On the Inevitable Arbitrariness of Market Definitions

Abstract

Economists and lawyers who know some economics readily admit that the decision to place a particular product inside or outside a market may be arbitrary. However, they insist that no such arbitrary decision will ever be critical in the sense of determining the conclusion of any policy or legal issue. Unfortunately, one cannot argue against this contention by responding to the claims made to justify it because its supporters have never in fact offered an explicit justifactory argument for their position.

In oral discussions, economists have repeatedly insisted that regardless of whether one assesses a series of market definitions in ideal-type or functional terms, markets can be defined non-arbitrarily. Thus, economists have told me that if market definitions are to be assessed by the extent to which the product-placements they generate satisfy certain popular and professional assumptions about (1) the competitiveness of products placed within a given market, and (2) the difference between the competitiveness of products placed in the same market versus the competitiveness of products placed in different markets, it will in principle be possible to establish an optimal set of market definitions non-arbitrarily. And again, economists have insisted that if market definitions are to be assessed functionally by their ability to perform a useful role in a market-oriented approach to predicting the economic efficiency or competitive impact of some behavior or practice it will be possible to select non-arbitrarily a series of market definitions that is best for this purpose.

This Article demonstrates that regardless of whether markets are to be defined as ideal types or functionally market definitions are arbitrary at their core. The Article begins by delineating five definite reasons why it will not be possible and two additional reasons why it may not be possible to define markets non-arbitrarily in the "ideal type" way. Most of these reasons relate to ambiguities in the concepts of "competitiveness" or "differences in competitiveness" that cannot be resolved non-arbitrarily and whose resolution will often be critical. The Article then explains why markets cannot be defined non-arbitrarily if the criterion for their assessment is functional on the assumption that the task at hand is predicting the competitive impact of a horizontal merger. In part, this explanation focuses on the fact that market-oriented approaches to this task cannot be cost-effective--that the data these approaches use to define markets have more predictive power than the market-aggregated data that the market definitions they produce are used to generate.

The Article also develops two examples whose examination reveals why no market-oriented approach to predicting the competitive impact of a horizontal merger can be cost-effective. These examples are also used to illustrate the difference between traditional, seller-oriented market definitions and the kind of buyer-oriented market definitions that the Justice Department is now employing whose use represents a kind of half-way move from traditional market-oriented approaches to the type of non-market-oriented approach to competitive-impact prediction that I believe is ideal.

JEL Classification: L22, L41