8.1.1 Characteristics of markets
A market can be defined as a group of economic agents, usually firms and
individuals, who interact with each other in a buyer–seller relationship. This is
fine as a general definition but it lacks practical applicability in defining a
specific market. How for example can we define the market for Coca-Cola? We
can refer to a cola market, a carbonated drinks market, a soft drinks market, or
a beverage market; all of these have different boundaries in terms of the
number and types of product involved. Of course, Coca-Cola operates in all of
these markets, but which definition is relevant? One might respond to this
problem that this is purely a matter of semantics and is not a significant issue.
This, however, is not the case. In 1986 the Federal Trade Commission (FTC) in
the United States tried to block the merger between Coca-Cola and Dr Pepper,
and the judgement in this case, as in many anti-trust cases, hinged on the
definition of the relevant market.1 In another case, in 1984, the FTC had to
determine whether General Foods’ Maxwell House brand of coffee had
engaged in unfair competition with Proctor and Gamble’s Folgers brand in
certain US cities.2 Again the FTC had to determine what constituted the
relevant coffee market, this time in terms of geographical boundaries.
It can be seen from these examples that markets can be defined in terms of
both product characteristics and geographical characteristics. In the first case the
cross-elasticity of demand is an important measure in terms of indicating
the degree of substitution between products. Thus in the Coca-Cola case it was
determined that the relevant market was carbonated soft drinks. In the second
case it was determined that the relevant market involved the whole of the United
States, not just certain local areas, since the two companies competed nationwide.
Of course, this raises an issue regarding global markets; many firms compete
internationally, in which case the relevant market extends across national boundaries,
even though this may pose problems for anti-trust authorities.