The EU Updates the Way It Defines Markets


On February 8, 2024, the European Commission (Commission) adopted its revised Market Definition Notice (Notice), replacing a version that was nearly 30 years old. The Notice is not binding, but it provides guidance on how the Commission defines markets when investigating potentially anticompetitive conduct and in merger control. 

As is typical for this type of document, the Notice mostly articulates, rather than replaces or further develops, existing practice. It addresses new issues related to digitalization, highly innovative markets, and globalized trade flows, by incorporating case law and the Commission’s decisional practice over the past 30 years. The Notice outlines general principles of market definition; elaborates on the Commission’s evaluation of different types of evidence; and provides guidance on market definition in several specified circumstances. The Notice is a handy summary for companies wishing to know how the Commission generally approaches market definition, a key component step in enforcement of EU competition law, including when contemplating mergers or business conduct.

We discuss key points from the Notice in more detail below.

General Principles

The most noteworthy of the Notice’s nine general principles for defining a market are:

  • The Commission is not bound to apply the past market definitions from its case practice. The Notice recalls that market definition is fact-specific and the Commission will be attentive to broader trends and market realities.
  • The Commission takes into account the parameters of competition that customers consider relevant. The relative importance that customers attach to particular parameters may change over time. Examples of such parameters include the product’s price, degree of innovation, sustainability, durability, and the resilience of supply chains. 
  • Market definition can differ in cases that seem to concern the same business. The Notice states this is because competitive constraints may vary from one case to another, and facts may change over time (e.g., distinct geographic markets converge into one market).
  • The Commission may take “forward-looking assessments” into account in limited cases. This is said to be possible to the extent that such assessments lead, with sufficient likelihood, to short- or medium-term structural market transitions or effective changes in the supply and demand dynamics.

Potential Competition

The Notice identifies three main sources of competition constraints: demand substitution, supply substitution, and potential competition. It confirms, however, that the Commission’s practice is not to account for potential competition for market definition purposes. Although it posits that any competitive constraints due to potential competition would play a role in the Commission’s subsequent competitive assessment, in practice such a role is rarely significant.

Product Markets

The Commission defines product markets by assessing both demand substitution and supply substitution.

  • Demand Substitution. The Notice states that demand substitution can often be assessed by asking whether a hypothetical monopolist in the candidate market would find it profitable to implement a Small but Significant Non-transitory Increase in Price (SSNIP) Test. However, it notes that it can be difficult to apply the SSNIP Test in some cases, typically where companies compete on parameters other than price, such as quality or innovation. This is especially true in the context of zero monetary price products and highly innovative industries. Be that as it may, the Commission acknowledges that it generally applies the SSNIP Test as a conceptual tool. Quantitative analyses of the Test are extremely rare in practice because of data constraints.
  • Supply Substitution. The Notice confirms that supply substitution must pass a high bar to play any role in market definition. For the Commission to accept that a market should be broadened based on supply substitution, (i) most suppliers must be able to switch production between products in the group of related products, (ii) suppliers must incur only insignificant additional sunk costs or risks when they switch production, (iii) suppliers must have the incentive to switch the product they supply when the market conditions change, and (iv) suppliers must be able to offer all products in the range effectively in the short term.

The Notice does clarify that supply substitution can be relevant when customers purchase bespoke products. In such cases, there may be no or limited demand substitution for different customers. Each bespoke product can therefore constitute its own relevant market. However, when other players can produce the specific bespoke products (e.g., suppliers can and generally do respond with offers that meet different customers’ specifications), those products can be included in the same relevant product market as the bespoke product.

Geographic Markets

The geographic market is defined as a certain area where the conditions of competition are “sufficiently homogenous” and distinguished from other areas. The Commission’s starting point is to identify the territory where the conduct at stake or the transaction concerned is likely to have effects.

  • Supplier Location (Undertaking(s) Involved). The relevant geographic market is usually defined based, as a starting point, on supplier location where suppliers do not negotiate with individual customers or do not discriminate between customers based on location. For example, in passenger air transport services, the Commission has focused on individual airports to consider whether passengers consider airports in a given radius to be substitutable. 
  • Customer (of the Undertaking(s) Involved) Location. The relevant geographic market is usually defined based, as a starting point, on customer location where suppliers negotiate with individual customers. If customers in two areas consider the same suppliers as alternatives and can readily switch purchase volumes between them, the Commission may conclude that conditions of competition between these two areas are sufficiently homogenous. Thus, the mere existence of (and the theoretically possibility of switching to) imports in a geographic area is not necessarily sufficient to expand the geographic scope of the relevant market to the area all exports originate from if the relevant customers in fact would not readily source from one or more origination areas. This is consistent with recent Commission merger decisional practice.

Evidence Used

The Notice describes various factors that may be relevant when defining product and geographic markets.

  • Product Markets. Product characteristics, prices, intended use, and general customer preferences are useful starting points to define product markets. The Commission then analyzes the underlying reasons for customer behavior to identify the parameters that are most relevant for customer choice. In addition to evidence of past substitution, the Commission may consider how customers are likely to react to hypothetical changes in relative supply conditions.
  • Geographic Markets. The Commission considers whether customers in different geographic areas have access to the same actual and potential suppliers and price. The Commission also analyzes if price levels are similar for the same products. Market integration through EU or global regulatory harmonization may indicate that geographic markets are (or are likely to become) wider.

Quality of Evidence 

The Notice devotes significant attention to how the Commission gathers and evaluates evidence. It clarifies that the Commission aims to make effective use of all available information and does not apply a rigid hierarchy of different sources of information or types of evidence.

  • Sources. The Notice regards evidence from public authorities or supported by multiple sources as most reliable. 
  • Forward-looking Assessments. When conducting forward-looking assessments, the Commission may find certain categories of evidence to be particularly relevant. These include, for example, internal documents generated in the normal course of business.
  • Customer Surveys. The Commission may consider customer surveys on usage patterns and attitudes, data on customer purchasing patterns, and market participant views to be relevant when determining whether an economically significant proportion of customers views two products as substitutable. With the help of outside contractors, it sometimes conducts its own customer and consumer surveys, which have attracted criticism as to statistical relevance and respect for polling principles.
  • Market Monitoring. Evidence that a company monitors the behavior of other firms may suggest that the observed firms exercise significant competitive constraint on the observing firm.

Specific Circumstances

In an entirely new section, the Notice addresses certain aspects of market definition in specific circumstances.

  • Significant Product or Geographic Differentiation. Product differentiation occurs where differentiated attributes of the product matter for the customer’s choice. Geographic differentiation occurs “where the location of the individual customer and supplier matters for the customer’s choice.” The Commission may identify a relatively broad market or separate markets within a continuum of differentiated products by analyzing the substitutes effectively available to customers. 
  • Discrimination Between Customers or Customer Groups. Such discrimination occurs when customers or customer groups are offered different conditions of supply for the same product, for reasons unrelated to costs. In such cases, the Commission may identify narrower distinct markets if (i) it is possible to identify clearly to which group an individual customer belongs when the product is sold, (ii) trade between customers or arbitrage by third parties is unlikely, and (iii) the possibility of discriminating between customers is not just transitory.
  • Significant R&D. The Commission may take frequent and significant R&D into account in highly innovative industries. If there is sufficient visibility into R&D processes to determine which other products a pipeline product is likely to be a substitute for, the Commission may conclude that the pipeline product belongs to an existing product market, or it may constitute a new product market limited to the pipeline product and its substitutes. In some cases, the R&D process may feed into various products. The Commission may then identify the boundaries within which companies compete in such earlier innovation efforts and assess whether there could be a loss of innovation competition due, for example, to a merger.
  • Multisided Platforms. According to the Notice, multisided platforms support interactions between different groups of users, creating a situation where the demand from one group influences the demand from other groups (e.g., payment card systems or advertising-sponsored platforms). In such platforms, the Commission may define a product market for the products offered by a platform as a whole, in a way that encompasses all (or multiple) user groups. Alternatively, the Commission may define separate product markets for the products offered on each side of the platform. It may be more appropriate to define separate markets on each side where there are significant differences in the substitution possibilities on the different sides of the platform. The Commission may consider the nature of the platform, whether the companies offering substitutable products for each user group differ, and whether users use one or multiple platforms in parallel for the same product (Homing Decisions). The Notice clarifies that zero monetary price does not imply that there is no relevant market for the product being assessed. In such cases, the Commission focuses on non-price parameters and alternatives to the SSNIP Test, and it may consider, for example, the impact of a Small but Significant Non-transitory Decrease of Quality (SSNDQ). Given difficulties in determining what constitutes a decrease in quality in many cases, as product evolution often involves trade-offs, it is to be expected that the SSNDQ Test will lend itself to quantitative analysis even less than the SSNIP Test does and will therefore mainly serve as a conceptual tool.
  • Aftermarkets. The Notice states that there are three ways to define relevant product markets in the case of primary and secondary products. First, these may be defined as durable and connected products, namely a system market comprising both the durable and the connected products. Second, these may be defined 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. Third, aftermarkets may be analyzed as dual markets, namely, the market for the primary product and, separately, the market for the secondary product. According to the Notice, it may be more appropriate to define a system market when, for example, customers take the whole-life costs into account when purchasing the primary product, or where the secondary product market requires a higher expenditure. Otherwise, it may be more appropriate to define dual or multiple markets.
  • Bundles. In some cases, customers may prefer to consume several products together although the consumption of one product is not dependent on a primary product. Here, the Notice states that the Commission may examine whether the bundle constitutes a relevant product market (distinct from the individual products) by assessing substitutability between the bundle and the individual products. In that assessment, the Commission may consider whether customers would be willing to purchase individual products separately in the event of a degradation of the supply conditions of the bundle. 
  • Digital Ecosystems. The Commission may apply principles similar to those applied to aftermarkets and bundles to define the relevant product markets in digital ecosystems. This is because the primary and secondary products are connected by technological links or interoperability. If the secondary product is offered as a bundle, the Commission may assess whether the bundle constitutes a relevant market on its own. The Commission also takes into account network effects, switching costs, and Homing Decisions.

Market Shares

The Notice recalls that market shares are only one of the indicators of market strength.

  • Possible Metrics. In addition to sales, the Notice mentions other metrics that may be more useful to determine market shares. These include usage metrics such as the number of active users, website visits or streams, time spent or audience size, downloads and updates, interactions, or the volume or value of transactions conducted on a platform. In markets characterized by substantial R&D, the Commission may assess the level of R&D expenditure, the number of patents, or the number of patent citations. The Commission may also take into account metrics used internally by market participants in the ordinary course of business. 
  • Including or Excluding Imports. Where markets are defined based on customer locations, all sales (including imports) to those customers located in the relevant market are included when calculating market shares, while all exports are excluded. Where markets are defined based on supplier locations, all sales by suppliers located in the relevant market are included in the calculation (including exports), while all imports are excluded. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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