Introduction

Who are your competitors? Are you likely to get a merger through? Can your commercial agreements benefit from some of the available block exemptions? Are you in a dominant position? You certainly have your own answers to these questions, but the European Commission (EC) may disagree with you. This is because EU competition law has its own way of defining “relevant markets” as the EC explained in the new interpretive framework provided by its recently published Market Definition Notice (Notice) of 8 February 2024.

Yet the Notice reaches far beyond the boundaries of EU law. The previous iteration, adopted in 1997, has been studied, used and copied by practitioners and competition authorities around the world, and it is to be expected that the same will apply to the successor Notice.

Building on the basic principles to define markets, the Notice provides detailed guidance on the principles and methodology of market definition, relying on the EU courts’ case law and drawing on the EC’s past decisional practice but also reflecting the significant economic changes in the last quarter century. The Notice also explains the types of evidence that the EC relies on to define markets, such as consumer preferences, price correlations, trade flows, and views of customers and competitors.

In this article, we will focus on the main changes as compared with the 1997 Notice, and the practical implications for businesses.

Key changes

The newly adopted Notice introduces several changes and clarifications. Some of the most notable changes are:

Market Definition—Overview

The Notice gives more guidance on the main principles of market definition: 

Non-price competition. If a product is supplied for free, that does not necessarily mean that it has no market (paras. 97, 98). The Notice emphasizes that parameters other than price, such as innovation and quality, may be relevant to market definition and can be included in demand substitution assessments (para. 15). 

Forward-looking market definitions. These apply especially in markets that are expected to undergo structural transitions, such as substantial technological or regulatory changes which can radically alter a market’s general dynamics. For the EC to take these transitions into account, there must be “reliable evidence” that there is a “sufficient likelihood” that the structural changes will take place, beyond “mere assumptions that observed trends will continue or that certain undertakings will change their behavior” (para. 21). For instance, the market for a medicinal product might be widened to include pipeline products (see below) that are currently undergoing late-stage clinical trials (Fn. 42). 

Expanded guidance on geographic market definition. The EC describes its process, analyzing the location of customers likely to be affected, or, where this is immaterial, basing the geographic market on the location of suppliers. It also offers extensive guidance on when a market can be considered global. The Notice states that this primarily depends on whether the conditions of competition are sufficiently homogenous as they range from local to global dimensions (para. 43). It also discusses both how imports and structural transitions in other territories should be treated for the purposes of the assessment. This can include defining a global market to the exclusion of a few outlier countries where the barriers to entry are disproportionately high.

Market definition in specific circumstances

The Notice contains a brand-new chapter on how the EC applies the concept of a relevant market in specific circumstances, such as the presence of (a) significant differentiation, (b) discrimination, (c) investment in R&D, (d) multi-sided platforms, (e) after markets, bundles, and digital ecosystems.

a) The recognition of significantly differentiated markets

A noteworthy change is the recognition of differentiated markets (at the product or the geographical level), where products are not perfect substitutes, but still compete to some extent due to attributes that matter to consumers (e.g., design, brand image, technical specifications, etc.). Accordingly, the EC can identify separate relevant markets within a continuum of products or define a broad relevant market that includes differentiated products (paras. 85, 86). 

b) Discrimination between customers or customers’ groups

The Notice acknowledges that discrimination may lead to narrower and distinct markets if different customer groups buy at different prices or levels of quality, and where the chance to switch between groups is limited. The Notice states that this usually occurs when three conditions are met:

1. A clear identification of the group an individual customer belongs to
2. Trade between customers or arbitrage by third parties is unlikely
3. The discrimination between customers or customers’ groups is non-transitory.

Under such circumstances, the competitive conditions may differ from one type of customer to another (para. 88).

c) Significant R&D

In highly innovative industries, the EC may include several specific factors to define the market. The Notice introduces the concept of pipeline products. These are products that are not yet available, but that have sufficiently visible R&D processes to establish which other products they may become substitutable with (paras. 89, 90). The Notice distinguishes between pipeline products and more nascent efforts, which are only at an early stage of development and for which it is difficult to identify a specific market (para. 92). Nevertheless, it might still be relevant to identify the boundaries within which the undertakings compete by determining the nature and scope of the innovation efforts, the objectives of the different lines of research, and the specialization of the different teams involved (para. 91). 

d) Treatment of multi-sided platforms

For multi-sided platforms, the EC will consider network effects, either when defining relevant markets and/or in the competitive assessment (para. 94). As indirect effects may render the SSNIP test challenging, non-price elements, such as product functionalities, intended use, barriers to switching, etc., may be taken into account. It may also consider replacements for the SSNIP test, such as the “SSNDQ”—a small but significant non-transitory decrease of quality (para. 97).

