Definition of the Relevant Market MARC FIERSTRA Topics

Definition of the Relevant Market MARC FIERSTRA

Topics ØConcept ØMarket power ØHow to determine market power ØMarket Definition ØDimensions ØDemand substitution ØSupply substitution ØGeographic market ØTemporal aspect

Concept of market definition ØA tool to identify and define the bounderies of competition between firms ØPurpose: to identify in a systematic way the competitive restraints that the undertakings involved face ØObjective: to identify actual competitors that are able to constraining undertaking’s behaviour and preventing them from behaving independently of effective competitive pressure

Topics ØConcept ØMarket power ØHow to determine market power ØMarket Definition ØDimensions ØDemand substitution ØSupply substitution ØGeographic market ØTemporal aspect

Market power Competition law: curbing inefficiences resulting from the exercise of market power Market power: the ability to price (limiting output, innovation, quality of goods, or limiting consumer choice) above short-run marginal cost Aim of competition law: Effective competition freedom and right of initiative of individual economic operators (Ordo-liberal school) Enhancing consumer welfare (Neo-liberal school)

Market power Art. 101 TFEU Appreciability test (differentiate between horizontal and vertical arrangements) Elimination of competition Market share thresshold BERs Art. 102 TFEU Dominance exist only in relation to a specific market Merger control Necessary precondition to any assessment of the effect of a concentration on competition

Topics ØConcept ØMarket power ØHow to determine market power ØMarket Definition ØDimensions ØDemand substitution ØSupply substitution ØGeographic market ØTemporal aspect

How to determine market power Direct measurement of market power ◦ Econometric methods ◦ Residual demand curve of a single firm quantitative data required Indirect measurement of market power ◦ Structural approach (Harvard School, structure-conductperformance paradigm) ◦ 1 definition of relevant market ◦ 2 assessing market share and barriers to entry

EU choice: market definition ! The definition of the relevant market is of essential significance, for the possibilities of competition can only be judged in relaton to those characteristics of the products in question by virtue of which those products are particularly apt to satisfy an inelastic need and are only to a limited extent interchangeable with other products ECJ 21 February 1973, Europemballage and Continental Can, 6/72, ECLI: EU: C: 1973: 22

Topics ØConcept ØMarket power ØHow to determine market power ØMarket Definition ØDimensions ØDemand substitution ØSupply substitution ØGeographic market ØTemporal aspect

Market definition - Dimensions Product or services market ◦ Demand substitution ◦ Supply substitution Geographical market Temporal market ◦ Potential competition ◦ Commission Notice, point 24 (‘not to be taken into account’)

Topics ØConcept ØMarket power ØHow to determine market power ØMarket Definition ØDimensions ØDemand substitution ØSupply substitution ØGeographic market ØTemporal aspect

Market definition – Demand substitution Product market ◦ 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. ECJ 21 February 1973, Europemballage and Continental Can, 6/72, ECLI: EU: C: 1973: 22 Commission Notice, point 7

Market definition - Demand substitution Functional interchangeability: ◦ Small markets ! ECJ 14 February 1978, United Brands, 27/76, ECLI: EU: C: 1978: 22

Market definition – Demand substitution Economic approach: ◦ Hypothetical Monopolist Test (SSNIP-test) Price correlation test ◦ Assumption: if prices of two products move together, the products are likely to compete on the same market Case No IV/M. 190 – Nestle – Perrier Relative price stationarity test The price ratio of two products that are substitutes should be relatively constant over time as they face a common set of supply and demand factors UK Competition Commission 18 December 2006, Pan Fish – Marine Harvest, Merger inquiry Shock analysis

Market definition Relevant product market ◦ Demand substitutability ◦ Functional interchangeability (United Brands, 27/76) ◦ SNNIP-test (Commission Notice, 1997) ◦ Supply substitutability ◦ Potential competition

Market definition - Demand substitution SSNIP-test ◦ Small but Significant Non-transitory Increase in Price ◦ Cross eleasticity of demand ◦ Hypothetical increase in price ◦ Small: 5 – 10 % ◦ Non-transitory: 1 – 2 years

