Why Market Definition Matters in Antitrust Litigation
Market definition provides the framework for assessing market power and competitive effects in an antitrust case. Without clearly defined markets, courts likely wouldn’t be able to meaningfully evaluate whether a firm possesses the ability to anticompetitively raise prices, reduce output, or otherwise harm competition. This makes antitrust market definition a pivotal and prominent issue that can shape the trajectory of an antitrust case.
Courts rely on market definition to determine whether alleged conduct could plausibly harm competition. In monopolization cases under Section 2 of the Sherman Act, for example, defining the relevant market is essential to evaluating whether a defendant possesses monopoly power.1 Similarly, in merger reviews conducted by the Federal Trade Commission (FTC) or the Department of Justice (DOJ), market definition establishes the competitive landscape against which concentration and competitive effects are measured.2
Economic experts can play a central role in helping to translate real-world market behavior into defensible market boundaries. This analysis bridges the gap between abstract legal standards and the practical realities of how firms compete, how customers make purchasing decisions, and how prices respond to competitive forces.
The Concept of the Relevant Market in Antitrust Analysis
The relevant market in antitrust analysis consists of two components: the product market and the geographic market. Together, these define the arena of competition within which competitive effects are evaluated. The Supreme Court established foundational principles for this analysis in Brown Shoe Co. v. United States (1962), and these principles continue to guide modern case law.3
Product Market Definition
Product markets are defined by identifying products or services that consumers view as reasonable substitutes. The central inquiry focuses on demand-side substitution: would buyers switch to alternative products in response to a price increase? If so, those alternatives may belong in the same market.
Economists examine several factors when defining product markets:
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- Cross-elasticity of demand between products
- Functional interchangeability from the customer’s perspective
- Industry recognition of distinct product categories
- Pricing patterns such as correlations and customer preferences
- Unique production facilities or distribution channels
The goal is to identify the competitive constraints that limit firms’ pricing behavior. A firm cannot profitably raise prices if customers would simply switch to readily available substitutes. This focus on competitive alternatives, rather than superficial product similarity, reflects the basic economic principles underlying market definition.
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Geographic Market Definition
A geographic market reflects the area (geographically) in which sellers compete and where buyers can turn for alternative products. The analysis examines where customers actually purchase products and whether sellers in different locations effectively constrain each other’s pricing.
Experts assess several factors when determining geographic scope, including:
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- Transportation costs relative to product value
- Regulatory barriers that limit cross-border competition
- Customer purchasing patterns and willingness to travel
- Shipping constraints and delivery logistics
- Historical patterns of customer switching between suppliers
Geographic scope is determined by practical, economic constraints rather than formal boundaries. A relevant geographic market might be local, regional, national, or international depending on the specific industry and customer behavior at issue.
Economic Principles Underlying Market Definition
Market definition is deeply rooted in microeconomic theory about substitution and competition. The market definition process starts from the premise that firms are constrained by actual competitive alternatives. If a firm attempts to raise prices above competitive levels, economic theory tells us, buyers will turn to substitutes, and the firm (who attempted to raise price) will lose sales.
In addition to product similarity, economists focus on competitive alternatives. Two products that might appear to be physically similar may not compete in the same market if they serve different customer needs, have different price points, or are purchased through different channels. Conversely, products that seem different may belong in the same market if customers treat them as substitutes or consider them interchangeable.
Key economic concepts applied in market definition include:
The SSNIP Test
How the SSNIP Test Works
The SSNIP (Small but Significant and Non-Transitory Increase in Price) test provides the conceptual framework courts (and competition regulators/agencies) use for defining markets.4 The test asks whether a hypothetical monopolist controlling a candidate set of products could profitably impose a small but significant non-transitory increase in price (typically five percent) without losing sufficient sales to alternatives.5
Said differently, the test evaluates whether enough customers would switch to alternative products (or suppliers in other geographies) in response to a small but significant price increase such that the price increase would become unprofitable. This would indicate that those alternative products (or geographies) should be included in the same relevant market and the market must be expanded to include those alternatives. The test then repeats with the broader candidate market and continues in an iterative fashion until a market is identified where price increases would be profitable because customers lack adequate substitutes.6
The logic is straightforward: a relevant market is one in which a firm would have sustainable pricing power.
