PRODUCT MARKET DEFINITION IN COMPETITION LAWclassic.austlii.edu.au/au/journals/FedLawRw/1980/27.pdf · do its job of informing and rewarding without its effectiveness being impaired

PRODUCT MARKET" DEFINITION INCOMPETITION LAW

By G. de Q. WALKER·

CONTENTS

I. THE ECONOMICO-LEGAL CONCEPT

Function 0/ the market concept

Underlying assumptions: degree and time

II. THE PRODUCT MARKET: A THREE-STAGE ANALYSIS

Price relationships and sales-purchase patterns

A three-stage approach

1. Identical products2. Differentiated products

3. Substitute products or distinctive substitutes

Ill. DISTINCTIVE SUBSTITUTES

1. Demand substitution

Meaning and context

Cross-elasticity 0/ demand

• Arbitrage

• Symmetry• Price and cost

2. Supply substitution or production flexibility

Clustering errors

3. Substitute products: some conclusions

IV. OF SPARE PARTS AND SUBMARKETS

Spare parts and attachments

Sub-markets

v. EnDENTIARYA~EC~

Presumptions and judicial notice unavailable

Relevance 0/ trader perceptions

VI. CRITIQUES AND POSSIBLE SOLUTIONS

* LL.B. (Syd.), LL.M., S.l.D. (Pennsylvania); Senior Lecturer, Faculty ofLaw, Australian National University. The author acknowledges his indebtedness toDr Philip Williams, Department of Economics, University of Melbourne, for hishelpful suggestions and comments, while reserving to himself responsibility forthe article's shortcomings.

386

1980] Product Market Definition in Competition Law

I. THE ECONOMICO-LEGAL CONCEPT

387

Although some concept of a "market" is inherent in all systems ofcompetition law, the Trade Practices Act 1974 (Cth) is striking in thatit expressly makes liability under most of its substantive sections(sections 45, 46, 47, 49 and 50, but not section 48) depend in oneway or another on the identification of a market or markets in whichcompetition has been injured by the impugned conduct. This is becauseat the time when the Trade Practices Act 1974 came to be drafted, theconcepts of market definition and market control had evolved to a highlevel in other jurisdictions, particularly in the United States.

Now, however, after five years' experience with market definitionunder the 1974 Act, the Australian doctrine should have its owncontribution to make. It should be rewarding, therefore, to attempt tostate the principles that have so far emerged, in light also of cases andwritings in the major overseas antitrust systems, those of the EuropeanCommon Market and the United States. Since market definition oftendetermines the outcome of suits or applications under the Trade PracticesAct, these principles have practical as well as conceptual importance.

Function of the market conceptThe economist Alfred Marshall considered a market to be the

collection of buyers and sellers who are "in such free intercourse withone another that the prices of the same goods tend to equality easilyand quickly". Originally a market was a public place in a town wherelnerchandise was exposed for sale, but now such a distinction of localitywas not necessary: "The traders may be spread over a whole town, orregion of country, and yet make a market, if they are, by means of fairs,meetings, published price lists, the post-office or otherwise, in closecommunication with each other".l

The element of communication is crucial, for a competitive marketis essentially an information system. It transmits data which enableproducers, day by day, to adjust their operations to changes in consumertastes, in technology or in the availability of materials (indeed, if thesefactors were not continually changing there would be no need foreconomic decision-making at all). Through the market, the firm'ssuppliers tell it how much of their raw materials they are prepared tosupply at different prices, and buyers tell the firm each time they makea purchasing decision what products they want and what quantitiesthey are prepared to take at various prices. The market gives all producers an incentive to emulate those who best adapt to, and make useof, change. The contest among suppliers to respond most effectivelyto changes in demand and supply conditions is the process calledcompetition.

1 Marshall, Principles 0/ Economics (8th ed. 1920) 324-325, quoting Coumotand Jevons.

388 Federal Law Review [VOLUME 11

All competition therefore presupposes the existence of a market, andall competition law is designed to keep the market mechanism free todo its job of informing and rewarding without its effectiveness beingimpaired by sellers who form cartels or exploit dominant positionswhich enable them to ignore, at least for a time, the signals from themarket.2

Alfred Marshall's definition relates to the geographic aspects of themarket. A homogeneous product is assumed by the words "the samegoods". For the purposes of applying competition law, however, onemust consider not only the geographic dimensions of the market, but theproduct market (which includes goods or services closely substitutablefor those of the parties under scrutiny) and the functional level inquestion (such as manufacturing or importing, wholesaling or retailing).When a market is defined in these terms, one is in effect saying that ifprices were appreciably raised for the product within a given area,supply from outside could not be expected to enter quickly enough andin sufficiently large amounts to restore the old price. Defining the markettherefore identifies those sellers who, if they all chose to act in concert,would have effective monopoly power, at least in the short run.s

Conversely, it identifies the sellers who currently are (or should be)competing among themselves and whose actions will thus limit oneanother's market power.

The market is thus the arena for the primary demand and supplyforces that determine the price of the product to which the conductunder legal scrutiny relates. Of its three dimensions-product, geographicand functional-the product market is the one that seems to give riseto the greatest controversy. It is therefore the central concern of thisarticle.

The anti-competitive impact of a given act, a restrictive agreement forexample, could be measured by several means. An economist mightprefer to plot the demand curves facing companies X and Y before theyentered into a price-fixing agreement with each other and compare themwith the demand curves facing the two companies after the agreementhad been put into effect. These functions would necessarily subsume andaccount for the dimensions of the market, the availability of substitutes,the respective market shares of X and Y, the possibility of new competingentry and all the other factors normally considered in reaching aconclusion on anti-competitive effect. If, for example, it appeared froma comparison of the two curves that before the price agreement betweenX and Y, X could sell 500 widgets per week at $10 each but only 400if the price were raised to $11, whereas after the agreement had comeinto force X could raise the price to $11 with a much smaller loss ofsales (and an increase in profit) one might conclude that the agreement

2 See generally Friedman and Friedman, Free To Choose (1980) 15-18.S See re Tooth & Co. Ltd; re Tooheys Ltd (1979) 2 A.T.P.R. 18174, 18197.

1980] Product Market Definition in Competition Law 389

had substantially lessened competition and had given X and Y a measureof monopoly power.

In practice, however, it is difficult to obtain accurate informationabout the demand curves facing individual firms4 (the word "firm" herebeing used in its economic, not its legal, sense). The Act implicitlyacknowledges this and prescribes the use of the market definitionapproach, which is more practicable, if somewhat less intellectuallysatisfying for an economist. This approach gives a picture of the relativesizes of the parties whose conduct is under scrutiny. This informationwill not in itself be a sufficient basis for drawing conclusions aboutcompetitive impact, but it is a start for an analysis of the structure ofthe market. Other structural data and whatever evidence is available ofmarket conduct and performance can be added later.o

Although this simplified method will result only in an approximation,and it has been criticised for this reason (as will be seen infra), it shouldat least identify markets which are dominated and in which no furtherrestriction of competition should be tolerated without good reason.Further, in the process of applying the principles of market definition,the tribunal of fact will gain insights into other aspects of the marketwhich are important for making its ultimate judgment on the issue ofanti-competitive effect: barriers to entry, the significance of productdifferentiation, the impact of government regulation and the like. It hasthe further advantage of relative predictability, consistency, and of beingreasonably well understood by the business enterprises to which it willbe applied. If properly applied, the market definition approach willallow a court, tribunal or commission to avoid many errors into whichit might otherwise fall.

In the 1958 Western Australian Cement case,6 for example, a cementproducer charged with monopolisation under a State monopoly Act wasable to defeat the allegation by showing that it faced competition fromother building materials. Pre-stressed concrete used less cement thanearlier building materials, while glass, aluminium, plastics and woodwere all causing a decline in the demand for cement. The defendantwas, nevertheless, the only supplier of cement, and if the product markethad been defined according to now accepted principles, the otherproducts would not have been included in the relevant market unlessthey could be described as "good substitutes", which probably theywere not. The decision might thus have gone the other way.

In an early case under the Trade Practices Act 1974, the AustralianIndustrial Court in Top Performance Motors Pty Ltd v. Ira Berk(Queensland) Pty Ltd refused to hear any evidence on the question of

4 l\1a:011, "Price and Production Policies of Large-Scale Enterprise" (1939) 29American Economic Review 61, 69.

o See Walker, "Structure, Conduct and the Test of Competition in Australia"(1976) 21 Antitrust Bulletin 657.

6 R. v. Wallwork; ex parte Cockburn Cement Pty Ltd (1957) S9 W.A.L.R. 49.


market definition.' It reached the conclusion that Datsun cars constituteda market in themselves on the basis, apparently, of unarticulated inferences at large. Similarly, the New South Wales Industrial Commissionwhen applying the Monopolies Act 1923 (N.S.W.) purported to discussquestions of. competition and monopoly in some detail without anyexplicit analysis of the boundaries of the market.8

Underlying assumptions: degree and time

If one puts aside the difficulties of gathering complete and reliableinformation on ever-changing market conditions, it is theoreticallypossible to say that for every product there is only one relevant market.There are not several possible ones. But this is true only if one holdsconstant two crucial assumptions. The first assumption is the questionof degree-where to draw the dividing line between the degree of marketpower that one is prepared to tolerate and the degree of market powerthat one seeks to prevent. As described supra, a market consists of agroup of sellers who, because of the context of supply and demand inwhich they work would, if they acted in concert, be able to raise pricesor restrict production, thereby increasing their individual profits. But inorder for them to be treated as a market, what margin of pricing freedomshould they have before substitute products or supplies from outsidethe area are drawn in? Intuitively, one would be inclined to say that a20 percent margin would be more than enough, whereas one percentwould be insufficient. A line must therefore be drawn; and if there is tobe consistency in market definition, the assumption about the acceptabledegree of power that constitutes a market must be the same in all cases,or should at least be quantifiable.

One possible solution to the problem of degree is Professor Breyer'ssuggestion that the market should be defined differently according to theperceived gravity of the contravention charged. This would entaildefining the market in an exclusive dealing case, for example, so as togive parties the benefit of a broader market definition by treating apower to increase price by three or four percent as not being an indication of a separate market. In a more serious case, such as an allegedmarket-sharing agreement, quite small degrees of market power wouldbe taken to indicate a separate market, since such undesirable forms ofbehaviour should not be allowed to eliminate even small amounts ofcompetition.' The United States Supreme Court supported this approach

, (1975) 24 F.L.R. 286, 1 A.T.P.R. 17113. The ruling appears in the transcript,not the judgment: see "Recent Cases" (1976) 50 A.L.J. 89, 91.

8 E.g. Rowan v. Carlton & United Breweries Ltd [1967] I.A.R. (N.S.W.) 144;Report of the Industrial Commission of New South Wales in Respect to the Pricesof Bricks ... [1938-40] N.S.W. Parliamentary Papers Vol. 8, 547.

