Thomas B. Nachbar

Qualitative Market Definition

Modern antitrust law has come under intense criticism in recent years, with a bipartisan chorus of complaints about the power of technology and internet platforms such as Google, Amazon, Facebook, and Apple. A fundamental issue in these debates is how to define the “market” for the purposes of antitrust law. In the Supreme Court’s first antitrust case on platforms (2018’s Ohio v. American Express), the definition of the relevant market was the central issue. The Justices’ 5-4 split on the issue was particularly stark, with the dissent describing the majority’s approach as not only “wrong” but “economic nonsense.” Partially in response to the controversy in American Express, recent judicial, legislative, and regulatory proposals have even suggested doing away with market definition in some antitrust cases.

The root problem, this Article shows, is that modern market definition has been treated in antitrust as a matter of quantitative economics, with markets defined by economic formulas lacking a connection to widely held social understandings of competition. Antitrust law needs to augment these quantitative approaches by explicitly acknowledging qualitative aspects of markets, including the normative visions of competition they represent. Such an approach is hardly radical. Such qualitative factors have been part of market definition since its origin, and federal antitrust regulators have recently solicited public comment on whether to include qualitative factors in market definition. This Article argues that market definition is necessarily normative and describes an approach for including qualitative criteria in market definition so that market definition accurately reflects the types of competition antitrust law seeks to protect.

Introduction

Few aspects of antitrust are more central, and more controversial, than the role of market definition. Market definition plays a role in almost every antitrust case.1 1.Jonathan B. Baker, Market Definition: An Analytical Overview, 74 Antitrust L.J. 129, 129 (2007) (“Throughout the history of U.S. antitrust litigation, the outcome of more cases has surely turned on market definition than on any other substantive issue.”).Show More Market definition featured prominently in 2018’s Ohio v. American Express,2 2.Ohio v. Am. Express Co., 138 S. Ct. 2274, 2285–87 (2018).Show More the first case in which the Supreme Court addressed the question of how U.S. antitrust law should regulate “platforms.”3 3.In the economics literature, a “platform” or “two-sided” market is one in which “1) two sets of agents interact through an intermediary or platform, and 2) the decisions of each set of agents affects the outcomes of the other set of agents, typically through an externality.” Marc Rysman, The Economics of Two-Sided Markets, 23 J. Econ. Persps. 125, 125 (2009). Facebook offers a typical example. Facebook produces two products (social media services and advertising services) that are consumed by two distinct groups (social media “friends” and advertisers) and the value of at least one product (the advertising) increases with consumption of the other product (social media) by a different group (“friends”). See Thomas B. Nachbar, Platform Effects, 62 Jurimetrics 1, 8 (2021). These indirect network effects and the externalities they generate separate platforms from other businesses, which also bring together distinct groups of users. Mark Armstrong, Competition in Two-Sided Markets, 37 RAND J. Econ. 668, 673 (2006); David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets, 20 Yale J. on Reg. 325, 332–33 (2003); Geoffrey G. Parker & Marshall W. Van Alstyne, Two-Sided Network Effects: A Theory of Information Product Design, 51 Mgmt. Sci. 1494, 1496, 1502 (2005). Platforms have been canonically described by Jean-Charles Rochet and Jean Tirole. See Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 1 J. Eur. Econ. Ass’n 990, 990 (2003). The terms “platform,” “two-sided,” and “multi-sided” are used interchangeably in the literature. See, e.g., Evans, supra, at 325; David S. Evans & Richard Schmalensee, The Industrial Organization of Markets with Two-Sided Platforms, 3 Competition Pol’y Int’l 150, 151 (2007); Lapo Filistrucchi, Damien Geradin, Eric van Damme & Pauline Affeldt, Market Definition in Two-Sided Markets: Theory and Practice, 10 J. Competition L. & Econ. 293, 299 (2014); Rochet & Tirole, supra, at 990. Following conventional usage, I will also use the terms interchangeably.Show More But correctly defining relevant markets is the subject of much controversy.4 4.For a comprehensive treatment of the problem, see William M. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 Harv. L. Rev. 937 (1981).Show More The case that introduced modern market definition to antitrust, United States v. E.I. du Pont de Nemours & Co. (Cellophane),5 5.351 U.S. 377 (1956).Show More is widely known in antitrust circles for giving birth to its own brand of error: the “Cellophane fallacy.”6 6.E.g., Baker, supra note 1, at 164; Thomas G. Krattenmaker & Steven C. Salop, Appendix A—Analyzing Anticompetitive Exclusion, 56 Antitrust L.J. 71, 80 n.32 (1987) (“This error, now termed the Cellophane fallacy . . . .”); Gene C. Schaerr, The Cellophane Fallacy and the Justice Department’s Guidelines for Horizontal Mergers, 94 Yale L.J. 670, 677 (1985); see Donald F. Turner, Antitrust Policy and the Cellophane Case, 70 Harv. L. Rev. 281, 309 (1956); Landes & Posner, supra note 4, at 960–61 (describing the error in the Cellophane case).Show More American Express itself resulted in a 5‑4 split on the market definition, with the dissent describing the majority’s approach as not only “wrong” but “economic nonsense.”7 7.138 S. Ct. at 2295, 2297 (Breyer, J., dissenting).Show More Even proponents of market definition are dubious about its accuracy,8 8.See Landes & Posner, supra note 4, at 960–61.Show More and at least one prominent antitrust scholar, Louis Kaplow, believes that the problems inherent in market definition are so central as to warrant its abandonment in antitrust.9 9.Louis Kaplow, Why (Ever) Define Markets?, 124 Harv. L. Rev. 437, 440 (2010).Show More

