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