What purpose does market definition serve in EC Competition Law analysis? Is it always necessary to define the relevant market when applying EC competition rules? How do the European Commission and Courts define the relevant market? Are there any criticis

When defining the relevant market, both demand and supply substitutability must be considered. Demand substitution identifies which products a consumer considers to be substitutes for another. Although there will rarely be a perfect substitute for another product, many customers find substitutable products, we must therefore analyse the factors which may influences a customer’s mind in whether a product can be regarded as an alternate. These include the customer’s preference, whether a switch can be made immediately or not, quality, price differences, and whether substitutes are readily available. Some products can be difficult however as they could be substitutes in one direction and not in the other, which was the case in Microsoft, where the Commission found that streaming a media player was a substitute for a media player but substitution was not readily available the other way round as it did not satisfy consumer demand for some of the features such as streaming or video playback.

There are many ways of measuring demand substitution which will be discussed below.

The Small but Significant Non-transitory increase in price test (SSNIP test), is the economic approach used by the Commission for measuring the cross-elasticity of demand. This crucially important test was first used in the Nestle/Perrier case in 1992, before being officially recognised in the European Commission’s Notice mentioned above. The application of the SSNIP test firstly considers the products or a service similar to those offered by the firm, and asks whether a hypothetical monopolist with control over all of these products would be able to profitably raise the price of those products permanently, by 5-10%, assuming that the price of all other goods remains constant. If the answer is yes, then this set of products defines a relevant market and competition between suppliers of those products provide the main sources of competitive restraint. However if the answer is no, then the firm will lack the power to raise their price. The relevant market would therefore need to be expanded to include other products or geographic areas. The next closest substitute is added to the relevant market and the test is applied again. This process continues until a set of products is identified for which a price rise would not induce a sufficient substitution in demand.

However the SSNIP test is not without its flaws as it can be difficult in applying the SSNIP test. The commission has stressed that it has an open approach to empirical evidence and has many ways of determining the required information for example, they could contact the main consumers or companies in the industry to ascertain their views by written requires for information, or visiting the actual premises. However where consumers are concerned, as Hughes and Beale recognise, asking hypothetical questions may lead to biased results.

The commission states in its Notice, that it will consider quantitative tests devised by economists for the purpose of delineating markets. These include elasticity measures, tests based on similarity of price movements over time, causality calculations, and price convergence analysis. In particular, evidence of recent substitution as a result of actual events or shocks in the market, including the entry of new competitors into the market or the introduction of new products. The wide range of tests used in attempting to define markets were discussed in a report, prepared by an economics consultancy for the Office of Fair Trading (OFT). The report showed that there were many problems with all tests. For example, it was mentioned that generally, tests based on price trends alone should be treated with caution, as they do not allow an assessment of whether prices could be profitably raised by market participants. This is most probably due to price tests not having the capability of being able to take into account other important factors such as branding, quality, or availability of another product.

Characteristics and intended use of the product are other factors which can help determine substitutability in regards to the relevant product market, as the Commission notices in Paragraph 36 of the Notice. Although the commission regards these as useful ‘as a first step, to limit the field of investigation of possible substitutes’, they are insufficient to show whether two products are demand substitutes, because the responsiveness of customers to relative price changes may be determined by other considerations as well. On the other hand, the Courts have relied heavily on qualitative analysis and the importance the Court has given to characteristics cannot be ignored for the Notice, which cannot overrule the cases of the Court.

The examination of the characteristics of the product has in particular given rise to criticism, as in the United Brands case. In this case, the Court decided not to use cross-elasticity of demand data, and opted for a more subjective test based on what the Court regarded as the banana’s special features. It held that ‘the banana has certain characteristics, appearance, taste softness, seedlessness, easy handling and a constant level of production which enables it to satisfy the constant need of an important section of the population consisting of the very young, the old and the sick.’ United Brands was an important decision as it set the stage for a series of cases emphasising on the demand side with physical characteristics of the products playing a leading role, while relatively limited attention was paid to supply substitutability.

Also in the case of Michelin, the Commission did not mention the SSNIP test and held that the market for new replacement tyres for lorries and buses was separate to that for retreads. The Court took into account the ‘analysis of their specific characteristics and their uses by final consumers’. The Commission also relied heavily on qualitative analysis in the decision of Microsoft, and Wanadoo,.

The ECJ stressed in Continental Can, that the market must be defined by reference both to the supply-side and demand side substitutability. An example of this is if a manufacturer of a product can easily switch its production to another product then both products may be in the same market. The Commission in its notice however consider the problem of being able to distinguish supply-side substitutability from potential competition. The commissions remedy for this problem is as follows: if a producer of one product can switch production in the short term to produce another product, without significant cost or risk, then those two products will be found to be in the same market. It is only likely for there to be supply side substitution where producers make products which are similar. The Commission gives a good example of this in its Notification in regards to paper, which it says is supplied in a range of qualities, but paper plants are prepared to manufacture different qualities and production can be adjusted with negligible costs and in  a short time-frame.

The Commission has however sometimes been criticised for placing too little emphasis on supply-side substitutability.

Another important factor which must be taken into consideration is the relevant geographic market, which the commission mentions in paragraph 8 of the Notice; The Relevant geographic market compromises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas. This definition follows the ECJ definition in the United Brands case. Whether or not geographic areas are mutually exclusive or whether the market is global will depend on a number of factors, most importantly, the cost of transport, the nature of the product, and legal regulation.

The type of evidence the Commission considers relevant to reach a conclusion as to the geographic market is listed in Paragraphs 44 to 50 of the Notice.

Firstly, if available, evidence of prices between different areas and consequent reasons for customers switching products can be analysed. However there is a clear limitation because if the prices vary on an international basis, this could be down to many factors, such as exchange rate movements, taxation, and product differentiation. Another measure is by taking into account the basic demand characteristics which entails looking at factors such as national preferences, or preferences for national brands, language, culture and life style and the need for a local presence which the Commission mentions as having a possibility of limited the geographic scope of competition. The views of customers and competitors could also be important so the Commission will contact the main ones of the parties to gather their views on the boundaries of the geographic market. They could also follow the current geographic pattern of purchases which provides useful evidence as to the possible scope of the geographic market. However when the number of customers is so large that it would not be effective enough to obtain them through geographic purchasing patterns then the Commission can look at information of trade flows instead.

The final important point the Commission discusses here in regards to barriers and switching costs associated to divert orders to companies located in other areas. An example delivered by the Commission is the important of transport costs which will limit the scope of the geographic market for bulky, low-value products.

From the evidence gathered, the Commission will then define a geographic market that could range from a local market to a global one. However as the Commission mentions in Paragraph 52, it will not always be necessary to obtain evidence and assess each of these factors because in practise, evidence provided from a certain amount of the above factors will be sufficient to reach a conclusion, as shown in the past decisional practise of the Commission.

The Community authorities’ approach to the geographic market has often been criticised in the past for failing to give adequate consideration to substitutability between different geographic areas. As in the case of the product market, the geographic market has often been drawn narrowly. One would expect further market integration in the EU, and particularly the adoption of the single currency, to broaden geographic markets in the EU.

In practise, the existence of a high market share alone is not normally seen as sufficient reason to conclude that a firm enjoys significant market power. It is therefore inappropriate for the competitive assessment to be confined to issues of market definition alone. Rather, the identification of high market shares simply means that a case cannot be dismissed at an early stage and a more detailed analysis of the economic characteristics of the market and the nature of the allegations will be required.

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