The relevant market is one that includes all the products and firms among which there is close competition. That is, it considers all the goods and services that, in the eyes of the consumer, are close substitutes. In addition, all firms that produce or could easily start producing the same goods or services are taken into account.
The relevant market is not an objective in itself, but rather seeks to determine the limits of a sector. This, in order to be able to analyze the degree of competition that exists in it, the possibility that a firm has a dominant position and the probable consequences on the well-being of consumers.
How is the relevant market determined?
The key to determining the relevant market is the substitution of differentiated goods. Whether the products are reasonable substitutes or not depends on two factors: (i) from the point of view of consumers, whether or not they consider that they are close substitutes (they have equivalent functions; and (ii), from the point of view of firms, of the ease in which they can begin to offer those products.
Usually, competition agencies use an iterative test called the "hypothetical monopolist test." This consists of imagining that there is a monopolist and questioning whether it would be able to increase prices and sustain the increase without losing profits. If the answer is negative, it is because consumers switch to other products or because other firms in the relevant market begin to offer the product.
What are the dimensions of the relevant market?
The relevant market two basic dimensions:
- Product dimension: It is the smallest group of products on which the hypothetical monopolist could profitably apply a price increase between 5% and 10%.
- Geographical dimension: It is the smallest geographical area where the hypothetical monopolist could profitably apply a price increase between 5% and 10%.
Some economists consider that there are also other dimensions such as:
- Time dimension: The season or time interval where firms act in the market.
- Functional dimension: The level in the production or distribution chain where the firms are located.
- Consumers dimension: The market can be subdivided into different sub-markets or segments according to the characteristics of the consumers.
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