S Breyer, "Five Questions about Australian Antitrust Law" (1977) 51 A.L.I.28, 34-35. Contrast Schroter, "Le Concept de 'Marche en Cause' dans l'Applicationdes Articles 66, Paragraphe 7, du Traite CECA et 86 du Traite eEE" in Regulatingthe Behaviour of Monopolies and Dominant Undertakings in Community Law,


in United States v. Continental Can CO.,11 which dealt with a mergerbetween a can producer and a glass container manufacturer. In thatcase, while holding that glass bottles and metal cans were in the samecontainer packaging market, the Court implied that each could be treatedas a separate product market if a merger were to occur between twobottle manufacturers, notwithstanding that the merged entity wouldstill face competition in the general container market.

It is difficult to imagine the Australian courts explicitly re-writing theTrade Practices Act in this way, though the Federal Court appeared todo so in J. Ah Toy Pty Ltd v. Thiess Toyota Pty LttP1 in a brief judgment that applied different market definitions in successive paragraphs.Ah Toy may be only an aberration, but a teleological element is boundto intrude to some extent. It does seem likely, perhaps even inevitable,that the courts will take a stricter view of market definition where theconduct charged is blatantly monopolistic and predatory than where it isof a more neutral character.

The second assumption relates to the time factor. Over a period, aposition of market power will tend to be eroded as customers tum toother products as substitutes for the monopolised one ("cross-elasticityof demand"), and as other suppliers, seeing that the cartel or dominantconcern is able to reap monopoly profits, enter the market in order toshare in some of those profits and, by increasing the supply, ultimatelyincrease competition and drive the price down ("elasticity of supply").Thus, in the 1940s, when both the supply of and the demand for coalwere thought to be inelastic, a coal monopoly or cartel would have beenregarded as having great market power. Over time, however, coal usershave turned to other sources of energy, such as hydro-electricity, oiland gas, while the opening of vast new coalfields has shown that thesupply of coal itself is elastic. But this substitution took' some years.What time lag in substitution should be regarded as being too long toqualify the alternative product or alternative producer as -being withinthe relevant market?12 The reaction time which we would tend to regardas too long will vary with the nature of the product, but, in general,where the appearance of new rivals is contingent on their constructingplant, those rivals are not treated as operating within the market. Adelay of twelve months might be too much in the ready-made clothingindustry, but not in the mining industry, where lead-times for expansionare much longer. If a time factor which is too short is assumed, the

College of Europe Bruges Week 1977 (hereinafter called Bruges Week) 460,466-469.

10 (1964) 378 U.S. 441.11 [1980] A.T.P.R. 42216.12 The question usually arises in the context of the product market; supplies of

most commodities can be brought in from other geographic areas relativelyquickly, whereas developing substitutes or expanding competitive productivecapacity normally takes much longer.


market will be defined too narrowly, thereby overstating the power ofthe parties to disregard competition; their power will be understated iftoo large a time factor is assumed. This assumption also, therefore, is amatter of judgment, but it should be based on an analysis of evidenceabout the particular industry and not on inferences at large. The TradePractices Tribunal, at least, is now beginning to articulate the timeassumption. In re Tooth & Co. Ltd, it declared the law's primaryconcern to be with longer-run, rather than short-run, substitutionpossibilities.IS

Insufficient attention to either of these assumptions gives rise tomarket definitions that are hesitant and unpredictable, or which attemptto vary the assumptions by having a little each way_ The spurious useof the submarket concept, discussed infra, is an instance of an attemptto give respectability to the practice of taking two bites at the marketdefinition cherry.

II. THE PRODUCT MARKET: A THREE-STAGE ANALYSIS

Product market definition is an inquiry into whether the product has"market alternatives that buyers may readily use for their purposes"..14

If the commodity in question is not a final product but somethingused in making another product, the focus of the inquiry is still themarket in which the component is traded, not the market for the ultimatederivative. An ingenious attempt to confuse the issue in this respectwas made in the Common Market case Commercial Solvents Corporationv. European Communities Commission.1s The defendant chemical companies, in response to allegations that they had abused a dominantposition in nitropropane and other chemical compounds used in makingthe anti-tuberculosis drug ethambutol, contended that the relevantmarket for determining the dominant position was that for ethambutol,not nitropropane. But ethambutol did not constitute a product marketin itself, being in competition with other anti-tuberculosis drugs whichwere to a large extent interchangeable. The defendants argued that sincethere was no separate market for ethambutol, it was impossible toestablish a separate market for the raw material used in manufacturingit. The European Court of Justice replied that although examining theeffects of the conduct in the market for anti-tuberculosis drugs wouldhelp in assessing the impact of the alleged contravention, it was nevertheless irrelevant in determining the relevant market for the purpose offinding whether a d0minant position existed or not. A market in a raw

13 (1979) 2 A.T.P.R. 18174, 18196. The Common Market doctrine makes useof the time factor, but so far not explicitly for market definition. See Schroter, Ope

cit. 520-522.14 United States v. E.I. DuPont de Nemours & Co. (The Cellophane Case)

(1956) 351 U.S. 377, 394.10 [1974] 1 C.M.L.R. 309.


material necessary for the manufacture of a product could be distinguished from the market in which the product was sold.

Price relationships and sales-purchase patterns

(a) Price relationships are the primary test for determining whethertwo products belong in the same market. Two products are part of thesame market if a small change in price or output causes a significantdiversion, in a relatively short time, of the buyers' purchases or thesellers' output from one product to the other. (The words "small changein price", "significant diversion" and "relatively short time" point to theunderlying assumptions about degree and time referred to supra. )Conversely, the absence of any such relationship suggests that the products are in different markets.

In St Regis-ACI Pty LttP6 the Trade Practices Commission, inconcluding that bulk insulation was not in the same market as foilinsulation, relied in part on the significant difference in cost to the userbetween foil and bulk insulation. An average-sized house could beinsulated with foil at a cost of $443, but bulk insulation for the samehouse would come to $970. A close price relationship must be observedover a considerable period of time, though, in order to minimise the riskthat spurious connections will be drawn between products which arereally only responding separately to a totally extraneous factor, such asan OPEC price rise or a national wage increase.

(b) Evidence of sales and purchase patterns is particularly usefulwhere, as is often the case, the information on price relationships isinadequate or ambiguous.17 Where a change in price results in manybuyers shifting their purchases from one product to another or in othersellers diverting a substantial portion of their production to the productfor which the price has increased, a single market is indicated. In lamesHardie & Co. Pty LttP8 the Commission's finding that asbestos-cementproducts had a number of substitutes, such as bricks, concrete blocks,plasterboard, hardboard, metal and fibreglass, rested on evidence showingthat buyers would use either asbestos-cement sheeting or brick, steel, orother products, depending on factors such as the quality of the construction, the height of the building, and whether scaffolding was required.1'

Again, in Q.C.M.A.,20 the Trade Practices Tribunal gave weight to the

16 [1976] A.T.P.R. 16156. The European Court seems to attach somewhat lessimportance to price relationships: Europemballage Corp. and Continental Can Co.Inc. v. E.C. Commission [1973] C.M.L.R. 199, 225-228; Kali & Salt. A.G. v. E.C.Commission [1974] 1 C.M.L.R. Dl (E.C. Commission); [1975] 2 C.M.L.R. 154,171 (E.e.J.); Schroter, Ope cit. 500-502.

17 Areeda and Turner, Antitrust Law (1978) ii, 354.18 [1977] A.T.P.R. 16101.19 Contrast St Regis-ACI Pty Ltd [1976] A.T.P.R. 16156 and RSR Corporation

v. F.T.C. [1979] 2 Trade Cases 78433, the latter case having a particularlymethodical and clear discussion and application of market definition.

20 Re Queensland Co-operative Milling Association Ltd (1976) 25 F.L.R. 169,1 A.T.P.R. 17223.


fact that bakery flour, as opposed to other kinds of flour, was sold to adistinctive set of customers. However, it found that baker's flour wasonly a sub-market, the relevant product markets being flour and bread.

Areeda and Tumer21 maintain that evidence of price relationshipsover time will be sufficient for delineating market boundaries if used inconjunction with evidence of sales and purchasing patterns. But reliableand complete data on sales and purchasing patterns are no easier tocome by than complete and accurate data on price relationships. Areedaand Turner themselves seem to acknowledge this when they approvejudicial reasoning which gives weight to engineering factors, such as theadaptability of production equipment to making a different product,whether or not these factors could be observed as price movements oras sales and purchasing pattems.22

These practical and conceptual difficulties mean that it would seldombe possible to prepare a product market definition case based solely onsome combination of coefficients of cross-elasticity (discussed infra)with sales and purchasing patterns that would withstand well-informedcross-examination. The evidence on this issue is therefore likely toconsist of a mixture of quantitative data of the kind mentioned supra,when available, together with information of a more qualitative ordescriptive kind.23

A three-stage approach

One workable method of assembling these different kinds of evidenceis to take a three-stage approach, each step representing a lower degreeof substitutability than the previous one. The first stage would look atthe products sold by the parties and all other products identical withthem. The second stage would consider goods or services which arephysically and functionally similar to those produced by the parties butare differentiated from them, whether by reason of quality differences,advertising or different methods of production. The third stage would beto consider whether the goods or services sold by the parties havesubstitutes, that is, products which serve the same purpose but arephysically different. Good substitutes would be within the productmarket, poorer substitutes would be outside it. This three-stage processshould show us the market choices available. Each of these three stagesmay now be considered.

(1) Identical products

The products sold by the parties whose conduct is under scrutinyobviously form part of the relevant product market. So do the productssold by other parties which are identical with the parties' in physical

21 Ope cit. 3S 1.DId. 429-431.23 It was partly for this reason that the Swanson Committee's recommendation

that the Act should define "market" in terms of strict cross-elasticity of demandwas rejected. See Trade Practices Act Review Committee Report (1976) para. 4. 22.


and chemical composition, in function and in the methods used toproduce them. In re A.C. Hatrick Chemicals Pty Ltd,'lA the TradePractices Tribunal treated all phthalic anhydride as homogeneous; inre Howard Smith Industries Pty Ltd,25 it included in the relevant productmarket all tug-boat services suitable for ships of 5000 tonnes or over.Similarly, the Commission's determination in John Lysaght (Australia)LttPi' treated imported steel sheet and coil as belonging in the sameproduct market as sheet and coil manufactured by Lysaght.