The current debate over market definition is universal, with scholars like Kaplow being joined by jurists, legislators, and regulators arguing not only over how to conduct market definition but whether it needs to be conducted at all. In American Express, Justice Breyer wrote a strong dissent, arguing not only that the majority wrongly defined the relevant market10 10.138 S. Ct. at 2297 (Breyer, J., dissenting).Show More but also that market definition was unnecessary because the district court had found evidence of anticompetitive effects, which obviated the need to define the market in the first place.11 11.Id. at 2296.Show More Legislation proposed in the last Congress by Senator Amy Klobuchar would have removed market definition as a requirement in many antitrust cases12 12.See Competition and Antitrust Law Enforcement Reform Act of 2021, S. 225, 117th Cong. § 13(a) (2021).Show More and would prohibit antitrust courts from requiring market definition in most cases if direct evidence of “actual or likely harm to competition” is present.13 13.Id. § 13(b).Show More The Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”), as part of their revision of the Horizontal Merger Guidelines, have recently solicited public comment on whether it is “necessary to precisely define [a relevant] market in every case,”14 14.U.S. Dep’t of Just. & U.S. Fed. Trade Comm’n, Request for Information on Merger Enforcement 5 (Jan. 18, 2022) [hereinafter DOJ/FTC Request for Information], https://www.‌regulations.gov/document/FTC-2022-0003-0001 [https://perma.cc/3TSX-GM3D].Show More how to change market definition to include qualitative criteria, or whether to eliminate it if likely anticompetitive effects can be shown.15 15.Id.Show More The FTC doubled down on the expendability of market definition in its recent policy statement on the application of Section 5 of the Federal Trade Commission Act to competition cases.16 16.U.S. Fed. Trade Comm’n, Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act 10, 15 (Nov. 10, 2022) [hereinafter FTC Policy Statement], https://www.ftc.gov/system/files/ftc_gov/pdf/p221202sec5enforcementpolicystatement_002.pdf [https://perma.cc/8YP4-EU8Q].Show More Such proposals (like Justice Breyer’s) could shift the emphasis in antitrust away from market definition, and the DOJ/FTC proposed changes to the merger guidelines suggest changing how market definition should be conducted—changes with the potential to revolutionize how antitrust cases are litigated. These conversations have placed the meaning and necessity of market definition at the forefront of antitrust law.

