Markets and Industries

MARKETS AND INDUSTRIES 575

Advertising research. Advertising research is aspecial application of marketing research but em-ploys many of the same techniques and methods.The task of advertising research usually is to findanswers to one or more of the following questions:(1) What shall we say? (2) How shall we say it?(3) Where, when, and how often shall we say it?(4) How well did we communicate the intendedmessage? These questions are investigated, respec-tively, in motivation research, copy research, mediaresearch, and evaluation research [see ADVERTIS-ING, article on ADVERTISING RESEARCH].

Growth of marketing research departments. Of1,660 companies surveyed more than half reportedhaving a marketing research department (Ameri-can Marketing Association 1963). Research depart-ments are most common among companies thatmanufacture consumer goods (62 per cent havethem), industrial companies (60 per cent), andpublishers and broadcasters (57 per cent). Thebigger the company, the more likely it is to havea research department. The research departmentis a fairly recent addition to corporate staffs; morethan half of the departments in the survey hadbeen formed since 1955. Even the companies thatdo not have formal marketing research depart-ments carry on such research, either through theirown personnel or through outside consultingfirms. Between 1960 and 1965 marketing researchbudgets as a percentage of sales increased for bothconsumer and industrial companies.

It is clear that marketing research has maturedgreatly since 1955 and that it has gained increasedacceptance from business management. It is alsotrue that marketing research has not yet reachedits full potential.

DIK TWEDT

[Directly related are the entries ADVERTISING and CON-SUMERS. Other relevant material may be found inINTERVIEWING, article on SOCIAL RESEARCH.]

BIBLIOGRAPHY

Readers interested in more detailed consideration of thevarious aspects of marketing research are referred toWales & Ferber 1956, an annotated bibliography of morethan 1,600 references covering 28 major areas. For cur-rent developments in the United States and abroad, seethe three leading professional journals: Journal of Market-ing, Journal of Marketing Research, and Journal of Ad-vertising Research.

AMERICAN MARKETING ASSOCIATION 1963 A Survey ofMarketing Research: Organization, Functions, Budget,Compensation. Edited by Dik W. Twedt. Chicago:The Association.

BRADFORD, ERNEST S. (editor) 1965-1966 Bradford'sDirectory of Marketing Research Agencies and Man-agement Consultants in the United States and theWorld, llth ed. Middleburg, Va.: Bradford.

HAIRE, MASON 1950 Projective Techniques in Market-ing Research. Journal of Marketing 14:649-656.

Journal of Advertising Research. -» Published since 1960.Journal of Marketing. -» Published since 1936.Journal of Marketing Research. -> Published since 1964.LEVITT, THEODORE 1962 Innovation in Marketing: New

Perspectives for Profit and Growth. New York: Mc-Graw-Hill.

PAYNE, STANLEY L. 1951 The Art of Asking Questions.Studies in Public Opinion, No. 3. Princeton Univ.Press.

TWEDT, DIK W. 1964 How Important to MarketingStrategy Is the "Heavy User"? Journal of Marketing28, no. 1:71-72.

WALES, HUGH G.; and FERBER, ROBERT (1956) 1963 ABasic Bibliography on Marketing Research. Chicago:American Marketing Association.

MARKETS AND INDUSTRIES

The market is the stage on which economicactors—firms, households, and unions—meet andmake key economic decisions for society. Out ofthe process of market exchange come the prices,wages, and profits that serve to determine the allo-cation of the economy's resources and the distri-bution of the national income.

The market is thus a central concept in eco-nomics. It is, however, an elusive concept. Itmay mean merely the geographical place whereexchange takes place—a nodal point where buyersand sellers meet to exchange goods and services.But the concept of the market as economists useit also embraces the whole set of circumstancesthat surround the process of exchange, and indeedit concerns as well the outcomes of the process ofexchange. Thus we speak of market structure andmarket behavior and market price. Firms andhouseholds may take conditions in the market asexternal to them, and such conditions affect theirbehavior. But this behavior in turn affects marketresults and, indeed, may determine what is themarket.

The market in the most general sense is theentire web of interrelationships between buyers,sellers, and products that is involved in exchange.The appropriate definition of the market dependsupon which aspects of this web are of interest atthe time; for different problems there are differentappropriate definitions.