Practical Application of the SSNIP Framework
Economists can apply the SSNIP test using data on prices, margins, distribution channels, etc. When detailed transactions data exist, an economist may estimate demand elasticities and calculate whether a 5% price increase would be profitable after accounting for lost sales. This can provide a rigorous and data-driven approach in support for defining a market.
Depending on the available data, the SSNIP test may be implemented quantitatively or qualitatively. Using data, as described above, can be challenging and complex but empirically solveable. However, in some matters, particularly those involving nascent industries or rapidly evolving markets, economic research may rely more heavily on qualitative evidence such as customer interviews, internal business documents, and industry studies. Neither should be considered superior and must be viewed alongside the facts of the case.
It is important to note that courts view the SSNIP framework as a conceptual tool rather than a mechanical formula. As decades of antitrust litigation have demonstrated, judges appreciate analysis grounded in the SSNIP methodology but do not require precise numerical implementation in all cases. The framework provides discipline and structure while allowing flexibility based on available evidence.
Evidence Economists Use to Define Markets
Pricing and Transactions Data
Transactions data (data indicating price paid, quantity purchased, location of sale, date/time, etc.) provides insight into how prices vary across products, categories, customers, and/or locations. Economists often use transactions data to understand pricing patterns, customer segments, and competitive dynamics that help to inform market definition.
Key data elements can include:
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- Historical prices across product variants
- Volume and revenue by customer type and geography
- Margin information to assess profitability of price changes
- Price movements over time in response to competitive events
Economists may analyze whether price movements are constrained by competitive alternatives. If prices for two products move together over time (i.e., exhibit correlation) or if price increases for one product lead to sales losses to another, this might suggest the products compete in the same market. Pricing evidence helps assess substitution patterns in practice rather than in theory.
Customer and Supplier Substitution Evidence
Customer switching behavior in response to price changes or supply disruptions is another area economic experts might turn to. Documentary evidence from companies—including strategic plans, competitive analyses, and customer correspondence—often reveals how firms perceive their competitive constraints and which alternatives they monitor. This type of information can be complementary to econometric analyses discussed below.
Supplier responses, such as entry or repositioning, inform supply-side substitution. While the primary focus may be on demand-side substitution, supply-side considerations may be relevant where suppliers can reposition quickly and credibly. The ability of firms to expand or reposition makes it easier for customers to substitute among products or across geographies. Of course, the opposite is also true: if firms lack willingness to alter supply availability, then this weakens customers’ ability to substitute.
Documentary evidence may be used to corroborate economic findings. When a company’s own internal documents identify specific competitors and competitive threats, this provides powerful support for a defined market.
Econometric and Quantitative Analysis
Regression analysis is another tool economists can use to estimate demand elasticities and measure how customers respond to price changes. For example, if the demand for product A (the regression “dependent” variable) increases when product B becomes more expensive (product B’s price is a regression “control” variable), then A and B are substitutes. These techniques can allow an economist to isolate the effect of price on quantity demanded while controlling for other factors like seasonality, economic conditions, and/or product characteristics.
Economic models help test whether products or regions belong in the same market by examining evidence such as:
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- Price correlation across products and locations
- Diversion ratios measuring where lost sales flow
- Critical loss calculations assessing profitability of price increases
- Natural experiments from historical pricing events
These analyses support market definition by linking data to economic theory. However, it is worth noting that the extent to which quantitative methods can be deployed depends on data quality and availability—factors that vary significantly across cases from our own experience.
Market Definition and Competitive Effects Analysis
Market definition can inform whether a firm possesses market power. Once markets are defined, economists can calculate market shares along with concentration metrics to assess the competitive landscape. These metrics serve as proxies for the ability to raise prices or exclude competition.
Defined markets provide the context for evaluating pricing behavior, output, and competitive constraints. In reality, the relationship between market definition and competitive effects is iterative—evidence about competitive effects can inform market definition, and market definition shapes how competitive effects are assessed.
