On 8 November 2022 the European Commission (“Commission”) published its draft Notice on the definition of relevant markets for competition law purposes (the “Notice”) and launched a public consultation which will run until 13 January 2023. All interested parties have one last chance to submit their views on the Notice, and potentially impact the final version.
The Notice provides guidance based on the case law of the European Court of Justice (“ECJ”) and the decisional practice of the Commission. It takes into account recent market developments following a consultation of stakeholders on whether the Market Definition Notice 1997 (“1997 Notice”) still functions effectively. This article covers these changes in accordance with the structure of the Notice.
Towards a new Notice
Much has happened since 1997, especially with the maturing of digital markets. To put this in historic perspective: 1997 was the year in which Stanford students Larry Page and Sergei Brin registered the domain name google.com. Since then, digitalisation has introduced new concepts such as multi-sided markets, globalisation, competition on non-price elements etc., most of which were not addressed in, nor easily dealt with under the 1997 Notice. Out of necessity, the case-law of the ECJ and the practice of the Commission adapted to these changes, which left the 1997 Notice further removed from this new commercial reality.
In its press release, the Commission reiterates the outcome of the consultation: the current Notice remains highly relevant and is generally fit for purpose, but no longer reflects the changes in the case-law and the Commission’s practice. Stakeholders asked for more guidance on various key issues regarding market definition. The response to the consultation has been covered in an earlier edition of Competitive Edge.
The Commission takes this feedback into account by offering more guidance on the principles of market definitions, non-price elements, markets that are expected to undergo structural transitions, digital markets, innovation-intensive markets, the geographic market definition in global markets, quantitative techniques, and evidence and its probative value.
General observations
The Notice contains is almost twice the size of the 1997 Notice. It also contains a brand-new chapter on how the Commission applies the concept of the relevant market in specific cases, such as multi-sided markets, innovation-intensive markets, after-markets and in situations of significant differentiation and price discrimination.
Many of the changes codify the decisional practices of the Commission and case law principles that have since become the norm. Other changes reflect lesser-known practices of, for example, defining the market in innovative industries.
Principles of market definition
On the principles of the relevant market the Commission is more elaborate than it was in its 1997 Notice. It reiterates that the relevant market is defined on a case-by-case basis, or as the Commission puts it, ‘based on the facts of the case in hand’. This means that the relevant market may differ from sector to sector and between various levels of the supply chain. The Commission also states that the principles for defining the relevant market are the same in antitrust cases and merger control. At the same time, the Commission does not consider itself bound by its previous definition of a relevant market in a seemingly similar case.
On the methodology for market definition, the Notice does not deviate substantially from the 1997 Notice. It maintains that the main sources of competitive restraint are determined on the basis of demand substitution and supply substitution and potential competition. But the Notice offers more guidance on the assessment of these sources of competition, particularly in more dynamic and digital markets. In addition to the 1997 Notice, the Commission states that in the event price-increases do not help in assessing the demand side substitution, the Commission may opt for the use of other competitive parameters, like innovation and quality. The Commission is particularly likely to do so in multi sided markets (as discussed below). On the relevance of supply side substitution, the Notice offers yet more guidance. The Commission considers supply side substitution relevant for defining the relevant market where suppliers use the same assets and processes to produce related products that are not substitutes for customers, and where this leads to similar conditions for competition.
In contrast with the 1997 Notice, guidance is given on when the Commission will make use of a previous definition of the relevant market from a case with similar product and geographical market definitions. The Commission considers three elements when deciding on re-using a market definition: the parameters of competition, the undertaking(s) involved, and the time period considered. We understand the parameters of competition as the market conditions under which undertakings compete with each other. The competitive constraints with regard to the price of a product may differ from the constraints on investing in the quality of a product, which may lead to different market definitions. Regarding the undertaking(s) involved, the explanation given is straight forward: if different undertakings are involved or an undertaking’s behaviour is different, this may lead to a different market definition. Lastly, the time period considered is also straight forward. The Commission states that changing market conditions may result in a different market definition.
Another point worth noting is that the Notice does not compel authorities to always reach a definitive conclusion on the scope of the relevant market. The Commission now explicitly reserves the possibility to leave the relevant market undefined if the competition concerns arise or fail to arise regardless of market definition.
Finally, the Notice contains a few points that have become so commonly understood that it may come as a surprise that they were not already in the 1997 Notice. For example, that defining the relevant market is only one step in the Commission’s assessment under competition law. Another example is that the concept of the relevant market under competition law may differ from similar concepts in other areas of law.
Markets expected to undergo structural transitions
The Notice offers guidance on how to define a market expected to undergo structural transitions. Structural transitions concern changes to the market conditions which affect the general dynamics of demand and supply. It will not come as a surprise that the Commission reserves the right to take into consideration expected transitions in the structure of the market if, according to the Commission’s assessment, they are expected to occur in the short or medium-term. It is not clear from the Notice what the Commission means by short or medium-term. Furthermore, the projected structural changes must be sufficiently likely to occur. The evidence of this must be reliable, going beyond mere assumptions.
Market definition in the presence of significant differentiation
To facilitate defining a relevant market, the Commission may differentiate between products in order to find closer substitutes. Differentiation can occur on the product or geographic level. Product level differentiation can be based on how the customer’s choice is affected by certain aspects of a product. The Commission may separate one type of product from another on the basis of design features, brand image, technical specifications, durability, etc. Differentiation on the geographic level is based on how the location of a customer or producer affects the customer’s choice. As a result of differentiating products, the Commission may find different relevant markets across a range of products.