Historically and in much of common usage "themarket" means a place where buyers and sellersmeet to buy and sell goods. But while this usageserves well enough to identify the Fulton FishMarket, it provides little insight into what is meantby the used-car market, the stock market, the labormarket, the mortgage market, or the black market

576 MARKETS AND INDUSTRIES

in Japanese yen. Within the market, however de-fined, buyers and sellers negotiate the exchange ofgoods or services. A market definition may focusupon what the products are, as the market forcement, aluminum cable, or wh^at. In this usageit is common to speak of the market as an industry.Alternatively, however, it may focus upon who thebuyers are, as, for example, the market for loansto Chicago borrowers. It may focus upon who thesellers are, as the market for engineers or themarket in which the integrated oil companiesoperate. Market definition may focus upon therules by which the market is run, as in an auctionmarket, or upon when goods are to be exchanged,as in the distinction between a present and a fu-tures market. Finally, geographical definition mayconcern where buyers or sellers reside or do busi-ness as well as where they meet to exchange. Inthis sense the New York Stock Exchange is oftenregarded as an international securities market.

None of these bases for definition is withoutinterest some of the time. In general, differencesin focus will lead to differences in designation ofwhich transactions belong in a market. The marketis a concept with many dimensions.

The market in economic theoryEconomists use the word "market" in two sub-

stantially different senses. While they have etymo-logical precedent for this—the Latin root mercatusmeans either the place of or the method of contactbetween buyers and sellers—the result is oftenconfusion.

The first sense in which economists use the wordconcerns the general conditions under which buy-ers and sellers exchange goods and services. Theconditions may be summarized in a series ofalternative theoretical market structures, such as"perfect competition," "monopoly," "oligopoly," and"monopolistic competition." [See COMPETITION;MONOPOLY; OLIGOPOLY.] These theoretical struc-tures, or models, make assumptions about suchthings as the number of sellers and buyers andtheir perceptions of each other and yield predic-tions about market behavior. In turn this predictedbehavior leads to predictions about market results :what will be the prices, quantities, and qualitiesof outputs that emerge from the market. Marketstructure is not one-dimensional, but it is oftenconvenient to think of different market structuresas differing from one another in terms of the kindand degree of competition that they lead to.

The second sense in which the word is used isto delineate the boundaries (usually geographic)that identify specific groups of buyers, sellers, and

commodities. This concept of the market is desig-nated extent of the market. In this sense we definethe fluid-milk market for the New York City areaor the upper Midwest cement market by an appro-priate map.

Up to a point these two usages are both separateand separable. One does not need geographic boun-daries to derive predictions about how, for example,a perfectly competitive market works in equatingdemand and supply, nor does one need theoreticalmodels of market structure to describe or delimitthe Fulton Fish Market. The need to confront theseseparate aspects of a market arises whenevereconomists wish to use economic theories of marketstructure to make predictions about the behavioror performance of real-world markets; it arises aswell if they wish to use observed data about real-world markets to test the predictions of theirtheories; it arises, further, if one wishes to useeconomic conclusions about market behavior andperformance in establishing or enforcing publicpolicies that relate to the behavior of actual indus-tries or firms. Since these are among the importantuses of economics, it arises often.

The number of participants in the market is heldto be a key factor in market structure, and thus inmarket behavior and in market results. The num-ber of participants in a market will, however, varyas we change the boundaries of the market. Marketstructure and market extent are thus interrelatedin applications. The great hazard in analyses ofeconomic markets is the circular, or prediction-determining, definition.

Defining market extent by its structure. Mostwell-defined theories of market structure containimplicit rules for delineating which transactionsbelong in the market. Using such implicit rules issuperficially an appealing way to solve a difficultproblem. Except in rare cases it proves quite un-satisfactory. Consider market definitions underperfect competition and under monopoly.

Under perfect competition. A central predic-tion of the theory of perfect competition is that theprice of all transactions will tend to uniformity,allowing for differences in transportation costs.Empirically, the boundaries of a perfectly com-petitive market may be established by searchingfor the area over which transactions occur at com-mon prices. This definition of a market has anhonored past and a wide range of contemporaryacceptance. It is the definition used by Cournot(1838, chapter 4), popularized by Alfred Marshall(1890, p. 327 in 1920 edition), and repeated inleading contemporary texts (Stigler 1942, p. 92 in1947 edition).


