Market Power Without Market Definition

ABSTRACT Antitrust law has traditionally required proof of market power in most cases and has analyzed market power through a market definition/market share lens. In recent years, this indirect or structural approach to proving market power has come under attack as misguided in practice and intellectually incoherent. If market definition collapses in the courts and antitrust agencies, as it seems poised to do, this will rupture antitrust analysis and create urgent pressures for an alternative approach to proving market power through direct evidence. None of the leading theoretic approaches--such as the Lerner Index or a search for supracompetitive profits--provides a robust solution. Further, one of the core premises in modern antitrust analysis--that the presence of high entry barriers is necessary to market power--is deeply flawed. Counterintuitively, the higher the entry barriers, the less likely it is that (1) the accused firm engaged in anticompetitive conduct and (2) the market would have been more competitive but for the alleged conduct. A robust approach to market power would require a tight nexus between the challenged conduct and a plausible competitive counterfactual. This Article articulates first principles of market power, diagnoses sources of confusion in the current caselaw, and scrutinizes the recognized methods of proving market power without reliance on market definition and market shares. INTRODUCTION Market power is an indispensable element in all antitrust cases except for those arising under the Sherman Act's rule of per se illegality. (1) Merger, monopolization, and rule of reason cases--the bulk of antitrust--require proof of market power to establish liability. (2) A showing of defendant market power has long been a "screen" through which plaintiffs must pass before advancing the merits of their complaint. (3) Traditionally, courts have required plaintiffs to prove market power by showing the defendant's share of a properly defined relevant market and then examining other structural factors such as entry barriers, demand elasticity, pricing transparency, and customer strength. (4) Market definition has been the necessary first step in this analysis and, because of its technical difficulty, a breaking point for many antitrust complaints. (5) In recent years, however, traditional market definition has come under severe attack in the legal academy and in the antitrust agencies. In 2010, the Justice Department and the Federal Trade Commission (FTC) drastically revised their Horizontal Merger Guidelines (Horizontal Merger Guidelines or Guidelines) and demoted market definition from the critical starting point to merely one available tool in merger cases. (6) Afterwards, Louis Kaplow, one of the most widely respected theorists of antitrust, published an article in the Harvard Law Review essentially calling the entire enterprise of market definition intellectually bankrupt and questioning whether market definition should ever be required. (7) Shortly thereafter, Herbert Hovenkamp, another highly respected antitrust academic and the senior author of the extraordinarily influential Areeda Antitrust Law treatise, (8) published a paper questioning the need to define markets in merger cases. (9) Given these and other developments, the handwriting is on the wall for market definition. If market definition falls, so does the entire structure of analysis built on top of it--which is to say, a whole lot of antitrust law--unless a suitable replacement can be found. But there is no clear candidate to take the place of traditional market definition as an indirect means of proving market power. While some caselaw recognizes the theoretical availability of "direct" approaches to proving market power (10) and academic theories abound, the existing theories and doctrines are a smorgasbord of incompatible and often incoherent recipes. Antitrust's analytical core is crumbling and there is no clear replacement. …