This Article reframes the ongoing debate over market definition by taking a step back to consider the problem of market definition more generally. The platform markets at issue in American Express (and subject to recent proposals) present particular challenges to market definition, but in confronting those challenges, the case provides valuable insight into how evidence of anticompetitive effects should (and should not) inform antitrust analysis more generally. There are few clear answers, although what is clear is that Justice Breyer’s (and Senator Klobuchar’s) claim that market definition is unnecessary is not only wrong but illogical.

Reliance on anticompetitive effects is frequently unreliable, and Justice Breyer’s invocation of anticompetitive effects in lieu of market definition demonstrates a deeper misunderstanding about the relationship between observed effects and anticompetitive harm. For instance, the evidence of anticompetitive effects that Justice Breyer would have relied on in American Express—higher prices—are singularly ill-suited to identifying the market power that is the target of the antitrust laws. Indeed, seriously considering Justice Breyer’s reliance on price emphasizes other problems with the economic definition of market power—captured by the Lerner Index17 17.See infra text accompanying notes 26–27.Show More—that has been accepted by antitrust theorists for decades.18 18.See, e.g., IIB Phillip E. Areeda, Herbert Hovenkamp & John L. Solow, Antitrust Law ¶ 503b (5th ed. 2021) (explaining the Lerner Index); Baker, supra note 1, at 142 n.49; Kaplow, supra note 9, at 445 (“This concept of market power is usually expressed using the Lerner Index.”); Landes & Posner, supra note 4, at 938–39.Show More

By reconsidering market definition and the anticompetitive effects that Justice Breyer would have relied on in its stead, we can gain new insight into the way market definition and conceptions of market power have been used and misused in American antitrust law over the last half century. Attacked by Donald Turner as economically inaccurate since its inception,19 19.See Turner, supra note 6, at 309–10.Show More the Cellophane approach to market definition has nevertheless survived. What those like Kaplow have made clear, though, is that the established practice of defining relevant markets is problematic at best. But the problems with current understandings of market definition and market power go far beyond criticisms identified by Kaplow and others. Theories of market definition and market power go to the very core of what is “anticompetitive,” a concept dependent on normative understandings of antitrust law. Indeed, it was just such a criticism over the Court’s understanding of antitrust law, not its understanding of economics, that led Turner to criticize the Court’s market definition in the Cellophane case in the first place.20 20.Id.Show More When the normative basis of Turner’s criticism is understood, it becomes an argument for, not against, antitrust market definition.

This Article proceeds in four Parts. Part I describes the general debate over market definition, whose merits are usually debated with regard to a specific use of market definition: the inference of market power from market shares, a singular emphasis that ignores other ways in which market definition can be useful in antitrust. Part II considers the problem of market definition in American Express and highlights problems with how the district court and Justice Breyer used pricing information as the basis for finding anticompetitive effects, a problem that goes beyond American Express. Part III expands on Part II’s consideration of American Express, explaining how the problem of focusing on price information in American Express is not limited to platform markets but applies generally to analysis of observed market effects in antitrust. Although price increases might reflect anticompetitive market power, they are equally indicative of competition through product differentiation. For the purposes of antitrust, the price effects are secondary to effects on output. That recognition puts in question antitrust scholars’ long-standing reliance on comparisons between price and marginal cost, as expressed in the Lerner Index, to define market power in antitrust cases. In the end, the Lerner Index does not just represent an incomplete understanding of market power; it embodies a normative understanding of competition that does not track the content of the antitrust laws. As explained in Part IV, antitrust actually protects a conception of competition that is far more complex, and quite distinct, from that embodied by the Lerner Index. So understood, market definition is a necessary element to describing the competition that antitrust seeks to protect. For the purposes of applying the antitrust law, relevant markets must be defined not only through economic tools like the Lerner Index; it is also necessary to use other legal and socially relevant features of markets, and Part IV considers what those factors might be. The Article ends with a brief Conclusion.

