New Developments on Relevant Markets Definition

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The Department of Economic Studies (DEE) of the Administrative Council for Economic Defense (CADE) had the opportunity to write a working paper in 2010 summarising some quantitative methods for defining relevant markets. This document, in turn, aims to give new perspectives on four approaches: (i) the critical loss analysis; (ii) the methodology that uses the aggregate diversion ratio; (iii) the use of simulations; (iv) the assessment of counterfactual scenarios. Briefly, this paper provides an updated list of quantitative methods for defining relevant markets. The DEE did not indicate, for instance, whether the previous working paper mentioned the use of simulations and counterfactual scenarios. This new paper also focuses on recent issues related to critical loss analysis, such as the debate about the interaction between intervals, that is, how the antitrust authority should conduct and determine whether it is facing a set of standard deviations of price elasticity of demand–robustly assessed by econometric tests–which is supposed to interact with another set of values (interval of critical values). Additionally, Annex II presents the concept of “generalised critical loss”, which had not been addressed before. Similarly, this document presents the concept of a “diversion rate” and an “aggregate diversion rate”, indicating in the Annex that the test may vary according to the circumstances. Again, this subject had not been properly covered in the previous document. Thus, the aggregated diversion ratio approach varies depending on whether: the residual demand is used, the demand is sensitive to price rise, there is a spillover to a neighbouring market, there is an asymmetry of diversion ratios, only one product suffers a price increase, amongst other issues that can intervene on its results. The aim is to indicate how the literature currently employs the cost pass-through rate and the aggregated diversion ratio to define relevant markets. The previous working paper only mentioned one case in which the critical loss analysis was used, considering CADE had not yet fully explored the method. The present document, on its part, indicates many other cases in which the authority adopted the above approach and different ones, such as the aggregated diversion ratio and the counterfactual scenarios approach. The increased use of these approaches is observed from an institutional perspective of the Department of Economic Studies. Therefore, this document presents a brief overview of this discussion within the Brazilian antitrust authority and the need for updates. Key-Words: Relevant Market; Critical Loss; Aggregate Diversion Rate; Aggregate Diversion Ratio; Simulation; Counterfactual Analysis; Cost Pass-Through Rate