One drawback of this definition is that actualprice behavior in such a market cannot be used totest the prediction of uniformity of prices. A moreserious difficulty concerns the interpretation oftransactions that occur at other than the adjustedcommon price. Do they represent transactions ina different market or do they provide evidence thatthis market is in fact not a perfectly competitiveone? The implications of these two possibilities aretotally different. In U.S. law, for example, themerger of two firms is legal if they are in quiteseparate markets but may be illegal if they are inthe same, imperfectly competitive market. Usinguniform price behavior to define market extentwould be satisfactory if such behavior were acommon implication of all theories of market struc-ture; this, however, is not the case.

Under monopoly. The theoretical model of mo-nopoly comprehends a situation in which there isbut a single seller of the commodity (or a groupof sellers who act as if they were under a singlecoordinated management). The implicit market fora monopolized product consists of all transactionsin the commodity in which the monopolist is theseller. It is not a prediction of the theory that theprice need be uniform among all customers, sincethe monopolist can discriminate among buyers. Itis a prediction of the theory of discriminating mo-nopoly that prices will be uniform only among sub-groups of customers who can resell the commodityor among whom demand elasticities are approxi-mately equal. Were we to apply the implicit com-petitive definition of a market in a situation thatis, in fact, that of a discriminating monopolist, thegroup of transactions which occur at a commonprice would represent only a small part of the totalrelevant market.

The major deficiency of defining a market onthe basis of theories of market structure is thatdifferent market structures contain different im-plicit rules for definition of the market. Indeed,their reason for being is that they make differentpredictions about market results. To define themarket according to the price behavior exhibiteddestroys any possibility of using the market sodefined to say anything about price behavior, andit prejudges the question of which market struc-ture is the relevant one for making predictions.An empirically useful market definition must beindependent of the alternative theoretical modelsof market structure, if we wish to test or to applythose theories.

Defining market extent by demand and supplyalternatives. Any particular buyer or seller has adefinable set of alternative sources of supply or

demand which he considers available to him. Fromhis point of view the relevant market is the set ofthese alternatives. This kind of individualizeddefinition of a market would be of little generaluse if there were not important clusters of buyersand sellers for whom the relevant market wasapproximately the same; suppose there are suchgroups and that it is thus feasible to define marketsthat apply to significant numbers of transactions.

As a logical matter, market extent defined inthis way may also be circular. The perceptions of,for example, a buyer as to which are the real al-ternative sources of supply depend upon the pricesthat prevail. A housewife who says she will nevergo across town to shop for food means it onlywithin limits. A big enough "sale" will change herview. Thus if prices are, in fact, uniform as amongsellers, the radius of the market extent around acustomer will be much smaller than the marketto which he might turn if prices were not uniform.Some Californians buy cars in Detroit if prices onthe west coast get too far out of line.

Empirical approximations to definitionWhile as a logical matter there is no satisfactory

definition of a market that identifies the relevanttransactions independent of the market results,reasonable markets do exist in many commodities.While everything in principle depends upon every-thing else, in many cases the interactions and feed-backs are small enough to be negligible. Bicyclesand sports cars are not in the same market, al-though there conceivably exists a set of prices thatwould lead to large-scale substitution of one forthe other. As a practical matter cement is so rarelysold outside of a radius of 200 miles from the fac-tory that a regional cement market may be defined.

The basic empirical problem of market definitionis to define the range of alternatives to which abuyer or seller may practicably turn and to identifythe sets of transactions whose outcomes are suffi-ciently interrelated that to subdivide them furtherinvites error. One definition of an industry is as"a gap in the chain of substitutes"; a parallel defi-nition of a market is as "a gap in the chain ofalternatives." As a logical matter it has been arguedthat industries do not exist (Triffin 1940) and thatall firms must be viewed either alone or as part ofa generally interdependent network. Most econo-mists reject this nihilistic view and believe the in-dustry is a useful aggregate concept. Similarly, themarket is a useful aggregation of sets of relatedtransactions.

