Hicks-Marshall Conditions and Defining Antitrust Markets for Intermediate Goods

Purpose To develop a framework for systematically defining the relevant market for intermediate goods that incorporates downstream market conditions. Methodology/approach We combine the well-established “Hicks-Marshall” conditions of derived demand for inputs with “critical loss/critical elasticity of demand” to yield insights into the definition of antitrust markets for intermediate goods and the competitive effects from a merger. Findings We show that examining “Hicks-Marshall” conditions can provide a more rigorous framework for analyzing relevant markets for intermediate goods. We also show that solely examining demand substitution possibilities for direct customers of an input can lead to an incorrect market definition. Research limitations/implications Our framework may be difficult to apply in circumstances when several different downstream products use the input being examined and each of those downstream products has a different elasticity of demand. Practical implications 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 for intermediate goods in practice. Originality/value Previous antitrust analysis has not systematically analyzed the impact of downstream market conditions in assessing market definition for intermediate goods. The framework we develop will be useful to future researchers attempting to define relevant markets for intermediate goods and evaluating the competitive effects of a merger.