Definition of relevant market

SUMMARY OF:

Commission Notice on the definition of relevant market for the purposes of Community competition law

WHAT IS THE AIM OF THE NOTICE?

It seeks to provide guidance to companies and other interested parties on the European Commission’s approach to market definition — a crucial first step in the Commission’s assessment in many antitrust and merger cases.

KEY POINTS

In the event of a suspected infringement of European Union (EU) competition rules, the first element to be considered is the relevant market. Defining the relevant market means determining the scope of the competition rules in respect of restrictive practices and abuses of a dominant position (Regulation (EC) No 1/2003 — see summary), as well as the scope of the merger legislation (Regulation (EC) No 139/2004 — see summary).

In a spirit of transparency, the notice explains the methods used by the Commission to define a relevant market on a case-by-case basis. This analysis, which incorporates both the product and the geographical dimensions of the relevant market, can be used to determine whether there are actual competitors which are capable of constraining the behaviour of the firms in question and to assess the degree of real competition on the market.

Defining the relevant market

The relevant market combines the product market and the geographic market, defined as follows.

A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer by reason of the products’ characteristics, their prices and their intended use.
A relevant geographic market comprises the area in which the firms concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently similar.

Analysis to define the relevant market

The Commission has identified a number of criteria which can help it to analyse the behaviour of firms in the market and the specific conditions of the relevant market. However, this methodology may give rise to different results depending on the nature of the competition in question. Therefore, a structured analysis which is also flexible enough to take individual circumstances into account is required.

In a preliminary analysis, the Commission attempts to define the product market by investigating whether two products belong to the same market. It also tries to determine the geographic market by producing an overview of the breakdown of the market shares held by the parties in question and by their competitors, the prices charged and any price differentials.

Once the product market and the geographic market have been defined, the Commission carries out a more detailed analysis based on the concept of substitutability. Firms subject to a competitive system must respect two major constraints: demand substitution and supply substitution. A market is competitive if customers can choose between a range of products with similar characteristics and if the supplier does not face obstacles to supplying products or services on that market.

The substitutability criterion enables research to be targeted on any substitute products, making it possible to define the relevant product market and geographic market with a greater degree of certainty. Only in the final stage is the relevant market analysed to determine the degree of integration in the EU’s markets.

The Commission therefore carries out an assessment of demand-side substitutability (i.e. of customers) and supply-side substitutability (i.e. of suppliers). In the first case, the question is whether customers for the product in question can readily switch to a similar product in response to a small but permanent price increase (of between 5% and 10%). In the second case, the question is whether other suppliers can readily switch production to the relevant products and sell them on the relevant market.

However, this criterion of substitutability does not take account of the conditions in which the firms in question operate. Therefore it is necessary, for instance, to examine the conditions of access to the defined market. In this regard, the Commission assesses the product dimension and the geographic dimension of the relevant market, taking account of the following elements.

The recent past. In certain cases, it is possible to analyse evidence relating to recent price variations, for example in terms of substitution between two products or in terms of the customer response.
The results of specific studies. It is possible to assess the elasticity of demand* for a product by means of econometric and statistical tests. It is also useful to assess the geographic market on the basis of factors which have an impact on local preferences (such as culture, language, etc.).
The views of customers and competitors. The Commission may contact the main customers and competitors of the firm in question to gather factual evidence and to evaluate their reaction in the event of price variations within the geographic area.
Consumer preferences.: The Commission may ask the firms in question for the market studies they carried out prior to launching a product on the market or setting its price. It may also compare the purchasing habits of customers on the relevant market with those of other customers on a separate geographic market where similar conditions prevail.
Barriers (regulatory or others) and costs associated with switching demand to other products or areas.
Different categories of customer and price discrimination. A distinct group of customers for the relevant product may itself constitute a narrower, distinct market when such a group could be subject to price discrimination.

As a final step, the Commission takes into account the process of market integration and how measures to remove barriers to trade and to create an integrated European market may have an impact on competition in a given geographic market.

Before drawing its conclusions, the Commission may consult the main firms in the sector on the limits of the product market and geographic market. Where appropriate, it may also carry out an on-the-spot inspection.

Calculation of market share

Defining the relevant market, in both its product and geographic dimensions, allows the market operators (suppliers, customers, consumers) to be identified. On that basis, the total market size and the market share of each supplier can be calculated with reference to their sales of the relevant product in the relevant area.

Companies’ estimates, studies commissioned by industry consultants or trade associations and companies’ turnover figures help calculate the total market size and the market share of each supplier. Although sales are usually the basis used to calculate market shares, there are other indications that can provide useful information, depending on the specific product or industry in question, such as capacity and the number of players in bidding markets, etc.

BACKGROUND

In line with Better Regulation principles, the Commission carried out an evaluation of the functioning of its 1997 market definition notice and, in July 2021, issued a report on its findings.

For more information, see:

Competition: Commission publishes findings of evaluation of Market Definition Notice — press release (European Commission).

KEY TERMS

Elasticity of demand. The extent to which demand responds to a change in factors such as price, income level, or the availability of substitutes.

MAIN DOCUMENT

Commission Notice on the definition of relevant market for the purposes of Community competition law (OJ C 372, 9.12.1997, pp. 5–13).