Even in this simple case, though, one is confronted at the outset witha problem of classification. What should be included in the productmarket, a supplier's output, or only its sales? There could be a greatdifference between the two figures if the supplier uses a significantproportion of its output as a raw material in its own integrated manufacturing operations. The earlier view in the United States was thatoutput produced by a supplier for its own use, and which thereforenever found its way into the market, was not to be counted as part ofthe market.27 But from the Alcoa case28 onwards, it has become acceptedthat self-used output should be included in the market. The reasonsgiven for so doing never go much beyond the explanation given byJudge Hand in the Alcoa case itself: that Alcoa's consumption ofaluminium ingot in its own fabricating operations pro tanto reduced themarket demand for ingot itself, thereby influencing the price. This is notentirely convincing.29 While it is true that self-use of a product reducesthe size of the market for it, the influence of self-used products on themarket price is indirect, in contrast to the direct influence exerted bysupply which actually finds it way onto the market. No doubt it represents capacity which could potentially be turned to supplying the market,but being a purely background influence, it could be taken into accountin this way at some later stage of the competition analysis, rather thanin the context of market definition.

lr;iAustralia (and the Common Market), so far, the Alcoa approach hasnot been accepted. In Comeng Holdings Ltd,30 the Commission excludedfrom the railway rolling-stock market all rolling-stock manufacturedby government railways for their own use. In John Lysaght (Australia)Ltd,S1 the C!ommission excluded steel sheet and coil manufactured by

SI (1978) 18 A.L.R. 129, 1 A.T.P.R. 17578.25 (1977) 28 F.L.R. 385, 1 A.T.P.R. 17324.26 [1978] A.T.P.R. 17304.27 United States v. Pullman Co. (1943) 50 F. Supp. 123; United States v.

American Can Co. (1916) 230 F. 859'; Whitney, Antitrust Policies (1958) ii,197-199.

28 United States v. Aluminum Co. of America (1945) 148 F. 2d 416.29 Cf. Scherer, Industrial Market Structure and Economic Performance (1970)

459; Schroter, Ope cit. 506.30 [1975] A.T.P.R. 8845-8.31 [1978] A.T.P.R. 17304.


Lysaght but further processed into Lysaght building and industrialproducts.

Which party will benefit from the American approach as against theAustralian approach? This will depend on whether the self-used outputis produced by the defendants or by their competitors. If it is producedby ~he defendants, the American approach will make the defendantsseem more powerful, by making their market share loom larger. If it ispr09uced by the defendants' competitors, the Australian approach willmake the defendants look more dominant. As was said supra, nonmarketed output will usually need to be taken into account at somestage of the competition evaluation, and it may not much matterwhether it is done at the market definition stage or later on, in thecon~ext of entry and potential competition. But once the decision hasbeen taken as to whether to exclude self-used output or not, the needfor consistency should influence the answers to some other problemsarising later in the market definition process, namely, whether to includeunused capacity in the product market and whether to include thecap*city of production facilities which are used interchangeably to makeboth the relevant product and something entirely different.

So far the argument has assumed products which are physically andfunctionally identical and which are produced by identical methods. Ifthe assumptions are varied slightly so as to include physically andfunctionally identical products which are produced by different methods,a second problem arises. This is the question of secondary, or recycledoutput. In the Alcoa case,32 Alcoa's "virgin ingot" (made from bauxite)was in fact competing with "secondary ingot" made by other companiesfrom scrap aluminium. The two kinds of ingot were physically andche~ically identical, although virgin was preferred for some purposes,such, as aviation. The Court excluded the secondary ingot from therelevant market, however, on the ground that it was not in fact incompetition with Alcoa's ingot. The reason was that at the time whenit was originally produced Alcoa had control over its production andsale.

This reasoning has been attacked in the United States on the groundthat it is simply unreal to suppose that production decisions are to anydegree influenced by calculations about the amounts of the productlikely to find their way back- onto the market in recycled -form in yearsto come.33 Moreover, the amount of aluminium scrap smelted would befar more likely to be a function of the current price for scrap aluminiumthan of any calculation on the part of the supplier ten years before. Butin a recent decision involving lead, a Circuit Court of Appeals has heldthe primary and secondary metals to be in separate markets.34

82 (1945) 148 F. 2d 416.33 Scherer, loco cit.; Sullivan, Ope cit. 46; Singer, Antitrust Economics (1968) 46.14 RSR Corporation v. F.T.C. [1979] 2 Trade Cases 78433.


The problem of secondary ingot arose in Australia in the ComalcoLtd and Nonferral Pty Ltd authorization matter,35 again in the contextof the aluminium industry. Although the Trade Practices Commissiondid not have to deal squarely with market definition because no publicbenefit had been shown, it did seem inclined to treat primary output,secondary output and imports as all forming part of the same productmarket.

(2) Differentiated products

The next stage in the gradation of products from homogeneous topoor substitutes is that of differentiated products.

Product differentiation describes buyer preferences stemming fromsuch causes as goodwill, habit and brand advertising, or from betterproduct design made possible by possession of patent licences or knowhow. Product differentiation has the effect of appearing to reduce thehomogeneity of competing products in the market and consequentlylessening the elasticity of the demand curve facing the individual seller.This in tum reduces the pressure on the seller to compete on price andcan make it more difficult for a newcomer to become established. Adifferentiated product gives the seller a degree of market power.

An early illustration of product differentiation in Australian tradepractices law arose in the Frozen Peas case36 before the Trade PracticesTribunal. In the course of the evidence in that case it appeared thatBird's Eye frozen peas commanded a slightly higher price than all otherbrands. Several Trade Practices Commission decisions have noted thisphenomenon in other markets. In the Shell authorization case,37 theCommission found that product differentiation made it possible tomaintain a price difference of around three cents per gallon (0.6 centsper litre) between branded and unbranded motor gasoline becauseconsumers had confidence in the brands of the major oil companiesand in the performance-enhancing qualities of the additives used bythose companies. Beyond that, most consumers appeared to believe that"petrol is petrol"; the market did not differentiate among major brandsthemselves, and prices for these were likely to remain closely parallel.Again, when deciding the application by Canada Dry Corporation forclearance to acquire the carbonated beverage division of Cottee's GeneralFoods, the Commission attached some weight to the fact that a newentrant, even an expert one, seeking to become established independentlyab initio would face problems in promoting the new brand and gainingcustomer acceptance in the face of the brand preferences already builtup by existing sellers.3s

35 [1979] A.T.P.R. 16796.36 Re Frozen Vegetables (1971) 18 F.L.R. 196. The relevant passage appears in

the transcript of evidence, 173.37 Shell Co. of Australia Ltd [1975] A.T.P.R. 16701.S8 Canada Dry Corporation [1975] A.T.P.R. 16105.


The seller of a differentiated product may command some priceadvantage, but his margin of pricing freedom is limited by the existenceof the other sellers and by the possibilities of new entry, even though anentrant, confronted with established consumer preferences, will not facequite the same demand conditions as the established seller. Pricemovements among differentiated products may be closely correlated. Ifthe retail price of petrol is reduced by either a major company or aprivate brand chain, the usual result is that other sellers will match thedecrease in part or in full. Consequently, it would seem reasonable totest possible contraventions of the Act in a market comprising all brands,whether differentiated or not. To treat each differentiated brand as amarket would be unreasonably stringent, unless the courts adopt theBreyer approach of varying the underlying assumption about the degreeof competition to be protected in cases where the challenged conduct isparticularly objectionable.

In Australia the practice has indeed been to include differentiatedproducts within the relevant product market. This was done in theFrozen Peas,· Shell40 and Canada Dry41 cases before the Tribunal orthe Commission. The Federal Court in the Ansett case, after consideringthe evidence of product differentiation, did likewise:

Differentiation in service provided does exist. Avis claims that itsfacilities are such that it can provide a car rental service throughoutAustralia, that its presence at Commonwealth airports provides aservice which cannot be matched by the other operators, its twentyfour-hour service and its delivery service all illustrate the provisionof a service of a higher standard than that provided by its competitors.... [N]evertheless [Avis] is conscious of the lower ratescharged by other operators and ensures that the gap between thetwo does not become too great.42

That passage describes a classic case of product differentiation. TheCourt was therefore justified in treating Avis as being part of a marketembracing smaller operators, even though some of these did not offerthe same range of services as Avis.43

There can be cases, however, where product differentiation has beenso successful that other commodities, although physically and functionally similar, can at best be regarded as substitutes and perhaps even

39 (1971) 18 F.L.R. 196.40 [1975] A.T.P.R. 16701.41 [1975] A.T.P.R. 16105.42 T.P.C. v. Ansett Transport Industries (Operations) Pty Ltd (1978) 32 F.L.R.

305, 338.43 An example of undue weight being attached to a non-functional differentiation

may be found in the decision of the English Restrictive Practices Court in re NetBook Agreement [1962] L.R. 2 R.P. 246, 308. There the Court took the view that"net books" (books which were subject to resale price maintenance) were in aseparate part of commerce from ordinary books, simply because the publishershad designated them as net books, which meant that they had to be dealt withdifferently in trade: "they are an identifiable and distinct kind of commodity".


poor substitutes. Price movements, purchasing patterns and otherindicators may no longer be correlated. It is at this point that differentiation shades into the next gradation, that of substitute products.

(3) Substitute products or distinctive substitutes

The problem of substitute products, or distinctive substitutes, hasgiven rise to so much difficulty and debate that a separate section isdevoted to it.

III. DISTINCTIVE SUBSTITUTES

The boundary of the product market will often be claimed to liesomewhere in the "substitutes" sector-that part of the spectrum ofsubstitutability which deals with goods or services that are different fromthe product in question in design, physical nature or chemical composition. The decisions reached in this sector are thus often controversial.They are also sometimes contradictory, as the history of Commissionmarket definition in soft drinks shows. In Coca-Cola Operations PtyLtd," the Commission included all carbonated beverages in the relevantproduct market, but excluded fruit juices and cordials on the groundthat they were not closely substitutable for carbonated soft drinks. Later,in Canada Dry Corporation45 the Commission defined a soft drinkmarket which consisted of carbonated soft drinks, fruit juices andcordials. In Coca-Cola Export Corporation46 the Commission appearedto hanker after a return to carbonated beverages alone, but swung backin Cadbury Schweppes Pty Ltd47 to a still broader market consisting ofcarbonated drinks, fruit juices, cordials and milk (particularly flavouredmilk), with sub-markets for each of these classes and also for productsdistributed by different methods.I The dictionary definition of the verb "substitute" is to put a thing inplace of another. In case this should be taken to mean that the otherproduct must be virtually identical, like a spare part to replace a wornmachine component, the words "or otherwise competitive with" insection 4E show that this was not the intention.

Nevertheless, "substitutable" in section 4E is, and must be, taken tomean closely substitutable. Otherwise, the resulting market delineationwill greatly understate market power, because in one sense all productsare substitutes for one another. As Chamberlin pointed out, "the only

The Court's finding was not made precisely in the context of market definition butfor a closely analogous purpose.

