Competition Law Economics
| Market Definition
The role of market definition in competition policy remains a contentious issue in Australia and elsewhere.
In QCMA the Tribunal defined market as the field of rivalry between firms in which there is 'substitution between one product and another, and between one source of supply and another, in response to changing prices.'
Section 4E of the Competition and Consumer Act 2010 states that:
For the purposes of this Act, unless the contrary intention appears, market means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first‑mentioned goods or services.
This adopts the 'substitutability' approach to market definition applied by the Tribunal in QCMA.
For discussion of market definition issues in Australia, with some comparative assessment of the changing role of market definition in the United States, see Rhonda Smith, 'Market definition: Going, going, gone? Developments in the United States' (2010) 18 Competition and Consumer Law Journal 119.
Maureen Brunt identified some of the difficulties in the following passage (in Maureen Brunt, Economic Essays on Australian and New Zealand Competition Law, Kluwer Law International, The Hague (2003) at 211 - as quoted in Smith's paper):
the outer boundaries of a market are not necessarily sharp and obvious. Sometimes there will be a break in substitution possibilities which does not admit of much argument. At other times, substitutability, competition, and market power are all matters of degree, requiring the exercise of some judgment in the delineation of relevant markets.
Section 4E of the Act expressly refers to substitutes in the context of defining markets:
For the purposes of this Act, unless the contrary intention appears, market means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services.
When first introduced the Trade Practices Act 1974 defined 'market' as 'a market in Australia' (section 4).
The Trade Practices Amendment Act 1977 inserted s 4E as follows:
'For the purposes of this Act, 'market' means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services. '
This was further amended by the Trade Practices (Misuse of Trans-Tasman Market Power) Act 1990 which inserted the phrase 'unless the contrary intention appears,' after 'Act' (s 5 of the 1990 Act)
This definition was retained when the Act was re-named the Competition and Consumer Act 2010 and remains unaltered.
Mergers (section 50(6))
For the purposes of merger analysis, a market is defined in section 50(6) as follows:
In this section
market means a market for goods or services in:
(a) Australia; or
(b) a State; or
(c) a Territory; or
(d) a region of Australia.
Re Queensland Co-operative Milling Association Ltd; Re Defiance Holdings Ltd (1976) 25 FLR 169
The seminal definition of 'the market' in Australia is contained in the decision of the Trade Practices Tribunal in this case
[from ALR 517]: '... the identificaiton of markets must be the essential first step in assessment of present competition and likely competitive effects. In our view the usefulness of the "market" con cept goes beyond the determination of market concentration ot the identificaiton of rivarous relationships between sellers. ...
(at 190) We take the concept of a market to be basically a very simple idea. A market is the area of close competition between firms or, putting it a little differently, the field of rivalry between them. (If there is no close competition there is of course a monopolistic market.) Within the bounds of a market there is substitution-substitution between one product and another, and between one source of supply and another, in response to changing prices. So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive. Let us suppose that the price of one supplier goes up. Then on the demand side buyers may switch their patronage from this firm’s product to another, or from this geographic source of supply to another. As well, on the supply side, sellers can adjust their production plans, substituting one product for another in their output mix, or substituting one geographic source of supply for another. Whether such substitution is feasible or likely depends ultimately on customer attitudes, technology, distance, and cost and price incentives.
It is the possibilities of such substitution which set the limits upon a firm’s ability to “give less and charge more”. Accordingly, in determining the outer boundaries of the market we ask a quite simple but fundamental question: If the firm were to 'give less and charge more' would there be, to put the matter colloquially, much of a reaction? And if so, from whom? In the language of economics the question is this: From which products and which activities could we expect a relatively high demand or supply response to price change, i.e. a relatively high cross-elasticity of demand or cross-elasticity of supply?