Market definition – Demand substitution SNNIP-test in practice ◦ Start with smallest set of products that might distort competition ◦ Raise price 5 – 10 % ◦ Assume that terms of sale for all other products should remain unchanged ◦ Customer response: will they switch to other products (economic substitutabilty and functional substitutability)? ◦ Add alternatives and repeat SNNIP-test until no further products are included/price raise is not profitable because of loss of sales (critical loss analysis) what is the smallest collection of goods to which the customers react. ◦ General Court 1 July 2010, ECLI: EU: T: 2010: 266, para 86 – 107. Astra. Zeneca/Commission, T-321/05,

Market definition - Demand substitution SSNIP-test focuses ◦ On price, not product characteristics ◦ Marginal consumer (not all consumers need to switch) Practical problems ◦ Information on customer response ◦ Customer respose may vary over time and across geographic areas ◦ Cellophane fallacy (Commission Notice, para. 19)

Market definition – Demand substitution Customer response: ◦ Customer response is supposed to be rational ◦ Characteristics, prices, functions and customer usage ◦ Evidence of response to price changes in past (Notice, para. 38) ◦ Margin between price and marginal cost (compare Delta) ◦ Brand loyalty, compatibilty of standards ◦ Switching costs in relation to the product ◦ Legal or regulatory requirements

Market definition – Demand substitution Obtaining data ◦ Customers of the product ◦ Customers od similar products ◦ Sellers of the product in another region ◦ Sellers of similar products ◦ Associations of sellers or customers (of the product) ◦ Wholesalers of the product ◦ Statistical data

Market definition – Demand substitution What if economic data are lacking ◦ Traditional approach (Functional interchangeability) ◦ What influences the actual choices by customers ◦ Businessplan ◦ Salespromotion ◦ Marketresearch

Market definition – Demand substitution Specific problems ◦ Locked-in customers/aftermarkets ◦ ECJ 31 May 1979, Hugin/Lipton, 22/78, ECLI: EU: C: 1979: 138 ◦ Printer/printercartridges ◦ Structure of supply and demand ◦ ECJ 9 November 1983, Nederlandse Bandenindustrie Michelin, 322/81, ECLI: EU: C: 1983: 313 ◦ Chain of substitution ◦ ECJ 13 February 1979, Hoffmann – La Roche, 85/76, ECLI: EU: C: 1979: 138 ◦ Commission Notice, points 57 - 58

Market definition – Demand substitution Two-sided markets ◦ Substitution on one side of market might trigger an effect on other side of market ◦ Both sides of market should be taken into account Asymetric markets Cluster markets ◦ Customers incur lower transaction costs when buying several products from the same undertaking cluster prices are relevant

Topics ØConcept ØMarket power ØHow to determine market power ØMarket Definition ØDimensions ØDemand substitution ØSupply substitution ØGeographic market ØTemporal aspect

Market definition – Supply substitution Not part of SSNIP – test ◦ Suppliers can change to other relevant products in reaction to increase in price (SSNIP-citeria) ◦ Within a year ◦ Without significant cost ◦ Without significant risk (sunk costs)

Market definition – Supply substitution Relevant factors ◦ Is switching production facilities technically feasible ◦ Costs of switching ◦ Are consumers willing to swith to a new supplier ◦ Time necessary to offer products on the relevant market ◦ Are production facilities elsewhere committed

Topics ØConcept ØMarket power ØHow to determine market power ØMarket Definition ØDimensions ØDemand substitution ØSupply substitution ØGeographic market ØTemporal aspect

Market definition – Geographic market ◦ The area in which the conditions of competition are sufficiently homogeneous ◦ ECJ 14 February 1978, United Brands, 27/76, ECLI: EU: C: 1978: 22, point 11 ◦ Commission Notice, point 8

Market definition – Geographic market Relevant factors: ◦ Cost and difficulty of transporting products ◦ Product characteristics ◦ Regulatory framework ◦ Trade bans, linguistic barrier ◦ Trade marks

Market definition – Geographic market Relevant indications ◦ LIFO-LOFI (Elzinga-Hogerty test) ◦ Shifting of trade in past in response to changes in price ◦ View of customers and competitors ◦ Customers preferences ◦ Current patern of trade ◦ Barriers and switching costs incurred when selling to another area

Topics ØConcept ØMarket power ØHow to determine market power ØMarket Definition ØDimensions ØDemand substitution ØSupply substitution ØGeographic market ØTemporal aspect

Market definition – temporal aspect The market is dynamic ◦ Seasonal goods ◦ Innovative markets ◦ Potential competition In first stage not relevant, Commission Notice, point 24 Dependant on conditions of entry

Questions and discussion