A Comprehensive Look At The Critical Loss Analysis In A Differentiated Products Market

How to apply the standard critical loss analysis first proposed by Harris and Simon to a differentiated products market is not a straightforward task. Four different ways of conducting the critical loss analysis in a differentiated products setting have been proposed in the literature or implemented in antitrust practice: (1) the average-price-increase test, which treats the products within the candidate market as a single group and examines the profitability of the group as a result of a change in the average price; (2) the joint-price-increase test, which examines whether it is profitable for the hypothetical monopolist to impose a uniform price increase simultaneously on all products within the candidate market; (3) the single-price-increase test, in which a candidate market constitutes a relevant market if it is profitable to increase price on one product; and (4) the respective-price-increase test, according to which a candidate market constitutes a relevant market if it is profitable to impose a price increase on each and every product within the candidate market. In this article, we summarize how to implement each test and, for each test, provide the criterion that is required for a candidate market to pass the test (and thus to constitute a relevant market). Furthermore, the four tests are not equivalent in a differentiated products setting, and may lead to different results with respect to market definition. In this article, we will explore the relationships between the various tests and the limitations of some tests. This article serves as a practitioner's guide to implementing the critical loss analysis in a differentiated products setting.