Suppose we seek an empirical approximation ofthe set of real, practicable alternatives. We must


ask: "Real alternatives to whom?" One may focusupon the products or the sellers that are real al-ternatives to a particular group of buyers, one mayinstead ask what are the alternative sources ofdemand to a group of sellers, or one may ask whatare the products that are effective substitutes fora particular product. There are, indeed, manyaspects of each of these different ways of lookingat the set of alternatives. Consider the producerof a given product: he may at one time be con-cerned with the group of other sellers of this prod-uct; at another time he may be concerned withother products that are technologically similar sothat they represent real alternatives to him in pro-duction; at still another time he may be concernedwith different products that his customers mayregard as substitutes for his product. Of the hun-dreds of possible ways of defining sets of alterna-tives, two are of major interest to students of eco-nomic markets and how they work.

The first is the real alternative sources of supplyavailable to a defined group of buyers. We mayask, for example, what are the sources of supplyof credit available to the small businessman; wemay be concerned with the sources of supply ofsafety glass to automobile manufacturers; or wemay be concerned with the sources of supply ofautomobiles in the $1,500-$2,500 price range tobuyers living in Peoria. Much of the public concernwith competition is concerned with preserving asufficient number of independent sources of supplyso that every group of customers has genuine al-ternative sources of supply. The legislative concernevidenced in the major antitrust laws is centrallyconcerned with preserving effective competition inmarkets defined in this way.

The second is the group of relevant rivals to aparticular seller. This concept of the market iscrucial to understanding the market behavior ofsellers. The number of rivals that a seller has andthe nature of the interactions between them arehypothesized to be major determinants of the priceand product patterns that emerge in an industry.Indeed, the very concept of an industry rests uponthe identification of a group of sellers in substan-tial rivalry (actual or potential) with one another.Economists largely concerned with industrial struc-ture and behavior regard this focus as central tothe definition of the market.

Implicit in each of these definitions is the notionthat a distinct "product" or group of productsexists. The classification of products into meaning-ful "industries" is a major concern of the U.S.Bureau of the Census and other statistical agen-cies. The recognition that for different purposes

different clusters of products are relevant has ledto the development in the United States of a Stand-ard Industrial Classification (SIC) at several levelsof aggregation. There are seventy-eight "2-digit"industries, hundreds of "3-digit" industries, andseveral thousand "4-digit" industries. By appro-priate recombinations of the 4-digit industries avery much larger number of industries may bedefined. The focus of the SIC is on the supply siderather than the demand side, and SIC industriesare more nearly appropriate to the identification ofinterrelated sellers than of alternatives to buyers.

Markets defined in these ways overlap but donot coincide. Every transaction involves a buyer,a seller, and a well-defined product. It may, how-ever, be a transaction in several different markets.Consider, for example, the purchase of a new com-pact Chevrolet by an individual living in St. Louis.From the buyer's point of view the relevant alterna-tive products may have been any of four or fivemodels of new cars or any of a number of usedcars in the same price range. (The list of alter-natives will certainly not include a truck or atractor and almost certainly will not include a newCadillac.) The relevant sellers will be the new- andused-automobile dealers in a definable geographicregion centered largely on St. Louis, as well as pri-vate sellers with whom the buyer may makecontact.

To the General Motors Company the transactionappears in a very different light. Its rivalry withFord and Chrysler and American Motors for thenew-car dollar is nation-wide and includes Buicksand Cadillacs as well as Chevrolets. At the sametime, the compact-car market—in which the vari-ous American manufacturers are in open compe-tition with certain foreign manufacturers, particu-larly Volkswagen—involves a different set ofrivalries.

From the product point of view, the transactionoccurred in SIC industry 37, Transportation Equip-ment; in industry 371, Motor Vehicles and MotorVehicle Equipment; and in industry 3717, MotorVehicles and Parts. Even the smallest of these isa substantially comprehensive classification includ-ing the manufacturing or assembling of (amongother things) passenger automobiles, trucks, am-bulances, and fire engines and also including theparts that make up such motor vehicles, such asaxles, radiators, drive shafts, exhaust systems,universal joints, and automobile bumpers. Formany purposes SIC 3717 is much too broad; anautomobile muffler and an automobile bumper arenot in any sense substitute products. The statisticalproblem of industry definition is made complex by


the fact that some firms make a large variety ofsuch component products and others specialize.For other purposes the definition of industries inthe SIC is too narrow. Multiproduct firms mayoperate in many industries, and their wage policiesand their labor market negotiations may extendacross industry lines. All production workers ofAmerican Motors, whether they are making carsor refrigerators, are covered by contract negotia-tions with the United Automobile Workers.

