Hicks-Marshall Conditions and Defining Antitrust Markets for Intermediate Goods

Appropriate definition of the relevant market for intermediate goods is often critical in antitrust inquiries. We combine the well established ldquo;Hicks-Marshallrdquo; conditions of derived demand for inputs with ldquo;critical loss/critical elasticity of demandrdquo; and upward pricing pressure analyses to yield important insights into the appropriate definition of antitrust markets for inputs and the competitive effects from a merger. We show that solely examining demand substitution possibilities for direct customers of an input can lead to the wrong market definition. Although several decisions in antitrust cases have qualitatively addressed some of the Hicks-Marshall conditions, a systematic application of critical loss analysis in conjunction with Hicks-Marshall conditions can provide greater insights for delineating relevant markets for inputs. We illustrate how reasonable ranges for key parameters relating to the ability of firms to substitute to other inputs and to adjust to downstream market conditions will often be sufficient to define antitrust markets in practice. In addition, we combine upward pricing pressure analysis with the Hicks-Marshal conditions to illustrate when merging input suppliers will not have an incentive to increase prices because of downstream competition