44 [1975] A.T.P.R. 8904; also Diverse Products Ltd [1975] A.T.P.R. 8845-27.45 [1975] A.T.P.R. 16105.46 [1978] A.T.P.R. 17329.41 [1980] A.T.P.R. 17094. It can be argued that these decisions might not be

contradictory if the different results stemmed from defining the market withreference to the individual firm or firms in question (see Mason, Ope cit. 69). Butnothing in the Commission's published reasons points to this.


perfect monopoly conceivable would be one embracing the supply ofeverything, since all things are more or less imperfect substitutes foreach other".48 In practice, the Trade Practices Tribunal has explicitlyand consistently defined the product market in terms of close substitutes,rather than using a wider "reasonable interchangeability" test such asthat in the Cellophane case.49 The question of close substitutability asagainst reasonable interchangeability has yet to be argued before theFederal Court, but the approach so far implicitly taken by the Court isconsistent with the Court's having adopted the Tribunal's position. Thepossibilities of substitution in supply, as well as substitution by customers,must also be considered.50

Here, as elsewhere in the market delineation process, the task is toidentify a group of sellers who would collectively possess substantial, ifshort-term, market power. If they were to join forces by merger or bycollusion, they would be able to increase their profits by raising pricesor offering poorer terms without their market share being substantiallyundermined by rivals.51

( 1) Demand substitution

Meaning and context

Demand substitution means that a distinctive product-one which isphysically different from the product in question-is to be brought intothe market if buyers can switch to a substantial extent from one productto the other.52 If substantial substitution can take place within theaccepted time interval, the exclusion of the other source of supply willtend to overstate the supplier's market power. In B.P. v. EuropeanCommunities Commission53 the European Court of Justice considereda Commission finding that during the period of the OPEC oil crisis inEurope (between November 1973 and March 1974) there was for thepurposes of Article 86 of the Treaty of Rome a relevant market forpetroleum products among B.P.'s normal customers (or, at most, amongits customers generally) in the Netherlands, because during that periodcustomers were entirely dependent on their normal suppliers.

48 Chamberlin, The Theory of Monopolistic Competition (6th ed. 1950) 65.49 (1956) 351 U.S. 377. See re Tooth & Co. Ltd; re Tooheys Ltd (1979) 2

A.T.P.R. 18174, 18196; re Howard Smith Industries (1977) 1 A.T.P.R. 17324,17336; Q.M.C.A. (1976) 1 A.T.P.R. 17223, 17247. Close substitution was alsothe formulation preferred by Bain, Price Theory (1952) 25.

50 Re Tooth & Co. Ltd (1979) 2 A.T.P.R. 18174, 18196; re Howard Smith(1977) 1 A.T.P.R. 17324, 17336.

61 Re Tooth & Co. Ltd (1979) 2 A.T.P.R. 18174, 18197; Posner, Antitrust Law(1976) 126.

52 Ct. re Tooth & Co. Ltd (1979) 2 A.T.P.R. 18174, 18196. Australian StandardIndustry Classification (ASIC) categories compiled by the census authorities areof little value in delineating the market, partly because they exclude substitutesentirely: Walker, Ope cit. 663-665; de long, "The Relevant Market" in BrugesWeek 524, 529-530.

53 [1978] 3 C.M.L.R. 174.


The Commission's decision was reversed on another ground, withoutcriticism of the market as delineated. However, Advocate-GeneralWarner pointed out that in a temporary emergency of this kind, a tradercould not distribute scarce supplies regardless of the attitude of customers.He must bear in mind that, "once the emergency is over, they will havememories of the way in which they were treated by him during theperiod of scarcity. Contractual customers will expect the favourabletreatment to which their contracts entitle them. . . . A supplier candisregard those considerations only at the peril of losing customers tohis competitors after the emergency is over. So I do not think that heis, during the emergency, in a dominant position ...".54 This concessionsuggests that the Commission's market definition was thought, no doubtrightly, to have paid insufficient attention to the time factor describedabove.

The possibilities of buyer substitution may vary at different levels inthe production and distribution of the same goods. An aluminiumsaucepan may be a substitute for a steel saucepan from the consumer'spoint of view, but a manufacturer of aluminium saucepans is notnormally in a position to switch readily to using steel. For that reason,the product market as defined in Ira BerkOO-Datsun cars-was probablycorrect, even though the reasoning was not. A Holden may be asubstitute for a Datsun from the motorist's standpoint, but for a Datsundealer to convert his retail business to another make would be costly.Conversely, the European Court of Justice was right in the CommercialSolvents case.56 A relevant market could exist in the production of theraw materials needed to make ethambutol, even though a drug companyselling the ethambutol it had produced would be competing in a largermarket in anti-tuberculosis drugs which were to a great extent interchangeable with ethambutol.

The Trade Practices Commission expressed a similar view when, inits decision to grant authorization for the acquisition by B.H.P. of JohnLysaght (Australia) Ltd, it defined the market as the manufacture anddistribution of hot-and cold-rolled steel sheet, coil and strip, coated anduncoated. "Substitution", the Commission pointed out, "occurs principally at end use level and therefore largely in markets not relevant tothis acquisition".57

Cross-elasticity of demand

Cross-elasticity of demand is a concept which is used, preferably inquantitative form, to evaluate the degree of demand substitutabilitybetween two products. If a rise in the price of one product is followedby an increase in the demand for another product (the price of which

54 Id. 185-186.55 (1975) 24 F.L.R. 286,1 A.T.P.R. 17113.06 [1974] 1 C.M.L.R. 309, 339 (supra p. 392).57 Broken Hill Proprietary Co. Ltd [1980] A.T.P.R. 16751, 16756.


is held constant), there may be positive cross-elasticity between thedemand curves for the two products. If the degree of positive crosseiasticity is sufficient, the two products belong in the same market. Thisresult should be observable if a small change in price causes a "significant" (the degree factor) diversion of buyers' purchases in a relatively"short" time (the time factor). In practice, and not only in Australia;there is seldom enough information for accurate calculation of thecoefficient of cross-elasticity. The evidence on this point will more oftenconsist of descriptions by witnesses of past trends, together perhapswith actual data showing buyer response to one or two specific pricerises. This looser and more fragmentary evidence may permit aninference as to whether a diversion effect is there, though the processshould perhaps not be given the exalted title of "cross-elasticity" analysis.

Some showing of "cross-elasticity" in this less exacting sense maywell be necessary for establishing that a distinctive substitute is withinthe market; or at least the plaintiff's showing that there is no demandcross-elasticity is likely to dissuade a court from inferring that thesubstitute should be counted as part of the market.58

In many industries there will be chains of substitution, such asbetween cars and station wagons, between station wagons and utilitiesand panel vans, and so on. This will make product market delineationmore difficult, as the Trade Practices Tribunal found in re Tooth & Co.Ltd, where it encountered "layer upon layer of substitution-betweendifferent types of leisure facilities, between beers and other alcoholicbeverages, between bulk beer and packaged beer, between bulk beer andbulk (or draught) wine, between clubs and hotels, between hotels andbottle shops [etc.]".59 In such a case the task is to seek what the Tribunal(and E.S. Mason before it) call "a break in substitution possibilities".The cross-elasticity concept can help to locate that gap.

When using the cross-elasticity concept it is important to ascertainthe number of buyers for whom elasticity is high. If it is high for only afew, there may be monopoly power; if it is high for the great majority,there probably is not. In re Tooth & Co. Ltd, the Tribunal concludedthat a monopoly position in the beer industry could still generate significant monopoly "rents" (profits), notwithstanding the greatly increasedpopularity of wines and spirits.GO In other words, the core of sincerebeer-drinkers for whom the cross-elasticity between beer and otheralcoholic beverages was low was sufficiently large to enable a beermonopoly to raise prices and increase profits.Arbitrage. In any case where there is a nucleus of buyers for whom theproduct has no close substitutes, one must therefore consider (a)whether the group is large enough to enable a monopolist to reap such

58 United States v. Empire Gas Corp. (1976) 537 F. 2d 296.69 (1979) 2 A.T.P.R. 18174, 18196.eo Id. 18198.


above-normal profits, and (b) whether it is possible to isolate the groupso as to discriminate against it by charging higher prices than thosepaid by buyers for whom the product does have acceptable substitutes.For it may be that the disfavoured group could be adequately protectedby arbitrage; that is, other purchasers could defeat the attempt todiscriminate by reselling the goods to the disfavoured buyers at a pricelower than the disfavoured buyers would otherwise have to pay.

The possibility of arbitrage was overlooked in the United Brandscase,61 where the European Court of Justice found that bananas constituted a product market. The Court relied partly on the fact that thebanana was a very important part of the diet of certain sections of thecommunity, namely, the very young, the old and the sick. But evenassuming that there existed a banana monopolist so heartless as to seekto exploit the very young, the old and the sick, his purposes couldreadily be foiled by arbitrage.

This would be much more difficult in the case of services, however.The existence of a dedicated body of customers, coupled with theimpossibility of arbitrage, probably accounts for the seemingly narrowmarket definitions in cases involving entertainments, professional sportsand other specialised services such as credit cards, not only in theUnited States, but also in Australia and the Common Market.62

Symmetry. When using cross-elasticity as a measure of demand substitutability, one should keep in mind J. S. Bain's point that if the twoproducts are substitutes, cross-elasticity should exist in both directions.This is particularly important in the case of intermediate goods.

61 United Brands Co. v. E.C. Commission [1978] 1 C.M.L.R. 429, 482.62 United States: American Football League v. National Football League (1962)

205 F. Supp. 60, (1963) 323 F'. 2d 124 (major league professional football);International Boxing Club of New York Inc. v. United States (1957) 150 F. Supp.397, (1959) 358 U.S. 242 (championship boxing); Philadelphia World HockeyClub v. Philadelphia Hockey Club (1972) 351 F. Supp. 462 (major leagueprofessional ice hockey); Robertson v. National Basketball Association S.D.N.Y.1970, unreported (major league professional basketball); Twin City Sportservicev. Charles O. Finley Inc. (1975) 512 F. 2d 1264 (major league baseball concessions); Affiliated Music Enterprises v. Sesac (1959) 268 F. 2d 13 (Gospel music);United States v. Paramount Pictures (1947) 334 U.S. 131 (first-run movie exhibiting). Australia: Bankcard Scheme: Interbank Agreement [1980] A.T.P.R. 52169(credit cards); perhaps Darwin Cinemas Pty Ltd [1976] A.T.P.R. 16127 (movietheatres). E.E-.C.: re WEA-Filipacchi Music S.A. [1973] C.M.L.R. 043 ("pop"music, and perhaps the performances of particular tied artists, are a separatemarket); Community v. Miller International Schallplatten GmbH [1977] 1C.M.L.R. 061 (light music a separate market, not interchangeable with seriousmusic).

A single-judge Federal Court decision has held that no market exists amongthe constituent clubs of a football league: Adamson v. West Perth Football Club(Inc.) (1979) 39 F.L.R. 199, 2 A.T.P.R. 18445. The relevant market, therefore,would presumably be between leagues, where there were more than one. ContrastLos Angeles Memorial Coliseum Commission v. National Football League [1980]2 Trade Cases 63523.


