Competition authorities often employ the hypothetical monopolist test to evaluate whether groups of products in candidate markets are sufficiently broad to constitute relevant antitrust markets. This paper, published in July 2021 in ElgarOnline, focuses on young and growing industries where consumer demand is dynamic and firms engage in penetration pricing. Serge Moresi discusses the implications of dynamic demand and penetration pricing for market definition analysis and the hypothetical monopolist test.
Industries with dynamic demand typically exhibit several key features. Firms supply relatively new products, earn relatively small contribution margins, and compete both within the industry and, at least to some degree, against firms that supply traditional products. For example, when Sirius and XM merged in 2008, satellite radio was a relatively new service. Sirius and XM were the only suppliers of satellite radio services, and neither company had ever earned a profit. They were competing against each other and also against traditional AM/FM radio stations. In addition to these features, a driving competitive dynamic is a vision by the firms supplying the new products that the demand for their products is still very much in a growth phase and far from being saturated, with a very large “addressable market” which needs to be developed and grown into. Fostering growth (rather than maximizing short-term profits) is typically the main incentive for firms selling new products.
In this type of industries, market definition can be an important and complex issue. Should the relevant antitrust market be limited to just the new products or should it be expanded to include traditional products? In the Sirius-XM case, if the proper relevant market were limited to satellite radio, then the merger would be a merger to monopoly and therefore likely to be found to be anticompetitive; if instead the market also included traditional AM/FM radio, then the merger would have a small effect on market concentration and thus would be more likely to be permitted. Market definition analysis however is more complex when demand is dynamic than in mature industries with static demand.