Market Definition

  • Up until this point in the class, we’ve made two important assumptions about markets and market power:

    1. We have perfectly defined markets that both the plaintiff and defendant agree on.
    2. 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.


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