Market definition with differentiated products: a spatial competition application

This paper applies the ‘hypothetical monopolist’ test of market definition to a retail market with products differentiated by means of location and other dimensions. The test for defining the relevant product and geographic market follows the conditions required by the European Union Competition Law and so it takes into account both demand- and supply-side substitution. The empirical model using sales data from a set of movie theatres in the North of Spain, incorporating the observed locations of consumers vis-à-vis the stores, shows that empirical tests of market definition may lead to an implausible (too restrictive) definition of the relevant market if supply-side substitution is not accounted for. It also shows that the main driver of competition in retail markets with differentiated products is not price but product characteristics.