ACCC v Metcash Trading Limited  FCA 967 (25 August 2011);  FCAFC 151 (30 November 2011)
In the context of mergers, Emmett J set out the relevant principles in his trial judgment in Metcash (at para 151) [emphasis in original] - in this case the functional market definition was particularly important.
 Defining a market delineates an area of close competition relevant to a firm’s products and conduct, and involves identifying the relevant competitive constraints on firms, so that the competitive implications of the conduct in question can be assessed. Substitution, either in demand or in supply, defines that area of competition. If two products are substitutes, an increase in the price of one relative to the price of the other, all other things being equal, results in a decrease in the sales of the first product and an increase in sales of the second product. It is necessary to identify close substitutes, since close substitutes will impose competitive discipline on a firm and its prices. Substitution can be inferred from quantitative or qualitative information. In quantitative terms, 'substitutability' is captured by measuring elasticity of demand and cross-elasticity of demand. The former provides a measure of overall constraint on prices. The latter provides a measure of substitutability between or among different products. The scenario in which a large number of consumers of a product would switch to a similar product in response to even a small increase in the price of the first product, meaning that any effort to increase the price of the first product would be doomed to failure, is an example of high cross-elasticity of demand between the two products.
[His Honour then discusses supply-side substitution, as provided for in the merger guidelines]
 A critical market definition test is the hypothetical monopolist test. That test involves determining whether a hypothetical monopolist supplier in a market could profitably impose a small but significant non-transitory increase in price, most commonly between five and ten per cent, for the supply of relevant products, or whether substitution by buyers or suppliers would make such an increase unprofitable. If the hypothetical monopolist supplier could profitably impose such an increase, to which I will refer as a relevant increase in price, the market is correctly defined.
 However, if the hypothetical monopolist supplier could not impose a relevant increase in price, a smaller and smaller market must be postulated until a positive answer can be given to the question of whether it could impose the increase profitably. The relevant market is identified as the smallest area, in terms of either product or geographic space, over which a hypothetical monopolist could profitably impose a relevant increase in price. If there are several products that compete within the same market, it is the cumulative switching to all those alternative products by consumers that determines whether close demand-side substitutes exist. If the cumulative effect is sufficient to make the relevant increase in price unprofitable, all close substitutes would be included in the market, even if the consumer switching to each individual product in isolation might be insufficient to make the relevant increase in price unprofitable.
 Markets can be defined in terms of product, function and geography (see AGL at ). ... Occasionally, time and consumer dimensions are used ...
 Definition in terms of function refers to the link in the chain of production for a specific product. Different functional levels, such as manufacturing, wholesaling and retailing, for a specific product, are often complements rather than substitutes. Accordingly, care must be taken to ensure that different functional levels are not combined into a single product market in cases where hypothetical monopolists at separate functional levels could each profitably impose a relevant increase in price. If they could do so, combining the functional levels into a single relevant market may violate the principle of identifying the smallest market under the hypothetical monopolist test.
 The identification of a relevant market by functional dimension requires consideration of the differences between horizontal economic relationships and vertical economic relationships. Horizontal economic relationships generally involve rivalry, whereas vertical economic relationships are generally co-operative. Generally, horizontal interactions are characterised by rivalry among entities selling the same or similar products to the same or similar customers. Such entities attempt to win custom from their competitors. In contrast, vertical interactions are generally characterised by co-operation among entities engaged in a supply and acquisition relationship. That is to say, such entities are engaged in different functions along a supply chain and would ordinarily work collaboratively to win sales at each level in that chain. In the Australian grocery industry, the self-supplying major supermarket chains, such as Woolworths and Coles, are often described as vertically integrated. Further, there are vertical relationships between Metcash, on the one hand, and the IGA retailers, on the other hand.
 Because the different functional markets in any distribution chain for a given product are generally considered to be economic complements, rather than substitutes, in the supply of the product, whether goods or services, the functional market concept is quite different in nature from the product market concept and the geographic market concept.
