Market Definition Notes

Market Analysis

MARKET DEFINITION

At the start of every analysis involving Article 101 TFEU or Article 102 TFEU, it is necessary to define the market.

It is also necessary to define the market when considering the substantive analysis under the EU Merger Regulations (EUMR), after the jurisdictional requirements of ‘concentration’ and ‘community dimension’ have been fulfilled.

The definition of the market often has a decisive influence on the assessment of a case. Note though that market definition is most important in relation to Article 102 TFEU and EUMR; it is still important for Article 101 TFEU, but can be shorter.

The main purpose of market definition is to identify the competitive constraints faced by undertakings (U) in the market; must identify the actual competitors of U that are capable of constraining U’s behaviour and of preventing them behaving independently of effective competitive pressure.

There are two parts:

1. Product market;

2. Geographic market.

The relevant market within which to assess a competition issue is established by a combination of the two.

Held in Continental Can [1973] that product interchangeability is an important consideration in defining the relevant market.

Product market

Commission Notice on the definition of relevant market for the purposes of Community competition law OJ 1997 C 372/5 (“Market definition notice” = MDN):

‘A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products' characteristics, their prices and their intended use’.

So, defining the product market considers whether product X and product Y are, and can be, used interchangeably by customers so that there is one single ‘product market’.

There are two parts to this inquiry:

1. Demand substitutability;

• From economic standpoint, this has the most immediate and effective disciplinary force on suppliers of X.

• U cannot have significant impact on conditions of sale (e.g. price) if customers can easily switch to substitute products.

2. Supply substitutability.

Demand substitutability

Assessment of this entails determining the range of products viewed as substitutes by the customer.

The SSNIP test (‘small but significant non-transitory increase in price’ test) is the leading test in relation to demand substitutability.

Would customers switch to readily available substitutes, or suppliers located elsewhere in response to a permanent 5%-10% increase in price?

If increased price of X would be unprofitable due to reduced sales (because customers switch to Y), additional substitutes and areas are included in the relevant market.

If, despite increased price of X, customers would still purchase X, one concludes that it is distinguishable and thus there is a separate market.

• NOTE: A concern with this test is the cellophane fallacy - where a monopolist is already charging monopolist prices, a raise of price of X under the SSNIP test would cause customers to switch to Y due to unreasonably high price.

• This means that X’s elasticity of demand looks higher, and thus X and Y are going to be grouped in the same product market.

• General Court in Astra Zeneca said it is something that the Court should consider, and thus the other factors (see below) are important because the SSNIP test is not fool proof.

• Always mention the existence of the cellophane fallacy, particularly in relation to Article 102 TFEU.

NOTE: When looking at demand substitutability, the inquiry focuses on marginal customers, not ‘captive’ customers who have no choice but to purchase a type of product – they are ‘locked in’ due to inelastic demand. In United Brands [1978], the Court incorrectly focused on the fact that the old and young wouldn’t switch away from bananas despite an increase in price because they need soft food – they ‘are not noticeably or even appreciably enticed away from consumption of bananas by other fresh fruit’.

This fact doesn’t help the inquiry – these customers need to consume bananas and so bananas in general are not necessarily a distinct product market. To show substitutability, one need only show that a sufficiently large number of non-captive customers would seek substitutes when faced with increased price. If this group is large enough, the increased price would be unprofitable.

In some cases, it may be desirable for firm X to flush out their marginal customers by increasing prices. Where X has a large proportion of locked-in customers, they can increase prices to encourage marginal customers to move away, allowing them to ‘go crazy’ with price increases which they know their locked-in customers will accept.

Supply substitutability

Supply substitution would exist where suppliers can switch production to X and market them in the short term without incurring significant additional costs or risks in response to small and permanent price changes.

When these conditions exist, the additional production has a disciplinary effect on competitive behaviour – equivalent to demand substitution in terms of effect.

• Example: The market for paper –

• Demand perspective:

• Different qualities of paper (from standard writing paper to high quality paper for art books) cannot be used for any given use.

• No demand substitutability.

• Supply perspective:

• Paper plants can manufacture different qualities.

• Production can be adjusted at negligible costs in short time-frame.

• Is supply substitutability – EC would not define a separate market for each quality of paper and its respective use.

Evidence to define the product market

• Product characteristics and its intended use.

• Hoffmann-La Roche [1979]: If X can be used for different purposes, and if these different uses are in accordance with different economic needs, these are good grounds that finding that X may belong to separate markets.

• Despite how the vitamins in the case could be used for different purposes, for some of which they did act as...

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