Tuesday, April 21, 2009
Posted by D. Daniel Sokol
ABSTRACT: Critical Loss is an empirical implementation of the hypothetical monopolist test for market definition contained in the Department of Justice and Federal Trade Commission Horizontal Merger Guidelines. As usually applied, the test accepts the proposed market as relevant for antitrust analysis whenever the predicted Actual Loss from a small, but significant and non-transitory price increase is less than the computed break-even Critical Loss. While the traditional analysis does not posit a link between the predicted Actual Loss and the break-even Critical Loss, some theoretical economists claim the two concepts are mathematically related. They believe that the Critical Loss test will almost never generate broad market definitions in high margin markets. We suggest that the critics overstate their case, as they have only identified a special case modeling structure that has rarely, if ever, been used in practice and if used, would have very limited applicability. Standard Critical Loss analysis, carefully applied, still represents the best tool for market definition.