ACCC v Liquorland 
Australian Competition and Consumer Commission v Liquorland (Australia) Pty Ltd  FCA 826; (2006) ATPR 42-123
Justice Allsop (at 429):
Market definition is not an exact physical exercise to identify a physical feature of the world; nor is it the enquiry after the nature of some form of essential existence. Rather, it is the recognition and use of an economic tool or instrumental concept related to market power, constraints on power and the competitive process which is best adapted to analyse the asserted anti-competitive conduct.
In the Matter of Fortescue Metals Group Limited  ACompT 2
Justice Finkelstein (president), Grant Latta and Professor Round
 ... to a businessperson, a market is a place or area where goods may be sold or, more broadly, where there are people who are sufficiently aware of a firm’s product to consider buying it. This concept of a market concentrates its attention on buyers rather than sellers.
 We are not here concerned with the businessperson’s understanding of a market but rather with the analytical definitions developed by economists. Several classical economists have offered definitions. Cournot defined a market as: “The entire territory of which parts are so united by the relations of unrestricted commerce that prices there take the same level throughout, with ease and rapidity” ...
 This economic (or relevant) market, then, consists of groups of buyers and groups of sellers in a geographic region who seek each other out as a source of supply of, or as customers for, products. The interaction of the buyers and sellers determines the price for the products.
 We have not referred to a “group” of products because implicit in the classic economists’ definition of a market is the assumption that there is only a single homogeneous product and that the firms in the market produce perfect substitutes.
 In the real world it is not only homogeneous products of rival sellers that affect price; price is also affected by the products of rival sellers that are close substitutes. Hence it is necessary to expand the definition of a market to include not only identical goods but also close substitutes.
 The output of the process of defining the relevant market – the identification of the participating firms, a description of the products exchanged and the borders within which the exchange occurs – is critical to an assessment of the behaviour of firms in the market (ie whether or not they impose competitive constraints upon one another) and, importantly, whether or not a firm has, or a group of firms have, power to control price or reduce competition (ie to shift the price away from that which would be obtained in a competitive market, namely the marginal cost of the product).
 In QCMA (at 517), the Tribunal defined a market to be a "field of rivalry" between firms in which there is "substitution between one product and another, and between one source of supply and another, in response to changing prices."
 Section 4E was introduced in 1977 to give statutory recognition to the concept of substitution. It provides that "for the purposes of this Act, unless the contrary intention appears, 'market' means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services."
 It is often difficult, and sometimes impossible, to define with any precision the relevant dimensions (product, geographic, functional and temporal) of a market. On occasion, it can be particularly difficult to describe the relevant product market and its geographic borders. The process often involves judgments as to matters of degree that can be difficult to measure.
 As regards the product market, the notion of substitution refers on the demand side, to a customer’s practical ability to switch from one product to another and, on the supply side, to the capacity of a supplier to switch production from one product to another. There are various conventional approaches to determining substitutability. [emphasis added]
 The first significant approach developed by the courts and leading economists in the US is the “reasonable interchangeability of use or the cross-[price] elasticity of demand between product itself and substitutes for it”: Brown Shoe Co. v United States 370 US 294 (1962) at . Cross-price elasticity of demand measures the extent to which consumers will change their consumption of a product in response to a price change in another product. A high cross-price elasticity value suggests that products are good substitutes and are probably in the same product market.
 Reasonable interchangeability of use is established by looking at actual and potential buyer substitution patterns. Relevant evidence will include product characteristics (including differences in grade or quality), price differences (including price trends), past buyer responses, the views of firms regarding who their competitors are, and the existence or absence of different distribution channels. [emphasis added]
 On the supply side, cross-price elasticity is also relevant. Products will be in the same market if a firm can readily switch production from one product to another. What is important is the ease with which the switch can take place. It may be immaterial that consumers do not regard the products as substitutes, that a price difference exists, or that the prices are not closely correlated. [emphasis added]
 The geographic market is the area of effective competition in which sellers and buyers operate. What is relevant, as a starting point, are actual sales patterns, the location of customers and the place where sales take place, and any geographical boundaries that limit trade. But it is not sufficient to measure only historical and current market behaviour. It is also necessary to consider whether customers would readily turn to more remote suppliers in response to a price increase by local suppliers or whether remote suppliers would choose to enter the local market.