This may be illustrated by using a hypothetical case involving effectof an increase in the price of uranium on the demand for coal. Raisingthe price of uranium should have virtually no effect on the demand forcoal, because the cost of uranium is a small part of the total cost ofnuclear power. If symmetry is not sought in the relationship betweenthe two products, then uranium and coal appear to be substitutes. Achange in the price of coal would probably influence the demand foruranium because coal is a raw material for thermal electricity anduranium is a raw material for nuclear-generated electricity. The twoforms of electricity are substitutes, and coal makes up a large part ofthe total cost of thermal electricity.

But a change in the price of uranium would not have a correspondingeffect on the demand for coal because uranium accounts for only asmall part of the total cost of nuclear power-the cross-elasticity is notsymmetrical. The relationship would be symmetrical if uranium constituted a large part of the total cost of nuclear-generated electricity, or ifthe comparison is made between the total cost of substitute inputs forthe two methods of power generation.

If symmetry is not insisted upon, then lead shielding and the servicesof physicists may appear to be substitutes for coal, because the demandfor them will increase if the price of coal increases.63 The problem, ofcourse, is not this kind of odd result, but the fact that asymmetricalrelationships can lead to the inclusion in the market of products whichare not true substitutes because the apparent substitute is not an effectivecheck on the price of the relevant product. This leads to understatingthe prevailing degree of monopoly power.64

A variant of the symmetry requirement is the class of case describedby Areeda and TurnefGS in support of the proposition that even highcross-elasticity is not enough if the price of one product does notrespond to large shifts in the demand for the other. They describe thesituation where, despite a continuing and substantial switch by purchasersof electric power cable from copper to lower-priced (but in some respectsinferior) aluminium cable, prices of copper cable have continued to risefaster than that of the comparable aluminium product. On these facts,either copper producers are not an effective check on aluminium prices,or the products are not close enough substitutes to warrant inclusion in

63 Schwartzman, "The Cross-Elasticity of Demand and Industry Boundaries:Coal, Oil, Gas and Uranium" (1973) 18 Antitrust Bulletin 483; Bain, Ope cit. 26.Distinguish the different symmetry concept discussed in Stocking and Mueller,''The Cellophane Case and the New Competition" (1955) 45 American EconomicReview 29, 45, which describes the effect of price changes in a monopolisticallycompetitive market.

64 Williams argues that this result will be avoided if one defines the market byreference to a firm, in which case a product is a substitute if buyers are preparedto switch from the product in question to another product.

65 Areeda and Turner, Ope cit. 371-372.


the same market. Consequently, a merger among aluminium cableproducers should be tested in a market of aluminium cable alone.

Price and cost. Before one puts the concept of cross-elasticity intooperation, one must face the most difficult problem of all: at what priceis interchangeability to be measured-the ruling price, or a notionalcompetitive price which is equal to costs (including normal profit)? Ifa brewery cartel were to raise the price of beer high enough, therewould come a point at which Laurent-Perrier Grand Siecle '69 wouldbegin to look like a close substitute. The false appearance of competitionbetween beer at the cartel price and champagne would in fact beevidence of successful exercise of monopoly power in beer.

Clearly, substitutability needs to be measured on the assumption thatboth products are being sold at their cost!J6 But this is exceedingly hardto do, particularly in the case of multi-product sellers. While one canaccurately estimate the cost of the total output of an oil refinery, thereis no single correct way of costing a litre of petrol. As Professor Turnerhas pointed out, even if one could isolate the necessary cost data, theinefficient monopolist which has allowed its costs to rise will therebygain the appearance of being in competition with other products whichwould never be regarded as substitutes at all if the seller were efficient(and therefore had lower costs than producers of substitutes) .67 Apossible escape from this dilemma will be considered infra.

The Swanson Report recommended that a requirement of high crosselasticity of demand should be written into the statutory definition ofmarket.68 It is fortunate that this suggestion was not accepted by Parliament. Not only are the available figures seldom adequate for thispurpose, but such a statutory requirement would also inevitably havecaused market definition in the courts to become unduly channelledinto this one line of inquiry, at the expense of others which might be atleast as illuminating.

(2) Supply substitution or production flexibility

Two products, even if not at all substitutable by the user, are nevertheless part of the same market if they can be produced from the samemachinery or facility interchangeably, provided that all or most suppliershave in fact converted from one product to the other at some time. If,

~ therefore, a machine for making fencing wire can, with only minoradjustments, turn out the light steel rod used in making concretereinforcing mesh, and most manufacturers have so used it at one timeor another, there will be a reinforcing mesh/fencing wire marketcomprising the total output of all producers of either product.69

66 Posner, Ope cit. 128-129; Turner, "Antitrust Policy and the Cellophane Case"(1956) 70 Harvard Law Review 281, 308-309.

67 Turner, ide 310.68 S. 4E. See n. 23 supra.69 ct. ARC Industries Ltd [1975] A.T.P.R. 8845-9.


Requiring as it does that most manufacturers should at some timehave actually produced the alternative product, this formulation is alittle narrower than some definitions of production flexibility.70 Thisfollows from the choice made by the Trade Practices Commission (andsupported by this writer) to exclude self-used output from the marketin order to keep the relevant market as the arena for direct, primarycompetitive forces exclusively.71

If any significant investment were required before a fencing wireproducer could make reinforcing rod, the proper course would be totreat fencing wire manufacturers as potential entrants at best, ratherthan including their total output in the relevant market. To do otherwisewould understate the market power of reinforcing rod producers,especially since the fencing wire manufacturers would probably not haveany experience, or contacts, in the marketing of reinforcing rod. In StRegis-ACI Pty Ltd,72 the Trade Practices Commission had to considerthe likely competitive impact of a merger between two producers oflaminated foil insulation. The applicant contended that all coatings andlaminations should also be included in the foil insulation market, sinceproducers of those products could turn their hands to making foilinsulation. It was clear that other laminators would have the necessarytechnical knowledge for this. The Commission said, however, that itsinvestigations showed that all of them would need to undertake substantial investment in equipment, especially if they proposed to competeeffectively in terms of range and quality. The Commission also pointedout that existing excess capacity in foil insulation would inhibit entryinto that market, at least in the short term. Authorization was denied.

While in St Regis-ACI Pty Ltd the Commission thought that supplysubstitution was not practicable, in re Tooth & Co. Ltd, by contrast,the Tribunal gave production flexibility as a reason for putting bothbulk beer and packaged beer in the same product market. Up to acertain stage in the production of beer, it was possible to leave open thechoice as to whether the bulk or the packaged product would emerge.73

Strictly speaking, the possibilities of substitution were limited in theshort run by the availability of the necessary packaging capacity, butsince this was unlikely to be a significant problem in any foreseeablemarket conditions, the Tribunal disregarded it.

Trade Practices Act doctrine has always taken elasticity of supplyinto account74 but this has not always been the case in the United Statesand the Common Market. At first, in United States v. Columbia Steel

70 Areeda and Turner, Ope cit. 374-375, would apparently not insist on this inall cases.

71 Supra nne 30, 31.12 Authorization determination [1976] A.T.P.R. 16156.13 (1979) 2 A.T.P.R. 18174, 18198.14 Q.C.M.A. (1976) 1 A.T.P.R. 17223, 17247.


CO.,75 the United States Supreme Court held that the appropriate productmarket was all the rolled steel products which steel producers couldmake, not merely the steel plates and shapes purchased by the targetcompany. Then came a line of cases beginning with United States v.Bethlehem Steel Corporation76 and continuing through the Brown Shoe77

and Alcoa-Rome78 cases in which production flexibility was pushed cleanoff the stage. This refusal to take account of fabrication facilities that werecompletely interchangeable, as in Alcoa-Rome (in which power cableequipment could use aluminium or copper wire indifferently), seems atrifle perverse, for the courts continued to define the geographic marketin the accepted way, even though the geographic dimension of the marketitself relates mainly to supply substitution.

The turning-point was Telex Corporation v. International BusinessMachines Corporation.79 The Circuit Court of Appeals there held thatI.B.M.'s dominant power in relation to computer "peripheral" equipment,such as printers, disk and tape drives, should be measured in a marketcomprising not only those peripherals that could be plugged into I.B.M.computers, but also those items that could be used with the computersmade by other manufacturers. This was because the suppliers of theseproducts could readily, and at trifling expense, convert them so thatthey could be used with I.B.M.'s central processing units. Many manufacturers of peripherals, including Telex, produced equipment for severaldifferent makes of computer besides I.B.M. Justified though the Court'sreasoning seems to have been, it was rather daring, since not only haddemand substitution completely displaced supply substitution sinceBethlehem Steel,80 but there was no evidence of substitutability on thedemand side at all. This revival of the supply substitution concept has,however, been continued in later cases.81

In the Common Market, supply substitution surfaced somewhatunexpectedly in the decision of the European Court in EuropemballageCorporation and Continental Can Co. Inc. v. E.C. Commission.82 TheEuropean Communities Commission had evaluated the anti-competitiveeffects of Continental Can's acquisition of another can maker in a "marketfor light containers for preserved meat", a "market for light containersfor preserved fish" and a "market for metal closures for the canningindustry, apart from crown corks". On appeal, the European Court

75 (1948) 334 U.S. 495.76 (1958) 168 F. Supp. 576. The Court concluded that products must be substi

tutable from the buyer's point of view in any event, if they were to come withinthe relevant market: 592-593.

77 Brown Shoe Co. v. United States (1962) 370 U.S. 294.78 United States v. Aluminum Co. of America (1964) 377 U.S. 271.79 (1975) 510 F. 2d 894; District Court: (1973) 367 F. Supp. 258. See Rodgers,

"Telex v. IBM: Defining the Relevant Market" (1975) 61 Iowa Law Review 184.80 (1958) 168 F. Supp. 576.81 Calnetics Corporation v. Volkswagen of America (1972) 348 F. Supp. 606;

RSR Corporation v. F.T.C. [1979] 2 Trade cases 78433.82 [1973] C.M.L.R. 199.


rejected this definition, declaring that for products to be regarded asindividualised in this way, it was necessary not only that they be usedfor packaging certain products, but also that there were special production characteristics giving them a specific suitability for this purpose:

a dominant position in the market for light metal containers forcanned meat and fish cannot be decisive in so far as it is notproved that competitors in other fields in the market for light metalcontainers cannot, by a mere adaptation, enter this market withsufficient strength to form a serious counterweight.83

This aspect of the decision was criticised at the time, partly for goingfurther than the American courts had, but this was just before Telex v.I.B.M.84

Since Continental Can,85 supply substitution has regularly been takeninto account in the Common Market. In Hoffmann-La Roche & Co.AG v. E.C. Commission86 the Court of Justice upheld a Commissionfinding in proceedings against the producer-distributor of 13 groups ofvitamins that each vitamin group constituted a separate market. Notonly were the 13 vitamins not interchangeable, but the synthesisingprocess was to a large extent unique to each group and was highlyspecialised. Plant used for manufacturing vitamins of one group couldnot be used for making vitamins of another group, nor was the conversion of plant for such production a simple matter.87

Clustering errors. There is an important distinction to be drawn,however, when one is using the supply substitution concept. To takethe fencing wire and reinforcing rod example again: supply substitutionmeans that examination of the market power of a reinforcing rodmanufacturer should include in the relevant market the total output offencing wire manufacturers, if their equipment can be (and has been)switched, with only minor adjustments, to making reinforcing rod. Itdoes not mean, as has sometimes apparently been thought, that therelevant market includes all the products manufactured by reinforcingrod or fencing wire makers, such as steel fence posts, field gates andother common steel items. An early example of this bundling, orclustering, can be found in United States v. United Shoe MachineryCorporation,88 in which Wyzanski J. held that U.S.M. had monopoliseda broad market which was defined so as to aggregate all types of shoemaking machinery. In relation to the more specialised shoe-making

83 Id. 227.M (1975) 510 F. 2d 894; Korah, "Interpretation and Application of Article 86

of the Treaty of Rome: Abuse of a Dominant Position within the CommonMarket" (1978) 53 Notre Dame Lawyer 768, 778, quoting J. Van Damme.

