Market Definition
Up until this point in the class, we’ve made two important assumptions about markets and market power:
- We have perfectly defined markets that both the plaintiff and defendant agree on.
- Exerting market power is easy.
In practice, defining the market is the most important step in antitrust litigation
- Are cars and trucks similar enough to be in the same market?
- Are buyers and sellers in Eugene and Salem competing with each other?
- Are the markets for cars and food the same size?
- Is it easier to exert market power for the food market or the sports car market?
There are two measures that define a market
- Geographic Space: how large is the area of the market?
- Product Space: what groups of products are close enough substitutes to be considered in the same market?
We rely on cross-price elasticity to analyze both the geographic and product space:
- Products A and B are substitutes if their cross-price elasticity is positive:
\[ \theta_{AB}=\frac{\% \Delta Q_A}{\% \Delta P_B} > 0 \]
High cross-price elasticities provide evidence of close substitutes
→ Products A and B could be the exact same good in different locations, similar goods in the same location, or a combination of both.
Questions
The price of milk increased by 400%, and the quantity purchased of soy milk increased by 150%. What is the cross price elasticy?
Answer: 0.375
When price of Coca Cola decreased from $2 to $1 and the quantity purchased of Dr.Pepper decreased from 100 units to 60 units, what is the cross price elasticity?
Answer: 0.8