 In the United States, geographic markets are occasionally defined based on shipment flows. ...
 A more recent (and increasingly popular) approach is to define a market as a group of products and a corresponding geographic area within which a hypothetical monopolist would be able to raise prices profitably. ...
 The hypothetical monopolist test has been adopted by the ACCC. ... [emphasis added]
 The test works this way. One looks at the effect of a price increase on a single product. If so many buyers would shift to alternative products that the monopolist would find the price increase to be unprofitable, the group of products is too narrow to constitute the market. The market should include all those products for which the hypothetical monopolist’s price increase would be profitable.
 The factors that the guidelines use to determine whether the test is satisfied are conventional. The factors include buyers’ perceptions, similarities and differences in price movements between different sets of products over a period of years, similarities or differences in product characteristics and evidence of sellers' perceptions.
 The test for the existence of significant market power is phrased in terms of the magnitude of the price increase that could be imposed by the hypothetical monopolist. It is generally accepted by both US and Australian regulators that a price increase is significant in size and length if it is at least 5% (sometimes 10%) and for at least one year, but there is flexibility in both the magnitude and the time period. It should be noted that these are not tolerance levels for anti-competitive price increases; they are merely a benchmark for assessing substitution. [emphasis added] ...
 Geographic markets are defined in an analogous manner. One identifies tentatively a small geographic area such that a hypothetical firm that is the only present producer of the relevant product or service is not able to profitably impose a price increase. If the product or service could be obtained elsewhere, an attempt to raise the price could not be profitable and the tentative geographic area would be too small. The geographic area is expanded until the hypothetical monopolist’s price increase would be profitable.
 The hypothetical monopolist definition was designed to satisfy three objectives: (1) To connect the relevant market in antitrust case law to economic policy justifications in merger cases; (2) To arrive at a standardised definition of a market; and (3) To develop a test that fell within existing jurisprudence that relied on the product and geographic dimensions of a market.
 The hypothetical monopolist test has its critics. ... The test is, in essence, a "thought experiment". ... But the trend is towards acceptance of the test ... not only in merger cases, but wherever it is necessary for competition purposes to define the boundaries of a relevant market ...
 Notwithstanding the criticisms, or in spite of it, the hypothetical monopolist test has gained currency in Australia ... [emphasis added]
Australian Gas Light Company v Australian Competition and Consumer Commission (2003) 137 FCR 317 (cited with approval in ACCC v Flight Centre Limited (No 2)  FCA 1313 (6 December 2013) [para 108]
[para 378] The concept of market describes, in a metaphorical way, an area or space of economic activity whose dimensions are function, product and geography. A market may be defined functionally by reference to wholesale or retail activities or a combination of both. The concept of product encompasses goods and services and, having regard to the definition of “market” in s 4E, includes the range of goods or services which are substitutable for or competitive with each other.
[para 379] The process of market definition was expounded in QCMA where the Tribunal defined “market” as the area of close competition between firms and observed that substitution occurs within a market between one product and another, and between one source of supply and another in response to changing prices (at 190):
So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive.
In Re Tooth & Co Ltd (1979) 39 FLR 1, the Tribunal identified the task of market analysis as involving:
1. Identification of the relevant area or areas of close competition.
2. Application of the principle that competition may proceed through substitution of supply source as well as product.
3. Delineation of a market which comprehends the maximum range of business activities and the widest geographic area within which, if given a sufficient economic incentive, buyers can switch to a substantial extent from one source of supply to another and sellers can switch to a substantial extent from one production plan to another.