  1. Jonathan B. Baker, Market Definition: An Analytical Overview, 74 Antitrust L.J. 129, 129 (2007) (“Throughout the history of U.S. antitrust litigation, the outcome of more cases has surely turned on market definition than on any other substantive issue.”). ↑
  2. Ohio v. Am. Express Co., 138 S. Ct. 2274, 2285–87 (2018). ↑
  3. In the economics literature, a “platform” or “two-sided” market is one in which “1) two sets of agents interact through an intermediary or platform, and 2) the decisions of each set of agents affects the outcomes of the other set of agents, typically through an externality.” Marc Rysman, The Economics of Two-Sided Markets, 23 J. Econ. Persps. 125, 125 (2009). Facebook offers a typical example. Facebook produces two products (social media services and advertising services) that are consumed by two distinct groups (social media “friends” and advertisers) and the value of at least one product (the advertising) increases with consumption of the other product (social media) by a different group (“friends”). See Thomas B. Nachbar, Platform Effects, 62 Jurimetrics 1, 8 (2021). These indirect network effects and the externalities they generate separate platforms from other businesses, which also bring together distinct groups of users. Mark Armstrong, Competition in Two-Sided Markets, 37 RAND J. Econ. 668, 673 (2006); David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets, 20 Yale J. on Reg. 325, 332–33 (2003); Geoffrey G. Parker & Marshall W. Van Alstyne, Two-Sided Network Effects: A Theory of Information Product Design, 51 Mgmt. Sci. 1494, 1496, 1502 (2005). Platforms have been canonically described by Jean-Charles Rochet and Jean Tirole. See Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 1 J. Eur. Econ. Ass’n 990, 990 (2003). The terms “platform,” “two-sided,” and “multi-sided” are used interchangeably in the literature. See, e.g., Evans, supra, at 325; David S. Evans & Richard Schmalensee, The Industrial Organization of Markets with Two-Sided Platforms, 3 Competition Pol’y Int’l 150, 151 (2007); Lapo Filistrucchi, Damien Geradin, Eric van Damme & Pauline Affeldt, Market Definition in Two-Sided Markets: Theory and Practice, 10 J. Competition L. & Econ. 293, 299 (2014); Rochet & Tirole, supra, at 990. Following conventional usage, I will also use the terms interchangeably. ↑
  4. For a comprehensive treatment of the problem, see William M. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 Harv. L. Rev. 937 (1981). ↑
  5. 351 U.S. 377 (1956). ↑
  6. E.g., Baker, supra note 1, at 164; Thomas G. Krattenmaker & Steven C. Salop, Appendix A—Analyzing Anticompetitive Exclusion, 56 Antitrust L.J. 71, 80 n.32 (1987) (“This error, now termed the Cellophane fallacy . . . .”); Gene C. Schaerr, The Cellophane Fallacy and the Justice Department’s Guidelines for Horizontal Mergers, 94 Yale L.J. 670, 677 (1985); see Donald F. Turner, Antitrust Policy and the Cellophane Case, 70 Harv. L. Rev. 281, 309 (1956); Landes & Posner, supra note 4, at 960–61 (describing the error in the Cellophane case). ↑
  7. 138 S. Ct. at 2295, 2297 (Breyer, J., dissenting). ↑
  8. See Landes & Posner, supra note 4, at 960–61. ↑
  9. Louis Kaplow, Why (Ever) Define Markets?, 124 Harv. L. Rev. 437, 440 (2010). ↑
  10. 138 S. Ct. at 2297 (Breyer, J., dissenting). ↑
  11. Id. at 2296. ↑
  12.  See Competition and Antitrust Law Enforcement Reform Act of 2021, S. 225, 117th Cong. § 13(a) (2021). ↑
  13. Id. § 13(b). ↑
  14.  U.S. Dep’t of Just. & U.S. Fed. Trade Comm’n, Request for Information on Merger Enforcement 5 (Jan. 18, 2022) [hereinafter DOJ/FTC Request for Information], https://www.‌regulations.gov/document/FTC-2022-0003-0001 [https://perma.cc/3TSX-GM3D]. ↑
  15. Id. ↑
  16.  U.S. Fed. Trade Comm’n, Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act 10, 15 (Nov. 10, 2022) [hereinafter FTC Policy Statement], https://www.ftc.gov/system/files/ftc_gov/pdf/p221202sec5enforcementpolicystatement_002.pdf [https://perma.cc/8YP4-EU8Q]. ↑
  17. See infra text accompanying notes 26–27. ↑
  18. See, e.g., IIB Phillip E. Areeda, Herbert Hovenkamp & John L. Solow, Antitrust Law ¶ 503b (5th ed. 2021) (explaining the Lerner Index); Baker, supra note 1, at 142 n.49; Kaplow, supra note 9, at 445 (“This concept of market power is usually expressed using the Lerner Index.”); Landes & Posner, supra note 4, at 938–39. ↑
  19. See Turner, supra note 6, at 309–10. ↑

