Market definition redefined: Commission adopts new guidance on its approach to market definition in competition cases

Market definition is the process of delineating the boundaries of competition in respect of a particular good or service in a particular geographic area – comprising both a ‘product market’ and a ‘geographic market’.  Despite being a precursor to any substantive assessment of competition within the relevant market, it is a crucial step for the Commission – particularly in merger and abuse of dominance investigations – as it involves identifying the relevant firm(s)’s immediate competitors, enables the calculation of market shares, and is vital to assessing market power. The revised notice aims to increase the transparency and predictability of this process by documenting the Commission’s current practice, in light of EU case law.

The revised notice generally retains the core principles of the pre-existing market definition notice, which dates back to 1997. At the same time, it greatly expands on its predecessor through more detailed explanations of the Commission’s methodology and references throughout to relevant merger decisions and judgments.  It also introduces various revisions and clarifications to the methodology and evidence employed when defining relevant product and geographic markets, especially in areas where traditional economic tools fall short. Key amongst those changes include:

• Recognition of the importance of non-price parameters of competition in defining the market, including quality, sustainability, efficiency, durability, value, reliability of supply, degree of privacy protection, and level of innovation. Under the old notice, the principal tool for identifying which products are viewed as substitutes by customers was the ‘SSNIP’ test, which looks at customer behaviour in response to a hypothetical small but significant non-transitory increase in price. The Commission now acknowledges the limitations of that tool – particularly when looking at zero-price markets or highly innovative industries – and its significance is somewhat downplayed. The Commission notes that other tools, including the small but significant non-transitory decrease in quality test (which examines customer behaviour in response to a decrease in quality) may be more relevant depending on the facts at hand.
• Guidance on when market definition may require a forward-looking assessment. The notice recognises that a transition in the structure of a market may be expected in the short or medium term, which will affect the general dynamics of supply and demand. This is particularly the case for industries characterised by fast technological progress. If sufficiently evidenced, the Commission may consider such transitions when defining the relevant product or geographic market.  For example, the Commission may consider emerging technologies or pipeline products and decide to include them within the relevant market.
• Expanded and updated guidance on geographic market definition. The notice recognises the challenges of defining geographic markets in the context of increased globalisation, digitalisation, and innovation. It emphasises the importance of examining trade flows and barriers to supplying customers in different areas, and gives greater recognition to the possibility of markets being global in scope. On the other hand, the notice sets out for the first time the Commission’s approach to defining geographic markets based on local catchment areas, including the proportion of sales the Commission will set as its criterion when determining the size of such areas.
• New sector/market-specific guidance, notably in relation to:
  • Highly innovative industries characterised by frequent and significant R&D. In such industries, the Commission may consider the specificities of innovation competition, such as the existence of pipeline products or early innovation efforts, which may not be closely related to any specific product or market. The Commission may factor in various potential outcomes of R&D processes in its assessment, depending on the degree of visibility and likelihood of their development and commercialisation. The Commission may also use alternative metrics, such as R&D expenditure or patents, to assess the relative competitive position of undertakings in innovation-intensive markets.
  • Multi-sided platforms that serve multiple groups of users, such as online marketplaces, social networks, or search engines, and that can exhibit network effects, economies of scale, and data-driven advantages. Markets for such platforms can be defined in multiple ways: as one market for all the products offered by the platform to its various users, or as separate markets for the products offered on each side of the platform. The Commission will define separate markets where there are significant variances in the substitution possibilities as between the different sides of the platform. Factors the Commission will look at in this regard include the identity of the competitors on each side of the platform, the degree of product differentiation on each side, and whether users tend to use one such platform or multiple platforms in parallel.
  • Digital ‘ecosystems’. The Commission is increasingly being called upon to look at cases involving interrelated and complementary digital products, such as core mobile operating systems and the products built around those systems. The notice explains that the Commission may define the markets for such products in a similar way to those for more traditional ‘aftermarkets’ (i.e. where a primary product is connected with secondary products such as spare parts or consumables – a scenario covered by the old notice). In particular, whether or not the Commission should define one overall ‘system’ market (comprising the core product and all connected products) will largely depend on the ease and degree of switching between alternative core products and the extent to which this may be driven by consumers’ choice of connected product. In this regard the Commission may consider factors such as network effects, switching costs, data portability and interoperability between ecosystems.

The revised notice is an important update to the Commission’s body of soft law, and the approach to market definition it sets out has significant implications for businesses involved in merger and antitrust investigations in the EU – particularly those in the tech, transport, pharmaceutical and heavy industrial sectors, which account for the majority of cases and decisions it references.

However, the new Notice should not be seen as signifying a material change in the Commission’s approach to market definition, nor to its assessment of cases involving dynamic and innovation-focused markets.  Rather, it largely codifies the Commission’s current practice. Its publication is nevertheless a welcome development as the Commission itself recognised in 2021 that the 1997 notice did not reflect current Commission practice or market realities.

Finally, it should be noted that the Commission reserves a great deal of discretion to define markets flexibly on a case-by-case basis. It also emphasises the importance of the competitive assessment that follows market definition and makes clear that the Commission may take a flexible approach in respect of market shares, both as to their calculation and significance. Businesses and their advisors should therefore be mindful of the risk of attaching too great an importance to arguments around market definition even if such arguments appear supported by Commission precedent and/or the revised market definition notice.