Critical Loss Analysis with Differentiated Products

Wenqing Li, Nathan Petek and Hassan Faghani

A chapter in The Law and Economics of Patent Damages, Antitrust, and Legal Process, 2021, vol. 29, pp 27-53 from Emerald Group Publishing Limited

Abstract: When products are differentiated, applying the standard critical loss formula to assess whether it is profitable for a hypothetical monopolist to impose a common price increase can lead to delineating an antitrust market that is too broad by setting a critical loss threshold that is too low. This error is particularly likely to occur when the products exhibit very different per-unit profits, own price elasticities, and cross price elasticities. In particular, different per-unit profits are a necessary condition for this error to occur and this difference is more likely to be driven by an asymmetry in prices than by an asymmetry in costs when own price elasticities are moderate in magnitude. In contrast, differences in the quantity sold of each product do not tend to lead to errors in market definition. Given the issues associated with the standard critical loss analysis, critical loss analysis with asymmetric price increases and the gross upward pricing pressure index are practical alternative approaches for conducting market definition analysis when products in a candidate market are differentiated.

Keywords: Critical loss; market definition; hypothetical monopolist test; relevant antitrust market; codes: K21; L4 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rlwezz:s0193-589520210000029003

DOI: 10.1108/S0193-589520210000029003

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