85 [1973] C.M.L.R. 199.86 [1979] 3 C.M.L.R. 211.87Id. 225-226, 270-273; Commission decision [1976] 2 C.M.L.R. D25, D27.88 (1953) 110 F. Supp. 295.


machinery U.S.M. was virtually unopposed, but it faced strong competition in some other lines such as ordinary sewing-machines.

The District Court market definition in this instance is defensible,though not for the reasons given by Wyzanski J. The fact that U.S.M.'scustomers, the shoe manufacturers, were purchasers of the full rangeof shoe machinery might warrant defining the market in this broadmanner, on the basis of the sales and purchase patterns.

Similarly, in United States v. Philadelphia National Bank89 theSupreme Court held that the appropriate product market was theaggregate of the various kinds of credit and other services provided bycommercial banks, even though in relation to some of these services,commercial banks faced competition from savings banks and savingsand loan associations (building societies). Here again, the bundling ofdifferent services might be justified, although with more difficulty thanin United Shoe Machinery, on the basis that there was a market for thetotal range of services, at least among people who preferred to do alltheir banking under one roof.90 Later, however, the Court began toforeshadow a more discriminating approach to the product market inbanking cases, which would distinguish between markets for services inwhich the commercial banks faced competition and those in which theydid no1.91

The broad-brush "cluster" approach to market definition has beenlauded as pragmatic:

The goal is to assess power. At times it will seem sensible to expandthe market, to conceptualize more widely than the product clusterachieved by a particular firm's business; at others, disaggregationwill be indicated-a breaking-down of a particular firm's businessand the assignment of segments of it to different markets.92

But when will it be "sensible"? Since most goods and services arecomposed of several distinct elements, there can be no objection tobundling together separate items that are normally sold as a singleunit.93 But beyond that, clustering would seem to introduce yet anotheropportunity for subjective judgment into a field of law which suffers

89 (1963) 374 U.S. 321.90 Id. 357, n. 34; see also United States v. Phillipsburg National Bank (1970)

399 U.S. 350, 360. The decision in United States v. Grinnell Corp. (1966) 384U.S. 563, has been attacked for grouping central station alarm system suppliersoffering protection only against fire with those offering protection only againstburglary. But most firms offered both sets of services; and analysing competitionin relation to each service separately would have been difficult because of jointcost problems. (This was a monopolisation case in which anti-competitive pricingpractices were alleged.)

91 United States v. Connecticut National Bank (1974) 418 U.S. 656, 668-669.92 Sullivan, Ope cit. 60, footnotes omitted.93 Thus, the cluster of services provided by a daily newspaper-news, legal

notices, stock market reports, weather forecasts-could validly be grouped in onepackage: United States v. Times Mirror Co. (1967) 274 F. Supp. 606, 617, aff'd390 U.S. 712. Accord, Marnell v. United Parcel Service [1971] Trade Cases 73761.


from quite enough unpredictability already. It would make accuratecalculation of market shares almost impossible and would in the longrun complicate the analysis of competitive effect.

Areeda and Turner argue persuasively that a better approach in thePhiladelphia Bank case94 would have been to select one or two productsor services, such as demand deposits (current accounts) or short-termcommercial credit, where banks appeared to be substantially insulatedfrom the competition of non-bank operations.

The broad market may not have been appreciably misleading inthis particular case, but in others it may give a highly distortedpicture. . . . For example, one or both merging banks may besubstantial factors in "commercial banking" as a whole, but insubstantial in those areas where only banks effectively compete,.DO

In Australia the courts have not yet been confronted with this problem(though it could have arisen in C.S.B.P.," if market definition had notbeen admitted), but the tendency of the Trade Practices Commission hasbeen to separate a supplier's product line into appropriate separatemarkets rather than bundling them together.97

One possible lapse, however, was its early decision denying clearanceto the exclusive dealing arrangements in Shell Co. of Australia Ltd,98where the Commission referred to "the market for petroleum productsand related services". This finding has been challenged on the groundthat since the various petroleum products cannot be substituted for oneanother, each one must comprise a separate market.99 This criticism seemsvalid, since there is no class of customer that demands the whole range ofpetroleum products, nor are there close price relationships between eachproduct. Production flexibility is perhaps not given its due, but this is notfatal to the argument since in relation to products such as furnace oiland other residual fuels (one of the product groups for which substitutesare most numerous and readily available), it is not practicable to adjustrefinery output to increase the amount of heavy fuel oil, preciselybecause fuel oil is a by-product of the refining process.1

The Trade Practices Tribunal has not been quite as consistent as theTrade Practices Commission on this point. In some cases it has addresseditself specifically to whether a seller's products should be grouped

94 (1963) 374 U.S. 321.90 Areeda and Turner, Ope cit. 425-426, footnotes omitted.96 T.P.C. v. C.S.B.P. and Farmers Ltd [1980] A.T.P.R. 42154.97 See ARC Industries Ltd [1975] A.T.P.R. 8845-9.98 [1975] A.T.P.R. 8621.99 Harman, ''The Competitive Impact of Exclusive Dealings in Australian Motor

Spirit Markets" (1979) 7 Australian Business Law Review 3, 9.1 There are, apparently, some crude oils that come out of the ground as pure

furnace oil and are of limited use for anything else, such as that from the Cyrusfield in Iran. However, to increase imports of this crude, even if available, wouldrequire some investment in storage and perhaps shipping.


together or not;2 on the other hand, in Ford Motor Company of AustraliaLtd, the Tribunal grouped together not merely small, medium, large andluxury sedans and station wagons, but also light commercial vehiclesand heavy trucks.3 In re Rural Traders Co-operative (W.A.) Ltd, itlumped together all artificial fertilisers, many of which were not substitutable for one another, without any finding on whether they could allbe produced with the same equipment. It then went on to define anothermarket, the services of stock and station agents, which included not onlythe provision of farm supplies and the selling of farm produce, but alsothe rendering of finance, insurance and travel services. The Tribunalacknowledged that in some of these fields stock and station agentscompeted with other enterprises such as banks, but stood by its marketdefinition, explaining that its reasons had to be given without delay.4

If there is a distinguishing factor between these two incompatiblelines of Tribunal cases, it is that in the former group (those in whichthe products were not clustered), the economist on the Tribunal wasProfessor M. Brunt, whereas in the latter group of cases it was ProfessorJ. McB. Grant. Professor Brunt has always emphasised the importanceof market definition, both for competition analysis and for the evaluationof public benefit.5 This may also explain why in the Media Councilappeal,6 in which there was no economist on the division of the Tribunalhearing the matter, the Tribunal did not attempt any market definitionat all.

(3) Substitute products: some conclusions

Besides the awkwardness of the cross-elasticity concept, the inclusionof distinctive substitutes in consumption within the relevant productmarket introduces an element of uncertainty into a statute which hasbeen criticised and amended for that very reason. The avoidance ofuncertainty may therefore be one reason why the courts, the Tribunaland the Commission have tended so far to be wary of distinctivesubstitutes on the demand side. Among the few Commission decisionswhich have drawn the market in this way are some of the soft drinkcases, as well as Hotham," Bagot,8 Pak PacifieD and James Hardie.10

After Hardie, the Commission returned to a narrower definition onalmost identical facts in John Lysaght (A ustralia) Ltd,11 and has similarly

2E.g. Q.C.M.A. (1976) 1 A.T.P.R. 17223,17248; re Tooth & Co. Ltd (1979)2 A.T.P.R. 18174, 18198.

3 (1977) 1 A.T.P.R. 17486, 17493.4 (1978) 2 A.T.P.R. 18111, 18119-18121.l) Re Tooth & Co. Ltd (1979) 2 A.T.P.R. 18174,18194.6Herald & Weekly Times Ltd (1978) 17 A.L.R. 281, 2 A.T.P.R. 17591 .., Hotharn Permanent Building Society [1975] A.T.P.R. 8822.8 Farmers' Cooperative Executors & Trustees Ltd/Bagor's Executor & Trustee

Co. Ltd [1975] A.T.P.R. 8816.9 [1975] A.T.P.R. 8841.

10 [1978] A.T.P.R. 16101.11 [1978] A.T.P.R. 17304.


changed course a number of times in relation to soft drinks. No court orTribunal decision has yet defined a market incorporating distinctivesubstitutes in consumption. Substitution in production, however, in itsnlore concrete and tangible form, has become a useful part of marketdefinition doctrine, although clustering errors have occurred.

IV. OF SPARE PARTS AND SUBMARKETS

Spare parts and attachments

There is not much authority on the proper definition of the marketin which spare parts for machinery are sold, and the subject is of somedifficulty, as can be seen from the decision of the European CommunitiesCommission in Lipton's Cash Registers & Business Equipment Ltd v.Hugin Kassaregister AB.12 This was a complaint by a small cash registerservicing company against a manufacturer-distributor of cash registerswhich refused to allow its selected distributors to supply Hugin spareparts to the complainant. The majority of parts for Hugin cash registerswere made to Hugin design and with tools belonging to that company.The parts were not interchangeable with the parts of other makes andcould not otherwise be economically reproduced. The Commission heldthat the relevant market was the market for Hugin spare parts throughoutthe world, a market in which Hugin enjoyed a monopoly.

Because Hugin had only 12 percent of the Common Market cashregister market, or 13 percent of the United Kingdom cash registermarket, the decision has been criticised on the ground that, even if it wastechnically correct, the de minimis principle in Article 86 of the Treatyof Rome should have been applied.1s On the other hand, it has beenargued that the market was cash registers, not Hugin parts.14 The latterproposition gains support from evidence given by Hugin, and apparentlyaccepted by the Commission, that competition in the sale of cashregisters was extremely keen throughout the Common Market and thatit was essential to provide an inspection, service and repair arrangementfor cash register buyers. In the United Kingdom, Hugin claimed, thisservice was run at a loss in order for Hugin to remain competitive (inthe sale of cash registers, presumably) .15

In Ford,16 the Trade Practices Tribunal appeared to treat spares asbelonging in the car market. It evaluated exclusive dealing in spare partsby the same tests as those which it applied to the restrictions in relationto new vehicles. However, its definition of the motor vehicle product,market is itself not entirely clear. This fact, together with the cursoriness

12 [1978] 1 C.M.L.R. 019.13 Comment (1978) 3 European Law Review 1.14 Korah, Ope cit. 781n.15 [1978] 1 C.M.L.R. 019, 024. See also General Motors Continental NV v.

