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Market Definition with Differentiated Products - Lessons from the Car Market

  • Brenkers, Randy
  • Verboven, Frank

For a variety of reasons, it is likely that the market definition approach will remain an important tool in competition policy analysis for some time, despite the increased importance of other tools such as the simulation approach. Against the background of the new block exemption regulation for cars in Europe, we explore an econometric approach to define the relevant markets with differentiated products. On the one hand, the approach is directly consistent with the SSNIP-test, and it is in fact more satisfactory than previous approaches, such as critical elasticity analysis or the simple use of standard industry classifications. On the other hand, the approach shares a lot of features with the simulation approach (similar data requirements, and similar assumptions about current market power). We find that the relevant market for minivan cars is defined at the widest level, i.e. at the aggregate country level. Furthermore, in Italy the relevant markets for domestic cars are defined at an intermediate level, i.e. at the segment level. In all other cases, the relevant markets for cars may be defined at the narrowest level, i.e. at the subsegment level. Based on these results, we identify the firms that may violate the market share thresholds stipulated in the block exemption regulation. We find that, if we would have used an approach based on standard industry classifications instead of our econometric approach, our conclusions would have been different and, in fact, inconclusive. We also draw attention to other issues in market definition that may be of use to practitioners.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5249.

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Date of creation: Sep 2005
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Handle: RePEc:cpr:ceprdp:5249
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  1. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
  2. Goldberg, Pinelopi K. & Verboven, Frank, 2005. "Market integration and convergence to the Law of One Price: evidence from the European car market," Journal of International Economics, Elsevier, vol. 65(1), pages 49-73, January.
  3. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  4. Goldberg, Pinelopi Koujianou, 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry," Econometrica, Econometric Society, vol. 63(4), pages 891-951, July.
  5. Frank Verboven, 1996. "International Price Discrimination in the European Car Market," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 240-268, Summer.
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