Conceptual and empirical advances in antitrust market definition with application to South African competition policy

ENGLISH ABSTRACT: Delineating the relevant product and geographic market is an important first step in competition inquiries,as it permits an assessment of market power and substitutability. Critics often argue that market definitionis arbitrary and increasingly unnecessary, as modern econometric models can directly predict thecompetitive effects of a merger or anti-competitive practice. Yet practical constraints (such as limiteddata) and legal considerations (such as case law precedence) continue to support a formal definition of therelevant market. Within this context, this dissertation develops three tools to improve market definition:two empirical tools for cases with limited data and one conceptual decision-making tool to elucidateimportant factors and risks in market definition.The first tool for market definition involves a systematic analysis of consumer characteristics (i.e. thedemographic and income profiles of consumers). Consumer characteristics can assist in defining marketsas consumers with similar characteristics tend to switch to similar products following a price rise.Econometric models therefore incorporate consumer characteristics data to improve price elasticityestimates. Even though data constraints often prevent the use of econometric models, a systematicanalysis of consumer characteristics can still be useful for market definition. Cluster analysis offers astatistical technique to group products on the basis of the similarity of their consumers. characteristics. Arecently concluded partial radio station merger in South Africa offers a case study for the use of consumercharacteristics in defining markets.The second tool, or set of tools, for defining markets involves using tests for price co-movement. Criticsargue that price tests are not appropriate for defining markets, as these tests are based on the law of oneprice - which tests only for price linkages and not for the ability to raise prices. Price tests, however, arecomplements for existing market definition tools, rather than substitutes. Critics also argue that price testssuffer from low statistical power in discriminating close and less close substitutes. But these criticismsignore inter alia the role of price tests as tools for gathering information and the range of price tests withbetter size and power properties that are available, including new stationarity tests and autoregressivemodels. A recently concluded investigation in the South African dairy industry offers price data toevaluate the market definition insights of various price tests.The third tool is conceptual in nature and involves a decision rule for defining markets. If marketdefinition is a binary classification problem (a product is either 'in' or 'out' of the market), it faces risks of misclassification (incorrectly including or excluding a product). Analysts can manage these risks usinga Bayesian decision rule that balances (1) the weight of evidence in favour of and against substitutability,(2) prior probabilities determined by previous cases and economic research, and (3) the loss function ofthe decision maker. The market definition approach adopted by the South African Competition Tribunalin the Primedia / Kaya FM merger investigation offers a useful case study to illustrate the implementationof such a rule in practice.