A “Defining Moment”: The Commission consults on its updated Market Definition Notice
A “Defining Moment”: The Commission consults on its updated Market Definition Notice
The European Commission is currently consulting on an updated draft of its Notice on the Definition of the Relevant Market for the Purposes of Union Competition Law (Market Definition Notice). The Market Definition Notice provides useful guidance to businesses on the factors that will be considered by the Commission when assessing the boundaries of the product markets within which they operate and the geographic markets which they serve. It is a helpful tool for businesses wishing to determine their competitive strength in a particular area and to evaluate the likely competitive effects of their actions.
As under the existing Market Definition Notice, the Commission makes it clear that businesses are subject to three main sources of competitive constraints: demand substitution, supply substitution and potential competition. Enhanced guidance provided by the Commission in respect of each of these concepts includes the following:
The Commission confirms that while it may rely in its review of the relevant market upon the traditional "SSNIP" test (i.e., whether it would be profitable to implement a small but significant non-transitory increase in price (generally of 5 – 10%)), it is not obliged to do so. In particular, where businesses compete other than on price, e.g. on the basis of quality and innovation, other forms of evidence may be more appropriate. These could include the results of an "SSNDQ" test, i.e., whether customers would switch in response to a small but significant non-transitory decrease in quality.
Reflecting the increased focus on digital markets, the updated draft confirms that the Commission may take into account expected structural market changes arising from new products or technologies in certain cases. Digitalisation has also influenced the list of barriers to switching which the Commission may consider when assessing demand-side substitutability and which now includes elements such as network effects and the cost of data portability.
In order for markets to be broadened on the basis of supply substitution, the Commission confirms that it requires most, if not all, suppliers to be able to switch production between products in the range of related products. Suppliers must also have the incentive to switch when prices or demand conditions change and must be able to market the products effectively in the short term, without significant additional sunk costs or risks. When only some of the suppliers meet these conditions, the relevant market will not be broadened, but the Commission will take any such suppliers into account as part of its competitive assessment.
The Commission confirms that it will consider remote competitive constraints arising from potential competition (which do not meet the criteria of supply substitution in terms of immediacy and effectiveness) during the competitive assessment, rather than at the market definition stage.
Definition of Geographic Markets
The revised draft Market Definition Notice acknowledges that geographic markets may range from local to global in scope. The Commission notes that when assessing whether competitive conditions in a certain area resemble or differ from those in a neighbouring area, it will examine a variety of evidence, including catchment areas and any switching to imports. It emphasises that the mere existence or possibility of imports will not necessarily lead to a widening of geographic markets, as customers in the area of origin and the area of delivery may face different conditions of competition. The Commission will, however, examine the constraint exercised by imports in its competitive assessment and when calculating market shares.
Further Novel Features
Perhaps unsurprisingly, many of the updates to the Market Definition Notice focus on the definition of digital or innovative markets. The updated draft provides standalone guidance for the first time on multi-sided platforms, after markets and digital ecosystems, differentiated products and markets with significant R&D investment:
In the case of multi-sided platforms (e.g., payment card systems or advertising-sponsored platforms which support interactions between various groups of users), the Commission notes that it may either define a relevant product market for the products offered by the platform as a whole or separate markets for the products offered on each side of the platform. Even where separate markets are defined for the products on each side of the platform, the Commission notes that it may still take into account network effects and constraints from the other side of the platform in its competitive assessment.
Where multi-sided platforms offer products at a zero monetary price to a user group in order to attract users to products offered on the other side of the platform, the Commission emphasises the importance of non-price elements (e.g., functionalities, intended use etc.) when assessing substitutability.
After markets and digital ecosystems
The Commission foresees various possible market definitions where the consumption of a primary product leads to the consumption of another connected (or "secondary") product. These include separate markes for the primary and the secondary products, a singe market for both or a market for the primary products and separate markets for the secondary products associated with each brand of the primary product. Where customers prefer to consume several products as a bundle, the Commission may examine whether the bundle itself is a separate product market. It recognises that it is possible also for these principles to apply to digital ecosystems comprising a primary core product and connected secondary products.
Significant investments in R&D
As regards pipeline products, the Commission confirms that such products may belong to an existing or to a new market. The intended use of the pipeline products and their projected substitutability with other products will be crucial in determining the relevant market. It may also be necessary to define the boundaries within which businesses compete in early innovation efforts which may not yet be closely related to any specific product. The Commission provides guidance on factors which will be relevant to any such assessment, including the research objectives, the specialisation of the teams involved etc.
Product / geographic differentiation
The updated draft Market Definition Notice includes a new section on products/geographic areas which are characterised by significant differentiation. In such cases, the Commission notes that it may identify separate relevant markets within a continuum of differentiated products or a relatively broad market that includes differentiated products. It observes also that where products are differentiated, market shares may be a less reliable indicator of market power and it may be more important for the Commission to analyse whether the business involved and other suppliers closely compete.
Building on the existing Notice, the updated draft also provides further guidance in relation to price discrimination and market shares. The Commission recognises that the use of market shares based on metrics other than sales or purchase data (e.g., the number of users or downloads) may be appropriate for specific products/industries. It also affirms that the standard approach of computing shares over one year reference periods for at least three years may not be suitable in all cases, particularly where there is lumpy or seasonal demand.
The Commission's public consultation on the updated draft Market Definition Notice will remain open until 13 January 2023. The Commission will then review and revise the draft with a view to having a final Market Definition Notice in place in Q3 2023. Adoption of the draft will provide useful additional clarification to businesses, particularly in relation to the factors that will influence the definition of innovative and digital markets. It will also be welcomed for its increased focus on global markets and for drawing to a greater extent on practical examples derived from recent decisions of the Commission and the Court of Justice of the European Union.
For further information on this, including details on how the revised Market Definition Notice may affect the definition of the markets within which your business competes, please contact A&L Goodbody's EU, Competition and Procurement team.