An analysis of competitive effects relies on market definition to assess whether conduct harmed competition. Key aspects of this relationship can include:
- Market share can provide an initial indicator of market power
- Concentration changes (measured by the Herfindahl-Hirschman Index) might signal merger competitive implications7
- Barriers to entry can help determine whether new competition can discipline incumbent behavior
- Buyer power may constrain seller pricing even in concentrated markets
Courts have increasingly recognized that direct evidence of competitive effects can sometimes reduce the emphasis on precise market definition.8 When clear evidence demonstrates anticompetitive harm, the substantive issue of competitive impact may take priority over definitional debates.
Market Definition Across Different Antitrust Contexts
Horizontal Conduct and Mergers
In cases or reviews of horizontal competitors, market definition assesses the competitive overlap of the firms. Mergers between firms selling substitute products can raise concerns about reduced competition and potential for price increases. Market definition identifies which products and geographic areas are relevant to evaluating such concerns.
Economists can evaluate whether consolidation or coordination reduces competition within the defined market. Under the Clayton Act, agencies assess whether mergers may substantially lessen competition, and market definition provides the framework for this analysis.9 High post-merger market shares, combined with significant increases in concentration, can create presumptions of anticompetitive effects.10
Vertical and Single-Firm Conduct
Market definition helps evaluate foreclosure and exclusionary effects in cases involving vertical competitors. When a firm controls an essential input or distribution channel, a market definition analysis can examine whether that control can be leveraged to harm competition in related markets
Economists may analyze whether conduct limits access to critical inputs or customers. Vertical restraints, exclusive dealing arrangements, and tying practices all require market definition to assess their competitive significance. A firm with modest market share in a broad market may still harm competition if proper market definition reveals dominance in a narrower segment or adjacent market.
Common Challenges in Market Definition
Market definition presents several challenges that complicate an antitrust analysis:
Data limitations may constrain the ability to provide a quantitative assessment. In such cases, economists can rely more heavily on qualitative evidence (such as produced documents) and industry knowledge.
Rapidly evolving industries might complicate substitution analysis. Technology markets, in particular, present challenges when products and competitive dynamics change rapidly.
A common dispute between economists is whether markets are defined too narrowly or too broadly. Narrow market definitions tend to produce higher market shares which could heighten antitrust scrutiny, while broad definitions can do the opposite.
Additional challenges may include:
- Two-sided platform markets where demand on one side depends on participation on the other
- Bundled products that may or may not compete with unbundled alternatives
- Global supply chains that blur geographic market boundaries
- Innovation markets where future competition is uncertain
The Economic Expert’s Role in Presenting Market Definition Evidence
Experts often translate complex market data and analysis into clear explanations relied on by courts. Judges and juries typically lack specialized training in economics, so an effective economic expert must convey sophisticated concepts in accessible terms without sacrificing analytical rigor.
Strong expert testimony explains the assumptions, data, and reasoning underlying market definition. A credible expert opinion often:
- Begins with clear articulation of the proposed market, including how it is related to and will help evaluate the alleged anticompetitive conduct
- Explains the methodology used and why it is appropriate given the facts of the case or the available data
- Presents supporting evidence in logical sequence, e.g., designing and implementing the market definition analyses and tests followed by next estimating market shares and market concentration.
- Addresses alternative market definitions and explains why they are less appropriate
- Connects the market definition to the competitive effects analysis
Courts expect transparency and consistency between market definition and competitive effects analysis. An expert who defines a narrow market to establish a high market share but then relies on broad competitive conditions to explain firm behavior may face credibility challenges. Sound expert analysis maintains internal consistency throughout.
Conclusion: Market Definition as a Foundation of Antitrust Analysis
Market definition is a critical step in antitrust litigation that shapes how courts evaluate competitive harm. Even as analytical tools have evolved, determining the relevant market has remained central to antitrust cases and it likely will continue to play a pivotal role in the years to come.
Economic experts apply accepted economic tools to define markets grounded in data and real-world behavior. The SSNIP test provides a conceptual discipline, while evidence from transactional data, customer behavior, and produced documents ensures that market boundaries reflect actual competition rather than theoretical abstractions.
Sound market definition supports a credible competitive effects analysis. When markets are properly defined, market shares and concentration metrics provide meaningful information about competitive conditions. When markets are poorly defined—whether too narrow or too broad—the resulting analysis can mislead courts and produce incorrect outcomes. For this reason, engaging a qualified economic expert early in an antitrust matter provides essential benefits for navigating these complex issues.