  20. Id. ↑

The Rationality of Rational Basis Review

Through the “rational basis” test, the Supreme Court asserts the authority to assess whether laws are “rationally related to a legitimate governmental interest.” Although it gives the Court an effective substantive veto over all legislation, rationality review is poorly understood and under-theorized. Developed haphazardly over time, rationality review is not the product of either a considered formula or a particular theory of constitutional law, and though it is clothed in the language of rationality, it represents the Court’s own decidedly intuitive understanding of the proper sphere of state regulation. At one time, that understanding was based in a widely held conception of the “police power,” but the connection to the police power was severed after the Court’s decision in United States v. Carolene Products. Since then, the Court has developed ad hoc a conception of the proper role of government that has become almost entirely utilitarian in nature.

This Article examines the Court’s view of how rationality should (and by virtue of the power of judicial review must) feature in legislation by tracing the development of rationality review and comparing it to more rigorous understandings of political rationality. Comparison reveals the Court’s limited conception of rationality, which allows the Court to avoid difficult questions in pursuit of seemingly uncontroversial instrumental ends. Examination of the Court’s approach to rationality demonstrates the need for a broader conception of legislative rationality – one that includes “constitutive ends.” Recognizing constitutive legislative ends, combined with an information-forcing rule for revealing those ends, can both improve democratic discourse in the legislature and lead to a richer and more intellectually honest form of rationality review.

Monopoly, Mercantilism, and Intellectual Property

Within intellectual property, Darcy v. Allen and the Statute of Monopolies are frequently, almost reflexively, invoked as establishing a baseline norm of economic freedom from which governments depart when they grant exclusive rights to deal in any trade or article of commerce. Against this free-market backdrop, all such grants are suspect, and only those that are justified by reference to their originality or utility (copyrights and patents) are valid. Rejecting the dominant view of Darcy and the Statute of Monopolies, this Article provides a more detailed political and legislative history of both the compromise leading to Darcy and the adoption of the Statute of Monopolies than any to date, and consequently demonstrates that their true importance lies in their political, not economic, content. This reinterpretation suggests that both events are best viewed through the lens of political accountability, a departure from the prevailing understanding of these events, both in and out of intellectual property. The Article concludes by considering the ramifications that this new understanding has for modern debates about intellectual property. Both events suggest that politics and coalition, not litigation, is the most promising brake on the seemingly ever-expanding scope of intellectual property laws. Further, the mercantilist experience with market controls suggests that targeted measures like compulsory licenses are more likely to perpetuate rather than restrict the power of special interests who hold large amounts of intellectual property.

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