AUTHORED BY
Thomas Bugeja
Jake Desira
READING TIME
4 MINS
Introduction
On the 8th February 2024, the European Commission published its revised Market Definition Notice (the ‘Notice’). This is the first update since the original notice published in 1997 and reflects the evolution of EU competition law over the past 27 years, particularly in the context of digitalisation.
Background – Understanding Market Definition
Market definition is generally the first step which needs to be undertaken when conducting an assessment under competition law. In essence, by defining the Relevant Market, one can determine the boundaries of competition between undertakings, identifying the products which are substitutes for one another. The exercise of defining the Relevant Market generally consists in defining a product market and a geographic market (i.e. the substitutability of specific products in a defined geographic area). At its most basic level, ‘market definition’ is the delineation of an ‘area of confrontation between competing undertakings.’[1]
Another important feature of market definition is that it allows, for the calculation of an undertaking’s market power within the defined ‘market’, being an essential step in any abuse of dominance, cartel or merger control case. In abuse of dominance cases, market definition allows for the determination of whether an undertaking enjoys a dominant position within the Relevant Market, typically calculated above 40% market share. In assessing whether an agreement is anti-competitive, market definition serves as a first step to identify the potential anti-competitive effects of such agreement, as well the applicability of certain block exemptions. Furthermore, market definition is also crucial in the context of merger control, given that the effects of a merger need to be considered within a defined Relevant Market.
Key Elements of the Revised Market Definition Notice
The Notice provides updated and comprehensive guidance on the Commission’s approach to market definition. It combines updated principles, case-law and decisional practice for defining markets in antitrust and merger cases. In particular, the Notice includes the following key elements:
A) Non-Price Parameters
The Notice emphasizes the significance of competitive factors beyond product characteristics, prices, and intended use. It highlights parameters such as innovation, quality, reliable supply and sustainability.
B) Specific Guidance for Particular Circumstances
The Notice also contains guidance on the application of market definition in specific circumstances such as digital markets, innovation-intensive industries, after-markets and digital ecosystems.
Digital Markets
The Notice provides ample guidance in relation to the market definition of digital markets, specifically with respect to multi-sided platforms. These platforms, most notably social media platforms, often supply products for free in order to attract users to products offered on the other sides of the platform and monetize their products on those sides. However, just because a product is supplied for free, it does not mean that there is no relevant market for that product. Since price is not a relevant consideration in such markets, the Notice has listed a number of factors which the Commission will focus on for the purposes of defining such markets such as:
a) product functionalities;
b) intended use;
c) evidence of past or hypothetical substitution,
d) barriers or costs of switching;
e) data portability and licensing features.
Furthermore, the Notice states that in such markets, the Commission may use alternative tests to the SSNIP Test, namely by assessing the switching behaviour of customers of the zero-price product in response to a small but significant non-transitory decrease of quality (‘SSNDQ’).
Innovation-intensive industries
Given that in innovation-intensive industries, companies compete through the development of new products, the Commission recognised that market definition requires the inclusion of additional factors. In doing so, the Notice states that pipeline products (i.e. products which are not yet available to customers, but which have sufficient visibility on their R&D process to establish that they are likely to be substitutable with the products currently available in the market) may be included in the market definition assessment.
After-markets, bundles and (digital) ecosystems
With respect to markets where the consumption of a primary product leads to the consumption of a connected secondary product, the Notice states that the relevant product market may be defined in the following three ways:
“a) as a system market comprising both the primary and the secondary product;
b) as multiple markets, namely a market for the primary product and separate markets for the secondary products associated with each brand of the primary product;
c) as dual markets, namely the market for the primary product on the one hand and the market for the secondary product on the other hand.”
The Notice further states that the aforementioned principles may be applied also in the context of (digital) ecosystems, where applicable.
Dynamic and Forward-Looking Assessments
The Notice also provides clarifications in relation to markets which are likely to be subject to structural transitions such as regulatory or technological changes. In this regard, the Commission will take such transitions into account insofar as there is reliable evidence that there is a sufficient likelihood that such transitions will in fact take place and such evidence needs to go beyond mere assumptions.
C) The SSNIP Test
The theoretical criterion generally used to determine product substitutability is the determination of whether a hypothetical monopolist in the market could exercise market power. This question is answered by asking whether a hypothetical monopolist in the market would find it profitable to implement a small but significant non-transitory increase in price (the ‘SSNIP Test’). The Notice recognises the limitations of the SSNIP Test, particularly in the context of zero-priced markets and innovation-intensive markets, where products are offered for free in exchange for other considerations such as the collection of personal data. Therefore, in the Notice, the Commission confirms that it may rely on the SSNIP Test but has no obligation to apply such test.
Practical Implications
The amended Notice is of course helpful as it provides additional clarity into the EU Commission’s approach when defining the relevant market. This will allow both business and practitioners to be able to anticipate the approach which will be taken by the Commission and National Competition Authorities when defining the relevant market, especially with respect to technological markets in which market definition can be quite challenging. It is important to note that the Maltese Office for Competition is also bound at law, in the interpretation of the Competition Act and of any regulations made thereunder and in the exercise of his responsibilities under the Competition Act and any regulations made thereunder, to have recourse to the judgements of the Court of Justice of the European Union, to relevant decisions and statements of the European Commission including interpretative notices on the relevant provisions of the TFEU and secondary legislation relative to competition. The notice is therefore part and parcel of Maltese Competition law and will apply to merger control and antitrust proceedings initiated by the Office or before the Maltese courts.
[1] Miguel Sousa Ferro, Market Definition in EU Competition Law, page 1
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