4. Consideration of long run substitution possibilities rather than shortrun and transitory situations recognising that the market is the field of actual or potential rivalry between firms.
5. Selection of market boundaries as a matter of degree by identification of such a break in substitution possibilities that firms within the boundary would collectively possess substantial market power so that if operating as a cartel they could raise prices or offer lesser terms without being substantially undermined by the incursions of rivals.
6. Acceptance of the proposition that the field of substitution is not necessarily homogeneous but may contain submarkets in which competition is especially close or especially immediate. This is subject to the qualification that competitive relationships in key submarkets may have a wide effect upon the functioning of the market as a whole.
7. Identification of the market as multidimensional involving product, functional level, space and time.
ACCC v Garuda 
The main issue on appeal was whether the relevant conduct occurred in a 'market in Australia'. The majority of the court adopted an exapnsive approach. A good overview of the decision can be found here:
TPC v Australian Meet Holdings 
A market is the field of activity in which buyers and sellers interact, and the identification of market boundaries requires consideration of both the demand and supply side. The ideal definition of a market must take into account substitution possibilities in both consumption and production. The existence of price differentials between different products, reflecting differences in quality or other characteristics of the products, does not by itself place the products in different markets. The test of whether or not there are different markets is based on what happens (or would happen) on either the demand or the supply side in response to a change in relative price.
Re Tooth 
Re Tooth & Co Ltd (1979) 39 FLR 1
[at 18,196-18,197] '… it may be helpful if we summarise briefly the principles we have had in mind in approaching the task of market delineation. …
First, and most generally, we seek to identify the area or areas of close competition of relevance for the applications.
Second, such competition may proceed not just through the substitution of one product for another in use (substitution in demand) but also through the substitution of one source of supply for another in production or distribution (substitution in supply). The market should comprehend the maximum range of business activities and the widest geographic area within which, if given a sufficient economic incentive, buyers can switch to a substantial extent from one source of supply to another and sellers can switch to a substantial extent from one production plan to another. In an economist’s language, both cross-elasticity of demand and cross-elasticity of supply are relevant.
Third, there is the matter of time perspective. It is plain that the longer the period allowed for likely customer and supplier adjustments to economic incentives, the wider the market delineated. In our judgment, given the policy objectives of the legislation, it serves no useful purpose to focus attention upon a short-run, transitory situation. We consider we should be basically concerned with substitution possibilities in the longer run. This does not mean we seek to prophesy the shape of the future—to speculate upon how community tastes, or institutions, or technology might change. Rather, we ask of the evidence what is likely to happen to patterns of consumption and production were existing suppliers to raise price or, more generally, offer a poorer deal. For the market is the field of actual or potential rivalry between firms.
Fourth, all competition or substitution does not cease at the outer boundaries of the market; the economy as a whole is a network of substitution possibilities in consumption and production; competition is a matter of [18,197] degree. Rather, at the extremities of the market, there is such a break in substitution possibilities that firms within its boundaries would collectively possess substantial market power: were they to join forces as a cartel, they would be able to raise prices or offer a poorer deal without their market being substantially undermined by the incursions of rivals.
Fifth, within the bounds of the market, substitution possibilities may be more or less intense, and more or less immediate: the field of substitution is not necessarily homogeneous but may contain within it sub-markets wherein competition is especially close or especially immediate. There may be, too, certain key sub-markets such that their competitive relationships have a wider effect upon the functioning of the market as a whole. In these matters we have found that the identification of relevant sub-markets may be rather helpful in clarifying how competition works.
Finally, as is commonly recognized, the market is a multi-dimensional concept—with dimensions of product, functional level, space, and time. Taking (as just explained) the longer run time perspective as given, we have found it helpful in our market identification task to proceed in step by step fashion dealing with each of these questions: What is the relevant product? What are the appropriate functional levels? What is the geographic scope of the market?'
For more case law discussing market definition see cases page.
See the reading page