The EC may define a relevant product market through the products available on a platform, encompassing some or all user groups, or it may define separate markets for the products offered on each side of the platform. The EC names factors which it may find decisive, including different undertakings offering substitutable product for each user group, degrees of product differentiation on each side (or each user group’s perception thereof), and behavioral factors such as the homing decisions of user groups (para. 94).

e) Digital ecosystems

The Notice explains that there are generally three possible ways to define markets where the consumption of a durable product (primary product) leads to the consumption of another connected product (secondary product):

1. “as a system market comprising both the primary and the secondary product;
2. 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; and
3. 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.” (para. 99).

The EC provides guidance on the circumstances where a system definition may be more or less appropriate, which largely depend on intended uses, substitutability and diversity of suppliers (para. 101). Where customers prefer to buy bundles products, the EC may assess whether these form a separate market by assessing what degree of disruption would be necessary for a consumer to choose to buy separately once again (para. 102).

Market shares

The EC provides additional guidance on how it calculates market shares when sales volume would not be a suitable metric (paras. 105–113). 

For instance (para. 108):

• In bidding or innovating markets: number of suppliers or tenders awarded
• In digital markets: usage metrics such as (active) users, the number of visits, time spent, audience numbers, number of downloads and updates, number of interactions, or volume or value of transactions concluded over a platform
• In markets with frequent and significant investment in R&D: the level of R&D expenditure and the number of patents or patent citations

For significantly differentiated products, the EC considers that market share may provide a less reliable indicator of market power. As a consequence, the EC may use other methods to assess closeness of competition, including (i) relying on shares for only segments of the relevant market (para. 110), and (ii) considering sales value as a complementary metric to sales volume (para. 111).

Guidance on the evidence and methods used to define markets

The EC dedicated a separate section in the Notice to discuss how evidence is used to define markets as well as the process of gathering and evaluating evidence (Sections 3.1 and 3.2). 

The EC will not apply a “rigid hierarchy of different sources of information or types of evidence” (para. 76). Nor may it rely on a single source or type of evidence. Instead, a combination of various indicators, such as product characteristics, customer preferences, past substitutions, views of market participants, and economic analysis should be used (para. 77). That being said, the EC is not bound to assess all factors, both quantitative and qualitative, mentioned in Section 3.2. and 3.3. The importance of the factors will depend on the industry involved, the products, or the circumstances (para. 76). 

Crucially, the Notice finally codifies the EC’s move away from a dependence on price as the primary parameter of value and towards a more diverse system of interdependent parameters, which may be important to consumers, including innovation, sustainability and distribution channels, as well as inherent customer bias. Evidence of past and hypothetical substitution will also be given more weight in analysis, alongside the more traditional barriers to entry, switching costs, etc. (para. 15).

Outlook for companies

The Notice is a welcome update that reflects the EC’s extensive experience in applying the concept of market definition in a changing and complex economy. It sheds some light on the analytical framework it uses, a clarification that is very much appreciated. The Notice demonstrates that—as Margarethe Vestager has previously noted—the EC does not have a “magic pen” that “designs the markets,” but that it instead applies a complex, evidence-based system of economic analysis.

The Notice will help competition law practitioners to better understand the EC’s analytical framework and therefore to anticipate the likelihood and nature of information requests when they are involved in transactions or conduct that may affect competition in the EU. National competition authorities will also welcome the Notice, as it will help them to better cooperate and coordinate with the EC and with each other, by providing them with a common language and methodology for market definition.

By investing so much effort to revise and publish the Notice, the EC makes clear that it will continue to place a great deal of emphasis in its decision-making on proper market definition. Some other competition authorities have taken a different route, particularly because it may be difficult to define a market in fast-moving sectors.  For example, the UK Competition and Markets Authority suggested in its 2021 Merger Assessment Guidelines that it could be advisable to not view market definition as an exercise separate from competitive effects analysis, and that there is no need for the assessment of competitive effects to be based on a highly specific description of any particular market definition.

All the same, market definition remains a dynamic and evolving concept of ever-greater complexity that requires constant attention and adaptation. So, while the Notice is a valuable and timely contribution that can enhance its understanding and application in the EU, it is not a substitute for a careful and comprehensive analysis of the competitive effects of mergers and conduct on a case-by-case basis.