Tuesday, June 19, 2007

Market Daffy-nitions

When I worked at GMU, one of the best experiences for me was freelancing as a junior associate with Bob Tollison on his antitrust consulting. I quickly (for me at least) learned three things. (1) big time lawyers are really smart, (2) never tell a client work they propose is unnecessary, and (3) anti-trust cases often come down to how the relevant market is defined, which is our present topic.

Consider the old proposed acquisition of Seven up by Pepsi. We (Pepsico) tried to define the market as "stuff to drink", while the government sought to define it as "nationally distributed flavored carbonated beverages". We set about estimating residual demand curves showing that a wide range of beverages were economic substitutes for soda and the battle was joined.

The foregoing is pertinent to the current antitrust proceeding against the proposed Whole Foods purchase of Wild Oats. The government is defining the market as "nationwide operators of premium natural and organic supermarkets", of which Whole Foods and Wild Oats are about all there is. Presumably, Whole Foods seeks to define the market as "places that sell food", where they are not even a drop in the proverbial bucket. My history probably biases me, but I gotta think the latter definition is more nearly correct than the former.

Anyway, if the past is any guide, economists will be hired, elasticities estimated, depositions taken, and then a judge will make a ruling based mainly on how much he liked or didn't like his personal experiences at Whole Foods.