Critical Loss vs. Diversion Analysis: Clearing up the Confusion

Malcolm Coate, Joseph Simons, Dec 16, 2009

Critical Loss Analysis has been a standard method of implementation for the market definition algorithm of the Department of Justice and Federal Trade Commission Horizontal Merger Guidelines. A few years ago, it was recognized as one of the major developments of the modern Merger Guidelines era. At the same time, however, there has been a lively debate about the pros and cons of the standard Critical Loss Analysis methodology. An alternative methodology has been proposed by the current chief economists at both the FTC and the DOJ. With the recent announcement by the agencies of their intent to amend the Guidelines, this debate takes on some urgency. A few years after the issuance of the 1982 Merger Guidelines, CLA was introduced as an empirical structure to define relevant markets, as well as a method to aid in the full competitive effects analysis. Recently, however, various commentators have suggested problems with CLA ranging from fairly minor issues to claims that the approach is not consistent with basic economic theory. Not surprisingly, there is considerable confusion in the antitrust community regarding the appropriate use of CLA and its potential alternatives. This article attempts to bring some clarity to this situation.

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