Where Markets Meet Their Boundaries – The European Commission’s Revised Market Definition Notice

More than 25 years after the adoption of the original Market Definition Notice in 1997, the European Commission published a revised Market Definition Notice earlier this year. The definition of relevant markets is often the first step in a competition analysis and forms the basis for calculating undertakings’ market shares and thus their level of market power.

The revision introduces significant updates, in particular with regard to digitalization, globalization and innovation. It aims to provide clearer guidance on the Commission’s approach to defining relevant markets in its antitrust and merger practice. 

Main updates

The overall approach to market definition has not changed. It remains a two-step process consisting of:

• the definition of the relevant product market, referring to all products that customers regard as interchangeable or substitutable based on the products’ characteristics, price and intended use, taking into consideration the conditions of competition and the structure of supply and demand on the market; and
• the definition of the geographic market, referring to the geographic area in which the conditions of competition are sufficiently homogeneous and which can be distinguished from other geographic areas, in particular because conditions of competition are appreciably different there.

For the purposes of market definition, only effective and immediate competitive constraints are to be considered. However, out-of-market constraints can still be taken into account in the ensuing competitive assessment, while always bearing in mind that they represent more remote constraints on the undertakings involved. When a case calls for a forward-looking assessment (e.g. assessing the effects on competition of a merger), the Commission may also take into account expected transitions in the market structure, such as the entry of potential competitors.

Market definition is based on a substitutability analysis which considers three main sources of competitive constraints: demand substitution, supply substitution and potential competition. The Commission emphasizes that demand substitution is the main consideration while supply substitution is only relevant in specific cases. Potential competition generally does not satisfy the criteria of effectiveness and immediacy and is therefore usually better considered in the competitive assessment rather than at the market definition stage.

The Commission emphasizes that market definition is based on the facts of each case and that, while past decisions can be a useful starting point for the analysis, the Commission is entitled to deviate from previous market definitions where this is justified by a change in circumstances. The outcome of market definition can differ depending on the undertaking(s) involved (for instance, where the competitive constraints that undertakings impose on each other are asymmetric); the time period considered (market definition results may vary over time as competitive dynamics change); and the competitive concerns under consideration (e.g., in abuse of dominance cases, market definition may have to be adapted to account for the fact that existing market power is liable to distort the analysis).  

Since the previous Notice, digital and innovative technology markets have become increasingly important in the Commission’s practice, often posing challenges that traditional market definition tools, such as the “SSNIP test”, are not well-suited to address. (The SSNIP test asks whether a hypothetical monopolist in the candidate market would find it profitable to implement a small but significant non-transitory increase in price.) In response, the Commission has significantly updated and expanded its guidance on the following points:

