, the group of products is too narrow to constitute the market. The market should include all those products for which the hypothetical monopolist’s price increase would be profitable.
[1028] The factors that the guidelines use to determine whether the test is satisfied are conventional. The factors include buyers’ perceptions, similarities and differences in price movements between different sets of products over a period of years, similarities or differences in product characteristics and evidence of sellers' perceptions.
[1029] The test for the existence of significant market power is phrased in terms of the magnitude of the price increase that could be imposed by the hypothetical monopolist. It is generally accepted by both US and Australian regulators that a price increase is significant in size and length if it is at least 5% (sometimes 10%) and for at least one year, but there is flexibility in both the magnitude and the time period. It should be noted that these are not tolerance levels for anti-competitive price increases; they are merely a benchmark for assessing substitution. [emphasis added] ...
[1031] Geographic markets are defined in an analogous manner. One identifies tentatively a small geographic area such that a hypothetical firm that is the only present producer of the relevant product or service is not able to profitably impose a price increase. If the product or service could be obtained elsewhere, an attempt to raise the price could not be profitable and the tentative geographic area would be too small. The geographic area is expanded until the hypothetical monopolist’s price increase would be profitable.
[1032] The hypothetical monopolist definition was designed to satisfy three objectives: (1) To connect the relevant market in antitrust case law to economic policy justifications in merger cases; (2) To arrive at a standardised definition of a market; and (3) To develop a test that fell within existing jurisprudence that relied on the product and geographic dimensions of a market.
[1033] The hypothetical monopolist test has its critics. ... The test is, in essence, a "thought experiment". ... But the trend is towards acceptance of the test ... not only in merger cases, but wherever it is necessary for competition purposes to define the boundaries of a relevant market ...
[1034] Notwithstanding the criticisms, or in spite of it, the hypothetical monopolist test has gained currency in Australia ... [emphasis added]
Literature