Market definition in the presence of significant price discrimination
The Notice contains a separate paragraph on how the Commission defines the relevant market when undertakings discriminate in price on the basis of customer characteristics. The Commission elaborates on this by giving three conditions which may suggest the existence of distinct groups of customers:
- the ability to identify clearly which group an individual customer belongs to at the moment of selling the relevant product;
- where trade among customers or arbitrage by third parties is unlikely; and
- where the price discrimination is of a lasting nature.
In these instances, the conditions for competition can differ from one type of customer to another to the extent that the Commission may define separate relevant markets.
Market definition in the presence of significant investments in R&D
The Commission may take into consideration specific factors in markets that have high levels of R&D investment. It gives the example of so-called ‘pipeline products’, where the R&D is so visible to the market that products still in development are already able to affect customer behaviour. The Commission may decide to conclude that the pipeline product forms a separate market or is part of another market, depending on how customers anticipate the product.
Market definition in the presence of multi-sided platforms
The Notice contains a separate paragraph on market definition in the case of multi-sided platforms. Such platforms often operate in the digital sphere. A characteristic of multi-sided platforms is that they facilitate interaction between two groups of users. This means that a change in demand from one group of users influences demand from the other group of users, which results in indirect network effects.
When defining the relevant market, the Commission takes the different sides of the platform into account. It does so either by defining the products offered by the platform as a whole, or by defining separate relevant product markets for the products offered on each side of the platform. It will define separate markets where there are significant differences in the substitution possibilities between the different sides of the platform. To assess substitution possibilities the Commission takes into account factors such as: whether the undertakings offer substitutable products for each user group; the degree of product differentiation on each side (or each user group’s perception of product differentiation); behavioural factors such as the homing decisions of each user group[1]; and the nature of the platform (for instance whether it is a transaction or a matching platform). Where separate markets have been defined for the products offered on each side of the platform, network effects and constraints from the other side of the platform may still be taken into account in the competitive assessment.
The presence of indirect network effects may render the use of the small but significant and non-transitory increase in price test (“SSNIP test”) more difficult. Multi-sided platforms often offer services (or a product) for free (zero monetary price) to users on one side of the market, whilst monetizing those same services on the other side of the market. Applying the SSNIP test would not work in that case, since users on one side of the platform are offered a product free of cost. This is an integral part of multi-sided platforms. To overcome this issue, the Commission will look at non-price elements, such as product functionalities, intended use, evidence on hypothetical substitution, competitive restraints based on industry views, barriers or costs of switching (e.g., interoperability with other products and licensing features). In the alternative, the Commission suggests it can apply to so-called small but significant non-transitory decrease of quality test (“SSNDQ test”). This test entails the assessment of switching behaviour by slightly reducing the quality of products or services.
Market definition in the presence of after markets, bundles and digital ecosystems
After markets are characterised by the fact that a primary, often durable, product influences the consumption of a secondary product. If this is the case the Commission takes into consideration the competitive constraints from both consecutive markets.
The Notice describes three alternative ways in which the Commission may go about defining the relevant product market. It may decide to (i) take the market for the primary and secondary products together as a systems market; alternatively, (ii) the Commission may define multiple markets, namely a market for the primary product and separate markets for the secondary products associated with each brand of the primary product; or (iii) dual markets, namely the market for the primary product on the one hand and the market for the secondary product on the other hand. The Commission also gives guidance on the circumstances it sees relevant for deciding which of the approaches to take. For instance, if customers are more likely to take the whole-life costs of a product into account, this in an indicator to take together the primary and secondary products when defining the relevant market. If customers prefer to buy products bundled, this may be an indicator of assessing whether the bundled products form a separate market.
The Commission points out that primary and secondary products may also exist in digital ecosystems. When digital ecosystems show signs of after markets the Commission reserves the possibility to apply similar principles which it typically applies to traditional after markets. In addition, when the Commission finds that secondary products are offered as a bundle, it may conclude that the bundle constitutes a relevant market on its own.
Market shares
On market shares, the Notice gives useful guidance on how the Commissions deals with methods for calculation other than sales volumes, such as capacity, production volumes, the number of suppliers, the number of tenders awarded, active users, number of visits, time spent or audience numbers, number of downloads, etc. In addition, the Notice indicates in which cases the Commission may opt for which alternative metric to calculate market shares. For example, the Commission views the number of downloads as a useful tool to determine market shares for multi-sided platforms.
Conclusion
The updated Notice will codify approaches towards market definition that have evolved through the decisional practice of the Commission as well as case law to keep up with the development of digital markets. The compilation of all these updated approaches in one place should provide clarity to businesses going forward. Compared with the 1997 Notice, the draft contains some notable differences:
| The Notice | The 1997 Notice |
| Guidance on when previous market definitions will be adopted in similar circumstances. | No guidance. |
| Structural transitions to the market taken into account if the Commission believes these will occur over the short to medium-term. | Static view of the market. |
| Acknowledges separate markets may exist where there is significant product differentiation or price discrimination. | No acknowledgement. |
| Defining the market by reference not just to price but also to other metrics in case of multi-sided platforms. | Price is the only metric as applied in the SSNIP test. |
| Defines a number of different alternatives for the relation between primary and secondary markets. | No alternative possibilities explored. |
| Market share calculated not just according to sales but other metrics particularly applicable to digital markets such as number of downloads. visits or active users. | Market share is calculated only by value of sales. |
The consultation ends on 13 January 2023. Until then, all interested parties can submit a contribution in a last chance to influence the final version. More information about submitting a contribution is available here. The Commission expects to publish the final version in the third quarter of 2023.
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For further information, please contact:
Pauline Kuipers, Partner, Bird & Bird
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[1] This refers to the decision by users to use one platform for a given product (single-homing) or use multiple platforms in parallel for the same product (multiple-homing).
