Friday, December 11, 2015

Containerization and the concept of "relevant geographic market"

My earlier post on concentration and market definition (December 8) has led, interestingly, to a number of questions and requests for clarification on the concept of relevant geographic market. I thought I should do this with the help of an example and the graph I attach here. 

From a competition policy point of view, the concept of ‘market’ which is of interest is the relevant geographic market. In other words, this is the physical place where consumers and suppliers interact for the acquisition/provision of a good or service, and where competition among suppliers is prevalent. The consumer is expected to have ample choice, i.e. enough substitute goods should exist for him to choose from. In the form of a witticism, although, say, Maersk Line covers a global network, the service it offers in South America is not of much use to a consumer in Antwerp, and unless the latter decides to move house, he cannot substitute that service for a bad one he may be receiving in Antwerp, neither can he do so if Antwerp tariffs go up. In this sense, the two markets in our example are distinct and geographically irrelevant from a competition policy point of view. Global concentration, in this sense, means very little, as do concentration measures, like the Herfindahl Index, applied at such an aggregate (global) level. 

A market has thus a geographical attribute which is of relevance in determining concentration and competition. For instance, the market of the city where the port is located is fairly captive. But as the port tries to extend its hinterland towards the region, the country or the continent, the market becomes just a potentially targetable market, with more players and thus more competition (see Figure). To give another example: The Shanghai-Hamburg port-to-port market may be highly concentrated, with just a few carriers offering services, but if one were to consider that the market is the door-to-door importation of bicycles made in Wuhan, China, to Paris, France, then the market is highly competitive with many players offering services, using not only those two ports but many others, at both ends of the trade. Simply put, if the market is port-to-port, it can indeed be concentrated; if however the market is door-to-door, including a miscellany of add-on logistics services, it could well be considered as not concentrated at all. HH