Review of Industrial Organization

, Volume 6, Issue 1, pp 33–48 | Cite as

Residual demand estimation for market delineation: Complications and limitations

  • Luke M. Froeb
  • Gregory J. Werden


To shed some light on market delineation in an antitrust context, many economists are turning to estimates of residual demand elasticities. Recent papers have drawn attention to the importance of demand curve in market delineation and explained how they can be estimated. This paper shows that there are many complications and limitations of the approach. The relationship between the residual demand elasticity and the scope of the relevant market is complicated and depends on behavioral assumptions. The residual demand elasticity that can be estimated is not the one on which market delineation turns. The estimation of residual demand elasticities can be very difficult because of the complex dynamics of consumer behavior. Finally, residual demand estimators are likely to have a high variance because of instrument problems and this is likely to lead to widely varying estimates depending on specification choices.

Key words

Mergers market delineation demand elasticities 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Baker, Jonathan B. (1987), ‘Why Price Correlations Do Not Define Antitrust Markets: On Econometric Algorithms for Market Definition,’ Working Paper No. 149, Bureau of Economics, Federal Trade Commission, January 1987.Google Scholar
  2. Baker, Jonathan B. and Bresnahan, Timothy F. (1984), ‘Estimating the Elasticity of Demand Facing a Single Firm: Evidence on Three Brewing Firms,’ Research Paper No. 54, Stanford Univ. Department of Economics, 1984.Google Scholar
  3. Baker, Jonathan B. and Bresnahan, Timothy F. (1985), ‘The Gains from Merger or Collusion in Product-Differentiated Industries, Journal of Industrial Economics 33, 427–44.Google Scholar
  4. Baker, Jonathan B. and Bresnahan, Timiothy F. (1988), ‘Estimating the Demand Curve Facing a Single Firm’, International Journal of Industrial Economics 6, 283–300.Google Scholar
  5. Froeb, Luke M. and Werden, Gregory J. (1990), ‘Residual Demand Estimation for Market Delineation: The Cellophane Fallacy Revisited,’ unpublished.Google Scholar
  6. Judge, George, C., Griffith, W. E., Hill, R. Carter, Lütkepohl, Helmut, and Lee Tsoung-Chao (1985), The Theory and Practice of Econometrics (2nd ed.).Google Scholar
  7. Ordover, Janusz A. and Wall, Daniel W. (1989) ‘Understanding Econometric Methods of Market Definition,’ Antitrust 3, 20–25.Google Scholar
  8. Scheffman, David T. and Spiller, Pablo T. (1987), ‘Geographic Market Definition under the U.S. Department of Justice Merger Guidelines’, Journal of Law and Economics 30, 123–47.Google Scholar
  9. U.S. Department of Justice (1984), Merger Guidelines (June 14).Google Scholar
  10. Werden, Gregory J. (1983), ‘Market Delineation and the Justice Department's Merger Guidelines,’ Duke Law Journal 514–79.Google Scholar
  11. Werden, Gregory J. (1985), ‘Is There a Principle for Defining Industries? Comment, Southern Economic Journal 52, 532–36.Google Scholar
  12. Zwangiger, Jack (1989), ‘A Dangerous Concentration in Hospital Markets,’ Wall Street Journal June 19, p. A10.Google Scholar

Copyright information

© Kluwer Academic Publishers 1991

Authors and Affiliations

  • Luke M. Froeb
    • 1
  • Gregory J. Werden
    • 1
  1. 1.Antitrust DivisionU.S. Department of JusticeWashington D.C.USA

Personalised recommendations