E.C. Commission [1976] 1 C.M.L.R. 95, 100, 109.16 Ford Motor Company of Australia Ltd (1977) 1 A.T.P.R.17486, 17493-17495.


of the treatment of spare parts, makes it difficult to extract any principlefrom this aspect of the case.

On the other hand, the Trade Practices Commission defined themarket in which Mazda rotary-piston replacement engines were sold asbeing the service and repair market for vehicle engines and the submarket for the servicing and repair of rotary engines.17 The replacementengines were apparently seen as an item used in the performance ofservices. Similarly, in Nashua18 the Commission delimited separateproduct markets for photocopier servicing and consumables.

An analogy might be drawn between spare parts and the peripheralequipment such as printers, disks and tape drives in Telex v. I.B.M.19I.B.M. had contended that the relevant product market was eitherelectronic data processing systems together with the products which arepart of such systems, or at least all peripheral products, not merelythose which could currently be attached to I.B.M. computers.

The Court chose the latter alternative for the reason that peripheralequipment made for use with other makes of computer could readily beconverted either by sellers or buyers for use with I.B.M. computers. Itdid not have to decide whether the competition between system manufacturers on a system-by-system basis, in which the peripherals were asignificant part, meant that the relevant market for peripheral equipmentwas in fact the entire electronic data processing system market. Still, asfar as it goes, Telex v. I.B.M. gives support to the Trade PracticesCommission's approach in Mazda Motors20 and Nashua.21

Better empirical data might show how far the buyers in particularmarkets consider the cost of parts and attachments when buying thebasic unit. In the absence of such data, the compromise reasoning inMazda and Nashua seems preferable to either of the other two solutions.The Hugin approach,22 though logically defensible, would make eventhe smallest manufacturer a monopolist in its own spare parts; thisresult would be especially inconvenient in Australia, since the TradePractices Act, unlike Article 86 of the Treaty of Rome, contains noexpress de minimis exception: a market is a market, no matter howsmall it may be.23 The other method, of treating the relevant market forthe spares as being the entire market for the type of machine in whichit is used, does have some empirical support. But it is open to theobjection that an increase in the price of spare parts would need to beof great magnitude before buyers would switch to another make of

17 Mazda Motors Pty Ltd [1975] A.T.P.R. 15905.18 Nashua Australia Pty Ltd [1975] A.T.P.R. 8720.19 (1975) 510 F. 2d 894.20 [1975] A.T.P.R. 15905.21 [1975] A.T.P.R. 8720.22 [1978] 1 C.M.L.R. D19.23 Subject to s. 50 (3) in the case of mergers.


machine. One would also expect a considerable time lag. Thus, thismethod might fail both the degree test and the time test.

This last-mentioned approach might, admittedly, have been justifiable in Telex v. I.B.M.24 because the District Court had found that whenI.B.M. lowered its prices for peripherals, it increased the price of itscentral processing units (CPUs) and expected the two movements tooffset each other. This suggested that buyers did purchase CPUs andperipherals in essentially fixed proportions, their purchasing decisionsbeing made in light of the price of the complete computer systemsoffered by the various manufacturers. In that case the relevant demandcurve would be the one for complete, integrated systems, and I.B.M.would have considerable freedom to raise or lower its prices for peripherals without greatly affecting its profits, provided that the price forthe total system did not markedly rise.25

The same could well be true of a wide variety of other markets formachinery that comes with attachments representing a significant proportion of the total price. It is less likely to be the case in relation tomere spare parts.

Supply substitution might provide the foundation for an argumentthat spare parts should be considered as part of the main machinemarket, since the parts may be produced on the same equipment as thewhole machine, without adjustment. Even so, this is not quite analogousto the steel reinforcing rod example, which is the production flexibilityparadigm, for in this case neither is a component in another item ofvastly greater value.

Sub-Markets

The notion of the sub-market has proved to be a source of greatconfusion in the United States, generating problems that are essentiallythe converse of the clustering errors described supra. If it is usedproperly, however, it can be a useful aid to competition analysis. Ifeveryone kept in mind the qualifications expressed by the Trade Practices"fribunal in Q.C.M.A., few problems would arise:

The distinction between markets and sub-markets can be merelyone of degree. Sub-markets are the more narrowly defined, typicallyregistering some discontinuity in substitution possibilities. Wherethe defining feature of a market is the existence of close substitutes(whether in demand or supply), the defining feature of a submarket is the existence of still closer and more immediate substitutes.Sub-markets may be especially useful in registering the short-runeffects of change; but they may be misleading if used uncritically toassess long run competitive efJects.26

24 (1975) 510 F. 2d 894.25 Sullivan, Ope cit. 66.28 (1976) 1 A.T.P.R. 17223, 17247, emphasis added.


In that case the relevant product markets were found to be flour andbread, but baker's flour was considered to be an important sub-marketof the flour market. The Tribunal then proceeded to study the play ofcompetitive forces in that sub-market as indicative of the likely effectsof the proposed merger in the overall market for flour.

In re Tooth & Co. Ltd one of the issues was the extent to which~ooth's exclusive dealing restrictions had the effect of lessening competition. These restrictions applied only to bulk beer, not packaged beer,and it was argued that the product market should be confined to theproduction and distribution of bulk beer. The evidence of substitutabilityon both the demand and the supply sides persuaded the Tribunal thatbulk and packaged beer belonged properly within the same market, butit saw bulk beer as a significant sub-market which would repay closestudy.27 Similarly, in Locksmiths the Tribunal treated restricted keywaysystems as an important sub-market in the locking systems 'productmarket.28

There are thus at least two ways of using the sub-market concept, oneof which is helpful and one of which will merely cause confusion.

First, the sub-market may be equated with the relevant market itself.This line of reasoning had its genesis in the Bethlehem Steel case,· butwas fully enunciated for the first time in the Brown Shoe case:

The outer boundaries of a product market are determined by th~reasonable interchangeability of use or the cross-elasticity ofdemand between the product itself and substitutes for it. Howeve~lwithin this broad market, well-defined sub-markets may exist which,in themselves, constitute product markets for antitrust purposes.so

The concept was further elaborated in the Continental Can case.~i

This use of the sub-market concept has rightly been criticised on th~

ground that it is self-contradictory to hold both that a broad area is amarket and that smaller parts of that same area are also markets.32 A'$Professor Posner points out, in this sense "a sub-market would be agroup of sellers from which sellers of good substitutes in consumptioQor production had been excluded, and these exclusions would depriveany market-share statistics of their economic significance".33

Secondly, identifying sub-markets can be used as a way of clarifyinghow competition works in the broader market. This is the sense in whichthe concept has been used by the Trade Practices Tribunal in such cases

27 (1979) 2 A.T.P.R. 18174, 18198.28 Re Obadiah Pty Ltd (The Locksmiths' Case) [19801 A.T.P.R. 42421, 42435.29 (1958) 168 F. Supp. 576.30 (1962) 370 U.S. 294, 325.31 United States v. Continental Can Co. (1964) 378 U.S. 441.32 Areeda and Turner, Ope cit. 411.33 Posner, Ope cit. 129.


as re Tooth & Co. Ltd,34 Locksmiths,35 Q.C.M.A.36 and Ford.37 TheCommission has done likewise in a number of cases, such as AmscollceCream Pty Ltd.38 In issue in this case was a merger involving manufacturers of ice cream. The Commission defined the products as ice creamand ice confectionery, but recognised four sub-markets: take-home,impulse, bulk, and multi-pack ice cream items. This division enabled theCommission to form a more accurate impression of the likely competitiveconsequences of the merger, because the nature and intensity of competition differed in the various segments.

v. EVIDENTIARY ASPECTS

Presumptions and judicial notice unavailable

The dimensions of the product market are a matter of fact andevidence, not judicial notice. In T.P.C. v. Ansett Transport Industries(Operations) Pty Ltd,· a great deal of evidence was adduced on thisissue, including evidence of the parties' internal workings and organisation. This is a striking contrast with the Ira Berk case,40 in which theCourt refused to hear any evidence on the matter at all, while nevertheless regarding the issue as one of fact. Significantly, Northrop J. inAnsett Transport Industries41 did JIot even cite the Ira Berk case, althoughtheoretically it was binding on a single judge. (Ira Berk was, however,followed in Ah Toy.42) Northrop J. also made it clear that section 4Eof the Act, which defines the expression "market" as including substitutable or otherwise competitive goods or services, does not in any waylimit the concept of the market, its purpose being apparent from the"history and nature of the legislation".43

Nor are there any presumptions either way-certainly nothingcorresponding with Professor F. M. Scherer's proposition that when indoubt, the American courts should (and do) resolve the question againstthe defendants.44

Relevance of trader perceptions

Evidence of the perceptions of those who trade in the market isrelevant to, and admissible on, the question of market definition. Theway in which buyers and sellers tend to view the market says somethingabout the scope and working of competitive forces. Even if these

34 (1979) 2 A.T.P.R. 18174.35 [1980] A.T.P.R. 42421.36 (1976) 1 A.T.P.R. 17223.37 (1977) 1 A.T.P.R. 17486.38 [1978] A.T.P.R. 16802.39 (1978) 32 F.L.R. 305.40(1975) 24 F.L.R. 286,1 A.T.P.R. 17113.41 (1978) 32 F.L.R. 305.42 [1980] A.T.P.R. 42216.43 (1978) 32 F .L.R. 305, 312.44 Ope cit. 480.


perceptions are mistaken, they may still be relevant as facts which willenable one to predict businessmen's responses to shifts in supply anddemand.

