FTC v. Kroger Co., an early test of the 2023 Merger Guidelines, focused on competition within labor markets as well as within product markets. In its decision, the court noted that it was “not aware of any standard economic analysis” for applying the Hypothetical Monopolist Test (HMT) to labor markets. As a result, the court found no fault in the FTC’s choice not to use the HMT for labor market definition.
While common tools for applying the HMT—like critical loss analysis—are well developed for product markets, similar shortcuts have not yet emerged for labor markets. Nevertheless, the core HMT framework is flexible enough to apply to both contexts. The key lies in starting with substitution patterns: for product markets, how consumers would switch between goods, and for labor markets, how workers might switch between employers.
Understanding the HMT Framework for Labor Markets
In product market analysis, the HMT asks whether a hypothetical monopolist could profitably raise prices by a small but significant amount, considering how customers would switch to alternatives. If enough customers would change, the market definition is too narrow. Analogously, for labor markets, the HMT imagines a single employer (monopsonist) asking whether it could profitably lower compensation. The test hinges on how many workers would leave to seek other jobs: if too many would do so, the labor market is too narrowly defined.
The HMT is a framework that can be applied in different ways depending on the context. A numerical test that quantifies the impact of a SSNIP (small but significant non-transitory increase in price) can be one way to add precision when applying the HMT. However, in labor markets, measuring the necessary inputs—like wage markdown or the marginal revenue product of labor—may be challenging, which may limit the value of such tests in labor market cases. Regardless, the HMT can still be applied to labor markets in different ways. The key is to use the best evidence on worker substitution between alternative jobs.
Job Transition Data and Patterns
Robust labor market definition requires considering all the job options workers might move to if employment terms change. Job transition data from sources like the U.S. Census Bureau illustrate that workers regularly switch not only between employers but also across industries and occupations. For example, between 2010 and 2022, 63% of job switchers moved to a different sector, while 71% moved to a different sub-sector.
These data show illustrative aggregate patterns. However, as a general matter, one cannot assume that the parties’ industry or occupations, or the set of firms in a particular product market, constitute a relevant labor market in a given geographic region. Labor market definition requires rigorous analysis that captures actual substitution patterns.
Data on job transitions can be a useful source of economic evidence when applying the HMT, as it shows the types of alternative jobs that workers are likely to consider in response to a change in compensation—the core question in market definition. Job switching data is particularly helpful because it can be challenging or even infeasible to directly estimate workers’ responses to compensation changes.
Economists may need to account for differences between job switching patterns and diversion. If economically plausible differences between switching and diversion would lead to the same conclusion, then switching data on its own may be sufficient. If not, more evidence may be necessary to bridge the gap, such as diversion estimates based on natural experiments.
A Practical Example: FTC v. Kroger Co.
In FTC v. Kroger Co., the FTC proposed a labor market restricted to “union grocery” jobs within defined geographic areas. However, job transition data showed that fewer than two percent of employee moves were within this proposed market; the vast majority switched to and from jobs outside the proposed market, with employers across diverse fields. Most new hires had general skills that could readily be applied in other industries and occupations, which further supported a broad range of employment options.
Geographically, the FTC’s market boundaries failed to align with realistic commuting patterns. Some bargaining areas were implausibly large, while others were implausibly small or internally inconsistent.
Given high turnover and the overwhelming breadth of job opportunities outside the proposed market, evidence showed that a hypothetical monopsonist could not profitably lower compensation—a SSNIP would merely worsen turnover and staffing issues. While the court “tentatively” found the FTC’s market “plausible,” the focus on long-tenured or specialized workers missed the mark, as the HMT centers on marginal workers who are likeliest to leave in response to wage changes.
Conclusion
Defining labor markets demands careful, fact-based analysis rooted in substitution patterns, not rigid formulas or industry boundaries. The HMT framework, despite a shorter track record in labor economics, remains a sound and adaptable approach for assessing labor market definition in antitrust matters. FTC v. Kroger Co. provides an illustrative example of how these analyses could be conducted in litigation. This is further discussed in “Applying the Hypothetical Monopsonist Test for Labor Market Definition.”
The views expressed herein are solely those of the authors and do not necessarily represent the views of Cornerstone Research.
