User:826540MAH/Market Definition

Market definition, for the purpose of Article 102 TFEU, is a crucial tool used to enable the Commission to define markets in which firms may operate. It is a necessary 'precondition for any judgement concerning alleged anti-competitive behaviour', on the grounds that before an abuse of a dominant position can be evidenced, it is essential to first establish the existence of a dominant position in a particular market.

It allows the European Commission to identify markets of products and services which are interchangeable or substitutable by consumers within certain geographic location. The identification of these markets and their boundaries form the relevant markets in which a firm operates, thus allowing for the Commission to calculate market power then dominance.

Under Europemballage Corpn and Continental Can Inc v Commission 1973, the European Court of Justice (ECJ) held that when one is to identify a dominant position of firm, it is crucial to find the delimitation of the relevant market. To the ECJ, market definition is so imperative, that it was forced to quash the case as the Commission failed to define the relevant market adequately.

Market Definition is a two stage process by delineation. The first stage is the identification of the relevant market in relation to the product and geographic market. The second stage, is the identification of the competitive constraints said firm may face. This is assessed using the Small but Significant and Non-transitory Increase in Price (SSNIP) test ( 'hypothetical monopolist test').

The Commission's Notice on the definition of relevant market for the purpose of Community competition law states that Market Definition is a 'systematic way' of identifying the competitive constraints which the undertaking under investigation face.

If the Commission defines a market too narrowly or broadly, it would result in incorrect calculations of market power and incorrect assumptions of dominance or lack of dominance.

The Relevant Markets
The Commission's Notice states that the relevant market is to be established by the combination of the product and geographic market. A market cannot effectively be defined without both aspects.

Product Market
A relevant product market amounts to all products or services which can be considered interchangeable and substituted by consumers, due to their characteristics, intended use and price. The Commission then must determine the competitive constraints the undertaking may face in the relevant market.

The test for the first stage was confirmed in the case Continental Can 1973 as fundamentally a matter of interchangeability. The Commission is to investigate the characteristics of the products in question which are capable of satisfying an 'inelastic need' and are to a limited extent interchangeable with other products. In United Brands 1978 the ECJ distinguished that bananas were in a different market to fresh fruit, due to special characteristics associated with bananas, i.e. softness. The relevant market was narrowed from fresh fruit to soft fruit.

Considering the complexity of the concept of interchangeability, the ECJ in Microsoft Corpn v Commission 2007, recognised that the Commission has a 'margin of assessment' in complex cases involving economic matters such as market definition. More so, the International Competition Network Recommended Practices for Merger Analysis specifies that 'the boundaries of relevant markets may not be precise.'

Geographic Market
The relevant geographic market is the identification of locations which the product or service is marketed and are adequately comparable.

The test was verified in United Brands 1978 as 'a clearly identified area in which [the product or service] is marketed where the conditions are sufficiently homogeneous..'

The location need not be wide reaching. In Alsatel v Novasan 1988, the ECJ indicated that a particular region, in this case France, can constitute a 'sub geographic market'. The ECJ upheld this decision in further cases such as Nerderlandse Vakbond Varkenshouders v Commission 2009 .

SSNIP TEST
The second stage of market definition is established in the Commission's Notice paragraph 13, explaining that firms are subject 'competitive constraints'. For market definition, demand substitutability and supply substitutability are the most significant.

The assessment of demand substitutability, in paragraph 14 of the Notice , determines the range of products which are viewed as substitutes by consumers. Considering both the relevant product and geographic market, in the event of a Small but Significant Non-Transitory Increase in Price (5%-10%), would it be enough for consumers to change to other makes of the same product or to a supplier located elsewhere?

If the substitution were enough to make the hypothetical price increase unprofitable, the additional substitutes and areas are then included into the relevant market.

There is no hierarchy of importance of competitive constraints, nonetheless, there is a lot of conjecture on the issue. Many jurists, including the ECJ in Continental Can 1973, suggest that supply substitutability is of greater concern as a constraint. In the opinion of US antitrust experts such as Thomas E. Kauper, basing market definition solely on demand substitutability 'could lead to relatively narrow product definitions' which in turn results in unfair punishment of firms not necessarily dominant.

Yet, the Commission has 'shifted its emphasis' to demand-substitutability significantly in United Brands Company v Commission 1978 and thereafter. The focus on demand substitutability only examines the consumer's perspective of the market. However, supply substitutability examines if a supplier can change its production process to produce something else. If it is able to, it suggests that they are within the same market even if the consumer does not consider them as a substitute. Nonetheless, it only appears important in situations where companies produce a wide range of qualities and versions of one product and if the effects 'are equivalent to those of demand substitution in terms of effectiveness and immediacy'.

Summary
We must take note that market definition is not an end in itself.

Commissioner Mario Monti, described it as ‘a cornerstone of competition policy, but not the entire building’.

However, US Professor Kaplow argues that market delineation ‘should be abandoned’  because there is no ‘coherent way to choose a relevant market without first formulating one’s best assessment of market power, whereas the entire rationale for the market definition process is to enable an inference about market power’. Nevertheless, Richard Whish QC advises that we must note that the ‘purpose of market definition and its limitations’ when properly defined ‘is often a helpful starting point for the assessment of market power’.

Furthermore, note must be taken that the Commission's Notice, as guidance and not legislation, does not bind the court to follow it. However, when the Court follows the guidance of the Commission, such as in Nederlandse Vakbond Varkenshouders 2009 paragraph 52, it adds significant weight and approval of the actions of Commission.