Question

Define what is meant by a product and by a geographic market. Assume that thereare five firms in the market, each with 20 % of total sales. If two of these firms wanted to merge, would they be allowed to do so under the 2010 Merger Guidelines by the Department of Justice? Why?

Answer 1

*product market

Product market refers to the economic market place where final goods and services are traded.

When a product is sold by one merging firm A against one or more products sold by other merging firm the Agencies define relevant product market around the product A to evaluate the importance of that competition. Such a relevant productmarket consists of a group of substitute products including product A.

*Geographic market

A Geographic market refers to in area in which the conditions of competition applying the product concerned are the same for all traders. .

European court of justice has stated that

" the relevant Geographic market comprises the area in which undertakings concerned are involved in the supply and demand of products and services, in which the conditions of competition are sufficiently homogenous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas".

*In the example given,there are five firms and each of them have 20 percent market share.Since the two firms have equalmarket shares ,the merger option before them is horizontal merger . However as per the 2010 guidelines,merger won't be an option and the firms should not be allowed to merge

*The guidelines States that market concentration is is often one useful indicator of likely competitive effects of a merger.Hetfindahl -Hirschman index of market concentration(HHI) is calculated by summing the squares of the individual firm's market shares.

In our case HHI before meger is 2000{400+400+400+400+400)

After merger HHI=2800{400+400+400+1600(since the market share of merged firms is 40now)

Now we consider increse in HHI=2800-2000=800

Mergers resulting in highly concentrated market that involved and increase in HIV of more than 200 points will be presumed to be likely to enhance market power .But the presumption may be rebutted by persuasive evidence showing that the merger is unlikely to enhance market power.our case is the same as this.