In Ansett Transport Industries, the bulk of the evidence on marketdefinition consisted of the testimony of witnesses who were engaged inthe car rental business. Particular weight was placed on material containedin management reports prepared by the senior management of Avis, thetarget of the proposed merger, for presentation to monthly Avis boardmeetings. These reports made numerous references to the competitionfrom local operators and the effect of that competition on Avis, theneed to take account of the rates charged by local operators, and theoccasional loss of market share to local car rental businesses.45 In T.P.C.v. Nicholas Enterprises Pty Ltd,"" the only evidence on (geographic)market was given by the general manager of Coles Stores in SouthAustralia, who was called as an expert witness. He testified to hisopinion that a liquor outlet anywhere in the metropolitan area would beaccessible generally to the public who lived in that area, and would be incompetition with other outlets selling in that area. The witness supportedthis view with statistics compiled by the Australian Bureau of Statisticsfrom the 1971 census.47 The admission of this statistical material, incidentally, contrasts with the attitude taken in another nisi prius case beforethe Federal Court.48

It is not clear whether traders, or anyone else, may give opinionevidence on the ultimate question of what constitutes the product market.The opinion evidence admitted in T.P.C. v. Nicholas Enterprises PtyLtd49 seems to have been directed to factors influencing the mobility ofconsumers and the purchasing choices which would be open to them,rather than to this ultimate point. In T.P.C. v. Ansett Transport Industries,50 Northrop J. held that economic expert witnesses could not giveevidence of their opinions as to whether Avis was or was not in aposition to dominate the car rental market in Australia. This was one ofthe principal issues under section 50, and his Honour apparentlyconsidered that it was for the Court alone to draw the necessaryconclusions on this issue. This ruling has been criticised,s1 but it stands,at least provisionally. For the time being it limits the evidence which

45 (1978) 32 F.L.R. 305, 315.46 (1979) 2 A.T.P.R. 18333.411d. 18356-18357. There was evidence that one retailer drove to a number of

larger discount outlets to see what prices they were charging but it was not arguedthat this evidence had any bearing on market definition.

48 McDonald's System of Australia Pty Ltd v. McWilliam's Wines Pty Ltd (1979)2 A.T.P.R. 18481, 18512.

49 (1979) 2 A.T.P.R. 18333.ao (1978) 32 F.L.R. 305.lil On the ground, inter alia, that it is quite common and proper for expert

witnesses to express opinions on the ultimate issue provided that they make theirassumptions clear: Sir Richard Eggleston, Seminar, Australian National UniversityLaw School, 29 September 1979.


trade witnesses, whether qualified as experts or not, may give on thenlarket issue.

In any event, this kind of evidence has some inherent weaknesseswhich should be borne in mind. First, it tends to be used predictablyby the parties; the plaintiff will normally have an interest in establishinga narrow market, and the defendant will usually seek to show that themarket is as broad as possible.52 But the evidence of businessmen whoare not parties to the suit should not suffer from this weakness to thesame extent.

Secondly, there is a tendency for businessmen to use the term "market"in a different, less precise, sense from that in which it is used ineconomics and antitrust law. It tends to become synonymous with a largegrouping of customers.53 This problem could be overcome by confiningsuch evidence to concrete matters such as the identities of customersand competitors. This would both lessen the risk of misunderstandingabout the meaning of "market" and would also be in harmony with theruling in T.P.C. v. Ansett Transport Industries.M:

VI. CRITIQUES AND POSSffiLE SOLUTIONS

Although there is genaral agreement among economists that competition is desirable, the profession is as far away from accepting a generaltheory of the competitive process as it was 30 years ago. They cannotagree on exactly what competition is, much less on all the forms ofbehaviour that may obstruct its course. In these circumstances it is notsurprising that the economic and economico-legal authorities differ notonly as regards the principles, but also on the value, of market definition.

Professor Posner views market definition as only a second-best startingpoint for measuring monopoly power. Other writers would prefer toreject the market definition approach altogether. Professor Turner, )Vhencommenting on the Cellophane case,55 attacked "the traditional two-steplegal approach of first defining the market and then deciding whethermonopoly power exists". He continued: "[p]ercentage share of a marketbased on a particular definition of the market does not in itself indicatethe extent of monopoly power". False conclusions could result eitherfrom excluding or from including distinctive substitutes: the formercourse would imply that substitutes imposed no check on the seller, the

62 Not invariably, however. In the case of conglomerate mergers or otherconduct that crosses industry boundaries, the contrary will be true: see UnitedStates v. Continental Can Co. (1964) 378 U.S. 441; Dun & Bradstreet Pty Ltd[1976] A.T.P.R. 16142.

03 This is a qualification which must be made to Donald and Heydon's propositionthat the law should never be allowed to determine what the market is: TradePractices Law (1978) i, 94. See Elzinga and Hogarty, "The Problem of GeographicMarket Delineation in Antimerger Suits" (1972) 18 Antitrust Bulletin 45, 70-71.

M: (1978) 32 P.L.R. 305.M (1956) 351 U.S. 377.


latter implies that distinctive substitutes compete on a par, whenprobably neither is true.56 Even the most discriminating application ofcross-elasticity of demand tends to understate the power of the inefficientmonopolist. All distinctive substitutes should, in his view, be omitted.51

In similar vein, Professor Chamberlin argues that

"Industry" or "commodity" boundaries are a snare and a delusion-in the highest degree arbitrarily drawn and, wherever drawn,establishing at once wholly false implications both as to competitionof substitutes within their limits . . . and as to the possibility ofruling on the presence or absence of oligopolistic forces by thesimple device of counting the number of producers included.58

A better approach than market definition, in the view of Dr V. Korah,would be "to analyze the competitive pressures operating or likely tooperate on a supplier . . . by stating at exactly what point remotersubstitutes should be considered irrelevant".59 Professor Handler woulddiscard market definition but, failing that, would opt for a perfunctorydelineation:

Decide on some commonsense market or sub-market without muchto-do.. Then start looking to see whether possible substitutes andentry conditions, including production flexibility possibilities, aresufficient to keep price for the product down to marginal cost. Ifnot, illegal market power exists, or may exist.GO

Posner inclines to the view that a practical solution is "to assume thatproducts ~whose design, physical composition, and other technicalcharacteristics are substantially different are not good substitutes inconsumption".61

The stern criticisms by Chamberlin and Turner may have beenmore fair at the time they were made, when market definition was asomewhat impressionistic exercise. They are much less valid whenapplied to the thorough and methodical judgments that have nowbecome commonplace, especially in the United States courts. They alsoappear to assume that the courts will be hypnotised by the market sharefigures that. will emerge from the market definition exercise. This assumption has n(~ver been sound, in Australia at least. Dr Korah, and perhapsProfessor ~Grant of the Trade Practices Tribunal, would prefer a moreinformal and flexible description of competitive conditions; but theTrade Practices Act, unlike Article 86 of the Treaty of Rome, doesgenerally require a finding about the boundaries of the market as an

56 Turner, op. cit. 309.51Id.310..~ Massel, Competition and Monopoly (1964) 288. I have been unable to locate

the original source of this quotation, but Chamberlin made the same pointelsewhere: op. cit. 202n.

69 Ope cit. 780.60 Handler, Blake, Pitofsky and Goldschmid, Trade Regulation: Cases and

Materials (1975) 286.61 Posner, Ope cit. 128.


ingredient of the contravention. The alternative process which Dr Korahadvocates-an overall competition analysis with a cut-off at some pointin the chain of substitutes-has in any event a good deal in commonwith classic product market definition. Similarly, to the extent thatTurner and Handler advocate disregarding distinctive substitutes, theirsuggestions could not be followed by the Australian courts, which arerequired by section 4E to take account of the possibility that distinctivesubstitutes may form part of the market.

At the same time, some solution must be found to Professor Turner's"inefficient monopolist" problem in the application of cross-elasticity ofdemand. Perhaps the answer lies in something like the Posner presumptionagainst physically different substitutes although, again, it could not be apresumption in the strict sense because section 4E, when read withsection 45, leaves the burden of proof on the plaintiff. Nevertheless, thecourts could in practice lean against distinctive substitutes. This, indeed,appears to be what the courts, the Trade Practices Tribunal and theTrade Practices Commission are doing.

The critics, moreover, give insufficient weight both to the fact thatlawyers are the ones who have to apply the Act, and to the fundamentalrequirements of the rule of law. The role of the courts is not merely toapply a particular economic theory, but to decide cases and developprinciples of law. A reasonably clear, even if not perfectly accurate orconceptually unshakeable, starting-point is needed for legal predictability,for the clarity of judicial reasoning and in order to give practisinglawyers a sufficiently defined path to follow when preparing advice fortheir clients. Lawyers have an eclectic cast of mind. If they are throwninto a swift-flowing stream of economic facts and theories, there is notelling where they will end up. They need a reasonably secure set ofstepping-stones, of which market definition can provide the first. Withoutthem, hopelessly confused and uncertain decisions will result, as theolder English cases under the Restrictive Trade Practices Act 1956(U.K.) show. The Federal Court has demonstrated its understanding ofthis point by cqoosing to adopt the reasoning in Tribunal cases in whichProfessor Brunt has expounded market definition principles.

This need for secure stepping-stones, incidentally, is an argument fordefining product markets relatively narrowly so as to include identicalproducts and differentiated products, but only the closest of distinctivesubstitutes. It is easier to use facts external to the market as defined,such as potential competition and barriers to entry, in order to fill in one'spicture of a market that is too narrowly framed than to use internalfactors to tighten a market that has been drawn too loosely. The overbroad market will be muddied by the assumption that distinctivesubstitutes compete on a perfectly equal footing, which is rarely thecase.

To date the Tribunal, Commission and courts in Australia have, byand large, avoided the gross errors of simplistic market definition which


marked the earlier days of the American and United Kingdom legislation.62 Their own contributions to the development of the doctrinehave in themselves already been worthwhile.

The Commission's adjudications have lately shown some tendency toomit market delineation without putting anything else in its place. Thissomewhat disturbing trend is chiefly noticeable in cases where theCommission is either granting authorization or is denying it on theground that no public benefit has been shown to result from the restriction.63 Subject to the reservations which this development engenders,however, there is no reason to doubt that the development and refinement of product market definition doctrine in Australia will continue inthe foreseeable future. Current work in the new field of psychologicaleconomicsM should bring still greater precision to the analysis of demandsubstitution and thereby make the tools of market definition moreaccurate and more reliable.

62 E.g. International Shoe Co. v. F.T.C. (1929') 280 U.S. 291, 296-297; reNational Federation of Retail Newsagents' and Stationers' Agreement (1965) L.R.5 R.P. 236; see Schwartz, Free Enterprise and Economic Organization (4th ed.1972) 139; Walker, Australian Monopoly Law: Issues of Law, Fact and Policy(1967) 127-129.

63 E.g. International Air Transport Association [1980] A.T.P.R. 52152; BananaGrowers Federation Co-operative Ltd [1978] A.T.P.R. 17035. In some other casesthe T.P.C. has dealt with market definition by implication, presumably becausethe point is thought to be obvious on the particular facts. Thus, the determinationin Victorian Guild of Furniture Manufacturers [19781 A.T.P.R. 17050, anunsuccessful application dealing with design copying rules, seemed to assume thatthe competitive context was furniture manufacture in Victoria. It might have beenrelevant to know whether, and to what extent, second-hand furniture competedwith the new product, but perhaps the Commission did not consider that the answerto that question would make any difference since the members of the associationaccounted for 90 percent of new furniture output in Victoria.

It is even more disturbing that the Commission in the important case lohnLysaght (Australia) Ltd [1978] A.T.P.R. 17304 inexplicably made almost everypossible error when defining the markets for various classes of sheet steel products.

64 See e.g. Defris and McDonnell, "Recent Developments in the Australian Fieldof Psychological Economics", paper at 48th ANZAAS Conference, Melbourne1977.

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