• Non-price parameters: In many digital and innovative markets, price is not the primary parameter of competition and the SSNIP test is therefore not suitable. Recognizing this, the Commission emphasizes that it will also consider non-price parameters, such as a product’s degree of innovation and its quality in various aspects – including sustainability, resource efficiency, durability or the value and variety of uses, the image conveyed, or privacy protection afforded.
• R&D-driven markets: Pipeline products under development may be considered when defining a relevant market if the product’s intended use and substitutability with other products is sufficiently visible. Pipeline products could either form part of an existing product market or belong to a new, separate market limited to the pipeline product and its substitutes. The geographical scope of a market containing pipeline products may be broader than the relevant geographic market for commercially available products, reflecting the geographic dimension of the underlying R&D efforts. Where an R&D process is not yet linked to any specific product but could ultimately feed into various products, it may be relevant to identify the boundaries within which undertakings compete, even at this early stage, in order to assess whether a merger or other conduct could lead to a loss in innovation competition.
• Multi-sided platforms: The Commission may define relevant product markets for the products offered by a platform as a whole or for each side of the platform separately, depending on the specifics of the case. It may be more appropriate to define separate markets where there are significant differences in the substitution possibilities on the different sides of the platform. Factors such as product differentiation, users’ (single- or multi-) homing decisions, the nature of the platform (e.g., matching vs audience-providing platforms), and indirect network effects can all play a role in the analysis. Multi-sided platforms often offer services at a zero monetary price to one side of the market (e.g., social media users) in order to attract users that can be monetized on the other side (e.g., advertisers). Non-price factors, including product functionalities, user intentions and barriers to switching (e.g., interoperability, data portability), may therefore play an important role in evaluating substitution. Consequently, instead of applying the SSNIP test, the Commission may decide to employ a SSNDQ test (small but significant non-transitory decrease of quality) to assess customers’ switching behavior.
• Aftermarkets, bundles and digital ecosystems: The Commission considers several factors when defining markets involving primary and related secondary products. The system market approach, in which the market comprises both the primary and the secondary product, is favored e.g., when consumers take into account whole-life costs when purchasing the primary product; when secondary products are significantly valuable or costly as compared to the primary product; or when there are no or few suppliers specialized only in the secondary product(s). In other cases, it may be more appropriate to define separate markets for the primary and secondary products. Depending on the degree of substitutability of the secondary markets, these might be characterized as “dual” or “multiple” markets. If the secondary products from different suppliers are compatible with all or most of the primary products, it is appropriate to define on the one hand a market for the primary product and on the other hand a market for the secondary product, without distinction by brand (“dual markets”). However, if customers of the primary product are locked-in to using only a restricted (brand-specific) set of secondary products, it is more appropriate to define a market for the primary product and separate secondary markets for the secondary products associated with each brand of the primary product (“multiple markets”). There may also be cases where consumers prefer to use several products together as a bundle, even though the consumption of one or more product(s) is not dependent on a primary product (e.g. package holidays). In that case, it may be appropriate to define a “bundle market”, distinct from the markets for the separate products, depending on the likelihood that a degradation of the supply conditions of the bundle would lead consumers to start “unpicking” the bundle. The Commission may apply similar principles to digital ecosystems. These can often be thought of as consisting of a “primary” product and several “secondary” products, connected with the primary product by technological links or interoperability (e.g. an ecosystem of products built around a mobile operating system, including hardware, an application store and software applications). Bundling is also a frequent practice in digital markets. The Commission considers factors such as network effects, switching costs and (single- or multi-) homing decisions for the purpose of defining the relevant product market(s) in relation to digital ecosystems.

Companies’ market shares. One of the main purposes of identifying relevant markets is the calculation of market shares as a measure of companies’ market strength. Market shares are typically determined based on sales turnover or volumes, but these measures are not the only and sometimes not even the most suitable yardsticks. The Commission provides some helpful clarifications on the parameters it will look at in addition to, or instead of, sales figures when calculating market shares for specific industries:

• Markets characterized by the strategic importance of capacity: capacity or production;
• Bidding or innovative markets: the number of suppliers or contracts awarded;
• Digital markets: the number of (active) users, the number of website visits or streams, the time spent or audience numbers, the number of downloads and updates, number of interactions or the volume or value of transactions concluded over a platform;
• Transport markets: units of fleet, seat capacity, number of trips or access rights such as slots at specific airports;
• Mining sector: reserves held;
• Markets with significant and frequent R&D investments: the level of R&D expenditure or the number of patents or patent citations.

Conclusion

The revision of the Market Definition Notice is a long overdue update, considering how digitalization and globalization have transformed the world since 1997. It seeks to address the limitations of traditional market definition methods when innovative and digital markets are involved, notably by placing greater emphasis on non-price, qualitative criteria. However, the new Notice is not revolutionary; it primarily summarizes the Commission’s current approach and practice to date. A final word of caution: while the Notice provides general guidance on the Commission’s assessment of the definition of the relevant markets, companies should be aware that the Commission retains a certain degree of flexibility, allowing it to adapt its approach to the circumstances of each case.

The authors would like to thank Ruben Debuf for his assistance in preparing this alert.