Geographic Market Definition: Equivalence between Hypothetical Monopolist Test and Tampa Electric

The Sixth Circuit Court of Appeals has reversed a district court decision to exclude an economic expert’s testimony delineating the geographic market for milk in the Southeast United States. The District Court had ruled that the expert’s methodology, a hypothetical monopolist test, was unreliable because it did not conform to the standard that the Supreme Court articulated in 1961 in Tampa Electric Co. v. Nashville Coal Co. (Tampa Electric).

In Tampa Electric, the Supreme Court defined the relevant geographic market as “the area in which the seller operates, and to which the purchaser can practicably turn for supplies,” and further explained that the relevant market must “correspond to the economic realities of the industry and be economically significant.” The expert’s testimony was based on an application of the hypothetical monopolist test, which rests on the principle that the geographic market corresponds to the smallest region in which a hypothetical monopolist, as the only supplier of the relevant product, could profitably impose a small but significant and non-transitory increase in price (SSNIP).

The appeals court reasoned that for the hypothetical monopolist construct to be of value in a case, the area under consideration must include the locations of at least some of the buyers and some of the sellers, including areas from which the buyer could procure alternative supplies if prices increased, given the commercial realities of the marketplace. The court further opined that, applied in such a way, the hypothetical monopolist test and the Tampa Electric standard were practically equivalent, thereby setting the legal precedent that the district court had found was lacking.

The appeals court decision also addressed the question of whether the district court had erred in its determination that plaintiffs had to define a geographic market if the alleged anticompetitive conduct were evaluated under the rule of reason. The appeals court affirmed that a full rule-of-reason inquiry would necessitate proper market definition while a per se analysis would not. In this case, although the district court had correctly relied upon a rule-of-reason analysis, the appeals court concluded that no consideration had been given to whether a quick-look analysis would have sufficed. The appeals court clarified that it had characterized quick-look analysis as a third approach under which a satisfactory showing of anticompetitive behavior could proceed without a detailed review of the surrounding marketplace and thus without defining a geographic market.

Lona Fowdur has analyzed geographic markets in the contexts of mergers, acquisitions and other antitrust litigation. She previously wrote about the district court decision in this case for the Spring 2012 issue of Economists Ink.