The market to buyers. Major impetus to em-pirical definition of markets in the United Stateshas been a by-product of the Anti-merger Act of1950 (the so-called Celler-Kefauver Act). It madevery general a prohibition on mergers "where inany line of commerce in any section of the country,the effect of such acquisition may be substantiallyto lessen competition, or to tend to create a mo-nopoly."

A first step in every one of the cases involvingthis statute is the definition of the relevant market.Pathbreaking opinions in a series of antitrust de-cisions have sharpened the notion of what is arelevant market, as well as defining the legal issuesinvolved. It is clear that one can always define asufficiently localized geographical area in such away that there is but one seller of a particularproduct; conversely, one can usually define an areaso broadly as to make the effect on competitionappear trivial. Every merger leads to the disap-pearance of one seller. But one out of how many?For example, the 1961 merger of the ContinentalIllinois National Bank and the City National Bankreduced the number of banks in the 200 S. blockof LaSalle Street, Chicago, from 2 to 1, the numberof business district banks from 16 to 15, and thenumber of banks in the Chicago Metropolitan Areafrom 219 to 218. For the whole United States therewere about 14,000 commercial banks. After themerger there was one less.

Recent court opinions have established guide-lines :

. . . the boundaries of the relevant market must bedrawn with sufficient breadth to include competingproducts . . . to recognize competition where, in fact,competition exists. (Brown Shoe Co. v. U.S., 370 U.S.294, 326, 1962)The relevant market is the area to which customerscan practicably turn for supplies. (Paraphrase ofU.S. v. Philadelphia National Bank, 374 U.S. 321,1963)The proper question, . . . is not where is the customerlocated, but what is the geographic area of effectivecompetition for his patronage. (U.S. v. Manufactur-ers Hanover Trust Co., CCH Trade Cases 71,708,pp. 80,744, 1965)

A relevant geographic market cannot be defined, how-ever, solely on the basis of where . . . banks haveactually done business, or even where customers haveactually turned for their banking needs. The marketmust be drawn also on the basis of potential competi-tion. . . . Where could customers practically turn foralternative sources of supply? (ibid., pp. 80,746)

These are sensible guidelines; implementingthem is hard. The problem is in relating observa-tion to guideline. A customer buys from a particu-lar seller for any or all of a number of reasons:it may be habitual, it may be convenient, it may bea matter of some indifference, or, importantly, itmay be necessary. Defining the relevant choicesof the buyer is in fact defining the group of sellersfrom one of whom it is necessary that he buy. Putdifferently, if we can define sellers from whom itis impracticable to buy, we have defined sellersoutside of the relevant market. If one is to baseempirical delineation of the extent of a marketupon observations of which sellers are in fact uti-lized by buyers, the key problem is to differentiatethe factor of necessity from that of convenience.

A housewife in a moderate-sized city will ingeneral have a dozen or more supermarkets atwhich she may conveniently shop, and anotherdozen at which she might shop if there were anyreal reason to do so. In fact she will usually tendto shop at two or three, because, other things beingequal, she has certain preferences. Indeed she mayonly shop at one. But this one is an explicit or animplicit choice from the larger set of practicablechoices. It is the larger group that constitutes herreal opportunities and that defines the market.

The determinants of a customer's choice of asupplier may in general be several. Some of theseare (1) portability of the product, (2) cost oftransportation of the product, (3) informationabout the availability and conditions of supply ofthe product, (4) acceptability of the customer tothe seller, (5) price of the product, (6) conven-ience, and (7) chance and habit. These factors maybe related to one another: for example, while thereare limits to the geographic range over which freshmilk and live lobsters can be transported withoutspoiling, these limits may be extended by increas-ing costs of delivery. Refrigerated trucks and rail-road cars extend the markets for fresh produce,some Maine lobsters are shipped to the Midwestby air (but none are shipped to San Francisco),and so on. Similarly, information can be gathered,but at some cost and some inconvenience. Whatis of concern in defining markets is the distinctionbetween the first four listed factors (singly or ininteraction), which represent real limits on prac-


ticable alternatives, and the last three, whichrepresent instead the bases of choices among realalternative sources of supply.

