Commission steers market definition to the 21st century

Background

This is the first-ever update of the Market Definition Notice since its adoption in 1997. The notion that market definition is a means to an end to conduct a competitive assessment, but not an end in itself, remains unchanged. As a result, market definition – although a useful tool – is not a mandatory step for the Commission in its competitive assessment of cases.

Many of the revisions in the Market Definition Notice are ‘21^st century tweaks’. Additional guidance is provided on how to deal with, for instance, non-price parameters, digital markets and globalised markets. On top of these tweaks, the revised Notice provides further insight into the probative value of evidence and the calculation of market shares.

Non-price parameters

To arrive at a relevant product market definition, the various parameters of competition that customers factor into their purchasing decisions need to be taken into account. The revised Notice expressly acknowledges that not only a product’s price but also non-price parameters are relevant in arriving at a product market definition. These include the product’s degree of innovation and its quality – expressed in, for instance, its sustainability, resource efficiency, durability, and the value and variety of its use. 

The express mention of these non-price parameters come as no surprise. Executive Vice President Vestager has pointed to the increasing relevance of non-price parameters in the Commission’s decisional practice. Examples mentioned are markets that had to be defined for digital services which do not have a monetary price and in the waste value chain where environmental costs are an important factor. 

Digital markets

Non-price parameters can play a particular role in the market definition of digital markets, such as multi-sided platforms and digital ecosystems. 

Multi-sided platforms often supply a product to a user group on one side at a zero monetary price to attract users to products offered on the platform’s other sides or to create scale to attract buyers on other sides. The revised Notice clarifies that for multi-sided platforms the relevant market can be defined either as a relevant product market for the products offered by a platform as a whole or as separate (although interrelated) relevant product markets for the products offered on each side of the platform. Factors taken into account to arrive at a definitive market definition include product functionalities, intended use, evidence of past or hypothetical substitution, barriers or costs of switching, such as interoperability with other products, data portability and licensing features. In addition, the switching behaviour of customers of the zero-price product in response to a small but significant non-transitory decrease of quality can be relevant.

For digital ecosystems, where the consumption of several secondary (digital) products is connected to the primary core product, the revised Notice suggests applying a similar approach to the market definition method used for after-markets. When the secondary products are offered as a bundle, the Commission may also assess whether that bundle constitutes a relevant market of its own. Other factors, such as network effects, switching costs and (single- or multi-) homing decisions may also be relevant. 

Globalisation

The revised Notice recognises the increasingly global nature of trade. It includes references to various markets that are potentially global in scope. These include IT services and civil aerospace equipment. In addition, the revised Notice mentions the possibility of defining a global market from which specific areas are excluded due to high entry barriers or other obstacles to global sourcing by customers: an issue that could play an increasingly important role in the current geopolitical climate.

Probative value of evidence 

The Commission can rely on various sources of information and types of evidence to define the relevant market. The revised Notice attaches a high probative value to evidence “predating discussions of a concentration or conduct and pre-dating the Commission’s investigation”. Moreover, evidence emanating from public authorities or supported by multiple sources, including market participants with conflicting interests, is likewise labelled ‘reliable’. 

Interestingly, internal documents of companies prepared in the ordinary course of business are also recognised as important evidence. Factors relating to the context of these internal documents, such as their date, the authors, addressees and purpose, will determine their probative relevance.

The revised Notice lists the following examples of useful internal documentation:

• marketing studies that companies have commissioned in the past to support decisions on, for example, the pricing of their products or marketing initiatives;
• customer surveys on usage patterns and attitudes;
• data on customer purchasing patterns;
• evidence showing that a company monitors the conduct of certain competitors, and
• strategic documents relied on by the company to inform business decisions.

Market shares and other metrics

Even though the Commission generally relies on market shares based on merchant sales (in value and volume), other metrics can sometimes provide better insights into a company’s competitive strengths. A good rule of thumb is that metrics used by market participants in their general course of business are particularly telling. 

To calculate market shares, the revised Notice lists the following alternative metrics: 

• for markets characterised by the strategic importance of capacity: capacity or production;
• for bidding or innovative markets: the number of supplier or the number of contracts awarded;
• for digital markets: the number of (active) users, the number of website visits or streams, time spent or audience numbers, the number of downloads and updates, the number of interactions, or the volume or value of transactions concluded over a platform;
• for transport markets: units of fleet, seat capacity, number of trips or access rights such as slots at specific airports; and
• for markets where there are frequent and significant R&D investments: the level of R&D expenditure or the number of patents or patent citations.

Conclusion

The revised Market Definition Notice provides companies with a ‘21^st century grip’ on the competitive assessment of their conduct and intended acquisitions. In addition, the probative value given to internal documentation and the alternative metrics used to calculate market shares provide helpful insights into market definition and the assessment of potential competitive constraints.

This article was published in the Competition Newsletter of March 2024. Other articles in this newsletter: