The new EU Commission’s Notice on relevant market definition for the purposes of competition law

 

Authors: Špela Arsova, Luka Vitamvas

 

On 8 February 2024, the European Commission (the “Commission“) published a new Notice on the definition of the relevant market for the purposes of Union competition law (the “Notice“), updating its guidance on relevant market definition after 27 years. Since the Commission first published such guidance in 1997, markets have changed rapidly under the influence of digitalisation as well as social and environmental change. In the meanwhile, the approach to defining relevant markets has evolved largely through the Commission’s practice and the practice of the Courts of the European Union. This evolution is also reflected in the Notice, in which the Commission describes its future approach to the definition of relevant markets, focusing especially on markets for new technologies. It is particularly welcome that in the Notice the Commission takes a practical approach and seeks to bring the understanding of the guidelines closer to businesses by citing examples from its practice.

 

The importance of the definition of relevant markets

 

Before presenting below some of the key developments in the assessment of relevant markets, let us first explain why predictability and clarity of the definition of the relevant market are important factors in assessing the compatibility of mergers and acquisitions and other conduct by firms on the market.

 

Before your legal adviser can give an opinion on whether a company’s conduct is compatible with the law, he or she will almost always first ask you about the company’s estimated market share on the relevant market. This is because market share is often an important indicator of whether a company’s conduct might infringe competition law:

• If the proposed transaction constitutes a notifiable concentration it may be subject to stricter scrutiny by the competition authorities if it results in an aggregate market share above a certain threshold.
• Due to the size of its market share, the company may not be able to set up an exclusive distribution system.
• If the company’s market share is sufficiently high, it can be considered to hold a dominant position, which imposes further restrictions or obligations on its business.
• If the company’s market share is low enough, it may be able to engage in certain practices that would otherwise be prohibited.
• Market shares should also be assessed prior to implementing any cooperation with existing or potential competitors.

 

Clear guidance on the definition of relevant markets is therefore essential to enable companies to realistically assess their market position (power) and thus allow them to conduct their business in compliance with competition law.

 

New features of the Notice

 

The relevant market should be defined both in terms of product and geographic markets. The basic approach to the definition based on substitutability of demand remains unchanged – i.e. if consumers easily substitute one alternative product for another, this is an indication that there is substitutability between the two products and that they therefore belong to the same product market. However, contrary to the Commission’s previous guidance, the Notice still introduces some new (more modern?) criteria.

 

The importance of ‘non-price’ elements in the definition of the relevant market

 

Although price increases remain central to determining the relevant interchangeable products, the Notice also places more emphasis on other non-price factors. Thus, in addition to the price of the product, the Notice requires consideration of the degree of innovation and quality, which include sustainability, resource efficiency, durability, value and variety of possible uses of the product, the possibility of integrating the product with other products, the image conveyed or the security and privacy protection provided, as well as availability. Most often, innovation and investment in research and development (R&D) is highlighted as a critical non-price parameter, not neglecting expected changes in a given market (e.g. pharmaceutical products expected to be on the market soon – ‘pipeline products’).

 

The development of behavioural economics has shown that consumers do not always make the most rational choices, as their decisions are often influenced by various cognitive-psychological factors. Therefore, the Commission shall also take into account consumer behaviour and how consumers react to changes in the market.

 

Expansion of geographic markets

 

With the expansion of the EU, reduction of borders between countries, and digitalisation and new ways of offering goods and services, the definition of the relevant geographic market also started to broaden. As a result, the definition of some markets has gradually shifted from national to EEA or world-wide. As a consequence, the Commission is defining more and more markets as global.[1] All these changes are taken into account in the Notice, which provides new guidance on the definition of the relevant geographic market.[2]

 

Starting points for the definition of some of the more complex markets

 

In the Notice, the Commission addresses separately individual markets with specific circumstances that are specific to certain industries, sectors or types of markets. One of the more significant changes is the possibility to consider expected short and medium term structural changes in the market when defining relevant markets. In an era of accelerated green transition and process automation through artificial intelligence, such structural changes in markets are certainly realistic.

 

Furthermore, the Commission focuses notably on important emerging market areas:

 

• Significant R&D – As explained above, in the Notice the Commission recognises the specificities of highly innovative industries, which are characterised by frequent and substantial R&D. An important part of innovation are the so-called products under development.

 

• Multi-sided platforms – The Notice devotes a specific chapter to multi-sided platforms, i.e. platforms that connect different groups of users (e.g. accommodation platforms such as Airbnb or Booking, payment systems, social networks and other internet service providers) and where the demand of one group of users influences the demand or supply of other groups. The number of users of a multi-sided platform is so important that users would most likely stay on the same platform even if another, better platform were developed.[3] In this respect, the market for multi-sided platforms is fundamentally different from ‘normal’ markets, where users would have no qualms about choosing another provider offering, for example, the same product at a lower price.

When assessing the competitive position and market share of an undertaking in the case of multi-sided platforms, the Commission will consider as relevant the number of (active) users, the number of visits to the website or streams of content, the time spent or the number of viewers, the number of downloads and updates, the number of interactions, or the volume or value of transactions concluded through the platform (in particular where access to the products is mainly provided at a zero monetary price).

 

• After-markets, bundles and (digital) ecosystems – The term aftermarket is often used to refer to a secondary market for products that are complementary or related to the primary (durable) product.[4] For example, automobile spare parts and improvements are an aftermarket for the automobile (primary durable product) market. The Notice explains that there are in general three possible ways to define the relevant product markets for primary and secondary products: (a) as a system market covering both the primary and the secondary product; (b) as multiple markets, i.e. a market for the primary product and separate markets for the secondary products related to individual brands of the primary product; and (c) as dual markets, i.e. a market for the primary product on the one hand and a market for the secondary product on the other hand. The Notice furthermore sets out the criteria that the Commission will consider while delimiting the markets between the above options. The delimitation will not be irrelevant, as a definition under option (b) would mean that a producer would be more likely to have a dominant position in a separate market for the secondary product of a particular brand.

 

 

Implications of the Notice for future decision-making by competition authorities?

 

The Notice only directly concerns the work of the Commission and is not binding on the competition authorities of the individual Member States. Nevertheless, the Slovenian Competition Agency (the “Agency“), like other national competition authorities, has in the past mostly followed the Commission’s non-binding guidelines, including the methodology for defining relevant markets. The adoption of the Commission’s guidelines by the Agency has been further confirmed by Slovenian case law.[5] Therefore, even if the guidelines cited by the Commission in the Notice are to a large extent only a summary of its approach to the definition of markets in recent years and an outline of its approach in the future, it can be expected that this time as well the Agency will follow the Commission’s new guidance.

 

Conclusion

 

The Notice includes a comprehensive and up-to-date overview of the approach to the definition of relevant markets and thus makes a useful contribution to the unification and objective enforcement of EU competition law. Despite its intention to provide greater predictability and transparency in the assessment of potential restrictions of competition, the Notice leaves the Commission (possibly intentionally) with a wide margin of discretion and flexibility. As a result, in more borderline cases, companies will likely continue to find it difficult to find precise guidance on the definition of relevant markets in order to determine the exact size of market shares and, consequently, to assess the compatibility of their business practices with competition law rules.

 

[1] Thus: the Executive Vice-President of the European Commission, Margrethe Vestager, in her comments on the adoption of the Market Definition Notice of 8 February 2024.

[2] For example, the Commission has already excluded China from the global market in previous decisions for the reasons stated above. Commission, Decision of 6 February 2019, M.8677 – Siemens/Alstom, paragraph 133.

[3] Yun, J. M. (November 2020), Overview of Network Effects & Platforms in Digital Markets. The Global Antitrust Institute Report on the Digital Economy 2.

[4] Waldman, M. (January 2003). Durable Goods Theory for Real World Markets. Journal of Economic Perspectives, Volume 17, No 1, pp. 131-154.

[5] In view of Slovenian case law, which refers to the 1997 Notice in a number of judgments, the Competition Protection Agency attributes great importance to the Commission’s guidelines. See, e.g., Supreme Court Judgment of 27 January 2014, Ref. No G 24/2011, paragraph 51; Administrative Court Judgment of 9 January 2018, Ref. No I U 423/2015-48, paragraphs 70 and 71; Administrative Court Judgment of 21 May 2020, Ref. No I U 1868/2018-31, paragraph 17.