As a practical matter geographic market defini-tion becomes relatively easy when one of the firstfour considerations exercises a dominant limitationon sources of supply. Consider a few examples.For commodities such as cement, for which trans-portation cost per unit is a high fraction of unitvalue, the geographic limits on choice of suppliersis very clear. It is easy to define the relevant ce-ment market for a given customer. The relevanthousing market for an individual is delimited bydistance from his work, by his income, and insome cases, additionally, by his race. The marketfor a business loan for a small business is effec-tively limited to those financial institutions thatwill accept local credit evaluations. Such a smallborrower is typically limited to his home city or aportion thereof. Purchase of a used car tends tobe limited more by available information than byanything else. On the other hand, well-organizedmarkets in securities make the supplier from whomone buys 100 shares of General Motors stock amatter of substantial indifference. The borrowingof $1 million for working capital by a national cor-poration is not practicably limited to any smallgeographic region.

Observing from whom each of the individualmembers of a large group purchases will tend todefine the relevant geographic market if transpor-tation cost, portability of product, information, oracceptability provides a binding constraint on avail-able alternatives. Chance, convenience, and habitwill average out over a large group, and over timevariations in price will average out as well. Thefact that over 90 per cent of all loans to businesseswith assets of less than $50,000 are made by banksin the same city, county, or metropolitan areastrongly suggests that the relevant geographicmarket is limited. Of customers with assets of over$100 million, only one-third borrow from localbanks. (As this example suggests, one can perhapsinfer geographic limitation by observed behavior.This is a complex matter of statistical estimation,discussion of which is inappropriate to this article.)Where no binding limitations of these kinds canbe identified, geographical delineation of marketextent is virtually impossible.

The market to the seller. Identifying the rele-vant rivals to a particular seller is typically a verymuch easier matter than identifying markets forcustomer groups, particularly for manufacturers ofmajor commodities. But not always. Some fortyfirms in the United States manufacture electricalequipment, but only six of them manufacture tur-

bine generators, only four manufacture meters,about a dozen manufacture industrial controlequipment. And General Electric and Westing-house are clearly in rivalry with General Motorsin the manufacture and sale of refrigerators,though they are no part of the automotive industry.

In practice the relevant group of rivals has tobe defined in the context of a particular problem.With respect to price determination, of primaryconcern in many cases, sellers who regard eachother's commodities as close substitutes and em-ploy consciously parallel price policies clearly arein the same market. Products whose prices moveclosely together over a sufficient period of time topermit other influences to vary are usually re-garded as in the same market, and the suppliersof them are considered to form an industry. Again,difficulties in precise definition exist but need notprevent reasonable estimation of related groups ofsuppliers who sell in the same market.

The many markets for a commodity. Considerthe market(s) for business loans. A Federal Re-serve Board survey in 1955 revealed over 1.2 mil-lion outstanding loans by some 7,000 U.S. memberbanks, amounting in aggregate to over $30,000million. Most of these loans were very small: over1 million were for less than $25,000, and theyaccounted for only one-sixth of the dollar total. Onthe other hand, 42,000 of these loans were forover $100,000, and they accounted for two-thirdsof the total dollars of outstanding loans. There isno doubt that there is a national market for verylarge loans. There is also little doubt that smallloans are largely limited to local markets. Thereare thus hundreds of local markets and a nationalmarket as well. (There may be regional marketsin addition.) Let us consider the definition of onesuch local market, that for the Chicago Metropoli-tan Area (CMA).

In a total of 20,500 loans representing about

Table 1 — Loans involving CMA bank or borrower (mil-lions of dollars)*

Location of

orrower

Locaf/o

of bank

In CMA

Not in CMA

All

In CMA Not in CMA

1,125 1,224(16.5) (2.5)756(1.5)

1,881(18.0)

All

2,349(19.0)

* Number of loans in thousands in parentheses.

Source: Special unpublished tabulation from FederalReserve Board 1955 loan survey.

