Why define markets in competition cases?

Competition policy investigations usually commence with a definition of the relevant product and geographic market. The relevant market provides a first evaluation of competitive conditions and allows for the calculation of market shares, which aids in the assessment of firms’ market power. Given its implications for assessing market power, the market definition in a competition case is frequently contested. Critics argue that market definition is often arbitrary and should be avoided. Instead, IO scholars argue that modern econometric methods are capable of directly estimating market power and competitive effects without the need for defining markets. We argue that market definition not only offers a valuable first screen for market power, but actually involves a substitution analysis that lies at the heart of any competition case. We argue that it is suboptimal to promote a single encompassing econometric model instead of the multi-faceted empirical approach underlying most market definition exercises in practice. In addition, we note that market definition involves much more than merely the estimation of price elasticities, which are in any event difficult to estimate in most competition cases.