Market Definition Using Consumer Characteristics and Cluster Analysis

Competition authorities commence merger investigations with a definition of the relevant market, i.e. the collection of products or regions that compete with the firm(s) under investigation. Market definition relies on evidence of cross‐price elasticity. When the econometric estimation of cross‐price elasticities is not possible, analysts have to rely on qualitative assessment and a set of quantitative tools relying only on a subset of information or less precise quantitative evidence. Under these conditions, a statistical analysis of the similarity of consumer characteristics of different products can offer a useful addition to this toolkit. Cluster analysis can be used to identify meaningful groups of substitutes (and hence markets) on the basis of homogeneity of products’ consumer characteristics. Cluster analysis is useful not only in drawing market boundaries, but also in ranking the competitors within the boundaries. In a recent radio merger case in South Africa, competition authorities and counter parties struggled to obtain systematic evidence for market definition and ultimately relied on mostly qualitative impressions based on a range of evidence from industry experts and company strategy documents. The substitutes suggested by the cluster analysis matches the closest substitutes suggested by the Competition Tribunal, although the results do not support the Tribunal's list of weaker substitutes.