MARKOV CHAINS 581

Table 2 — loans under $700,000 involving CMA bankor borrower (millions of dollars)*

Location oforrovver

Locof/o

of bank

In CMA

Not in CMA

All

In CMA Not in CMA

215 36(14.8) (2.3)

20(0.8)235

(15.6)

All

251(17.1)

* Number of loans in thousands in parentheses.

Source: Special unpublished tabulation from FederalReserve Board 1955 loan survey.

$3,105 million in value, either borrower or bankwas located in the CMA. What fraction of thisbusiness was in the CMA "local loan" market?Table 1 shows this total business classified by loca-tion of bank and borrower. For only $1,125 millionwere both bank and borrower in the CMA. Chicago-located borrowers borrowed $756 million from otherbanks, and Chicago banks loaned $1,224 millionto other borrowers. Some of the loans for whichboth bank and borrower were located in the CMAwere very large loans, in which dealing with alocal bank was a matter of convenience ratherthan necessity. Table 2 presents all loans with anoutstanding balance of less than $100,000. Ofthese about 15,000 loans, representing $215million, were between CMA banks and CMA bor-rowers. Judge MacMahon (in the ManufacturersHanover case) suggested that only business loansunder $100,000 should be considered limited tothe local market. If he is correct, then the trans-actions in the CMA local market of $215 millionare but a small fraction of the total transactionsinvolving Chicago banks or Chicago customers.

Definition of a local market for loans no doubtrequires more sophisticated measures than merelythe address and size of loan used here. One wouldwish to pay attention to the size of the borrower,the nature of his business, his other sources offunds, and so on. Further, one would wish to con-sider nonbank suppliers of funds as well. But theillustration is suggestive.

Does it really matter how one defines a market?In some cases it matters very much. For example,in the CMA bank illustration the share of the mar-ket of the four largest suppliers (called the 4-firmconcentration ratio) varies enormously as the defi-nition of the market is changed. For 1955, the fourlargest Chicago banks made 84 per cent of thedollar volume of business loans of banks in the

CMA, 42 per cent of the dollar volume of loans toCMA located borrowers, but only 25 per cent ofthe dollar volume of loans of under $100,000 toCMA borrowers. These are major differences interms of the relevant theoretical model to apply:84 per cent is in the range where monopolisticmodels are often invoked; 25 per cent is near thecompetitive level. These differences are also impor-tant in terms of the legal status under antitrustlaws. To take a different example, failure to recog-nize the geographical limits to the economical ship-ment of cement would lead to the conclusion thatthe U.S. cement industry has dozens of smallsellers. In fact regional cement markets are highlyconcentrated and in some cases have but a singlesupplier.

The concept of a market is multidimensional andit is complex, but reasonably accurate delineationof markets is required if economic theory is to bebrought into contact with economic observation.No single-definition serves the many uses to whichthe concept is put; the relevant definition must besuited to the particular application required. Log-ical difficulties exist in attempting to define marketextent independent of market behavior and marketperformance. Notwithstanding these difficulties,there is scope for approximations to the extent ofrelevant markets. These require both care in for-mulation and sophistication in empirical estima-tion. No greater barrier exists to the fruitful appli-cation of economic theory than the failure to forgethe links to observable data. The operational defi-nition of economic markets is such a link.

PETER O. STEINER

[See also ANTITRUST LEGISLATION.]

BIBLIOGRAPHY

COURNOT, ANTOINE AUGUSTIN (1838) 1960 ResearchesInto the Mathematical Principles of the Theory ofWealth. New York: Kelley. -> First published inFrench.

MARSHALL, ALFRED (1890) 1936 Principles of Econom-ics. 8th ed. New York and London: Macmillan. -» Atwo-volume variorum edition was published in 1961.

STIGLER, GEORGE J. (1942) 1960 The Theory of Price.Rev. ed. New York: Macmillan.

TRIFFIN, ROBERT 1940 Monopolistic Competition andGeneral Equilibrium Theory. Harvard EconomicStudies, Vol. 67. Cambridge, Mass.: Harvard Univ.Press.

MARKOV CHAINS

A Markov chain is a chance process having thespecial property that one can predict its future justas accurately from a knowledge of the present stateof affairs as from a knowledge of the present to-gether with the entire past history.

Markets and Industries

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