The European Commission’s revised Market Definition Notice for competition cases

In February 2024, the European Commission (“EC”) published the revised Market Definition Notice for competition cases (“Revised Notice”), the first revision since its adoption in 1997. The Revised Notice aims to reflect new market realities, in particular technological advancements in digital markets, as well as developments in the EC's and the European Courts’ decision-making practices. While it is in principle only soft law, nevertheless the EC is bound by the principles and methods for market definition laid down in it. The Revised Notice offers important and, in comparison to the previous notice, more accessible guidance to companies in all industry sectors. We explain the role of market definition in competition cases and the Revised Notice’s most significant amendments.

I.   Importance of market definition

Defining product and geographic markets is a prerequisite for determining the competitive constraints that market participants impose on each another. In other words, it is a helpful tool for assessing the market power of companies. The definition of the relevant market is therefore key when considering whether a merger between undertakings is possible, as well as when assessing whether certain agreements between undertakings may benefit from an exemption from competition rules, for example, under the Vertical Block Exemption or Specialisation or Research and Development (“R&D”) regulation. Furthermore, it is essential when assessing whether an undertaking has a dominant position and is therefore subject to the abuse of dominance rules.

II.   Relevant product and geographic market

The most important criterion for product market definition is the interchangeability of the products from the customer's point of view (demand substitutability). Other criteria include the possibility of switching to other suppliers (supply substitutability) and to a lesser extent the influence of potential competition. The relevant geographic market is the area in which the objective conditions of competition for the product in question are sufficiently homogeneous for all companies, and which can be distinguished from other geographic areas, because conditions of competition are appreciably different in those areas (see, para. 12).

• Demand substitutability

Price is the strongest element for the evaluation of demand substitutability. According to the Revised Notice, the EC can, but does not have to, rely on the small but significant non-transitory increase in price test (“SSNIP test”). The SSNIP test may, in particular, be of less relevance for market definition in the sphere where services are often offered on non-monetary terms. This is also a reason why the EC recognises the importance of non-price parameters, including innovation, quality, reliability of supply and sustainability when taken into account by customers in their purchasing decisions (see paras. 15 and 27 et seq.).

• Supply substitution

It is recognised that a given product market can be broadened where suppliers use the same assets and processes to produce related products that are not substitutes for customers and where the conditions of competition across the range of such related products are similar (para. 32). However, the EC points out that (i) most, if not all, suppliers must be able to switch production between products in the range of related products; (ii) that suppliers incur only insignificant additional sunk costs or risks when they switch production; (iii) that suppliers have the incentive to switch production, and would do so, when relative prices or demand conditions change; and (iv) that they can offer all products in the range effectively in the short term (see para. 33).

• Geographic market definition

The EC explains factors that may justify defining markets as global, EEA-wide, national or local (see para. 38). Imports play a role, but the mere existence of them or the possibility of switching to imports in a geographic area does not necessarily lead to a wider geographic market including the area from which the product was or could be imported. Additionally, sufficiently homogeneous conditions of competition must exist (see para. 42).

III.   Market definition for certain sectors

• Market definition in the presence of significant R&D

The EC considers the specificities of highly innovative industries that are characterised by frequent and significant R&D. Pipeline products can be included in the relevant product market if there is sufficient visibility on their R&D process (see paras. 90 - 91).

• Market definition in the presence of multi-sided platforms

Multi-sided platforms support interactions between different groups of users, leading to a situation where the demand from one group of users has an influence on the demand from the other groups. The EC can choose to either define a relevant product market for the products offered by a platform as a whole, encompassing all user groups, or rather separate relevant markets for the products offered on each side of the platform. Non-price parameters are particularly important for the evaluation of substitutability (see paras. 94 and 98).

• Market definition in the presence of after-markets, bundles and (digital) ecosystems

The Revised Notice identifies three options for defining the relevant product market:

(i) as a system market comprising both the primary and the secondary product;

(ii) as multiple markets, i.e., a market for the primary product and separate markets for the secondary products associated with each brand of the primary product;

(iii) as dual markets, i.e., the market for the primary product on the one hand and the market for the secondary product on the other hand (see para. 100).

Where customers prefer to consume several products as a bundle, the EC may examine whether the bundle constitutes a relevant product market distinct from the individual products. As the EC points out, not all (digital) ecosystems fit an after-market or bundle market approach. In those cases, factors such as network effects, switching costs and multi-homing decisions are relevant parameters to consider (see paras. 103-104).

IV.   Market shares

Historically, the EC regularly relies on market shares based on sales or purchases. The Revised Notice explicitly adds other metrics to determine market shares, such as capacity or production, the number of suppliers, the number of active users, the number of website visits or streams, volume or value of transactions concluded over a platform (see para. 108).

V.   Gathering and evaluation of evidence

As it is practice, the EC may rely on both qualitative and quantitative information which can be derived from various sources of information (e.g., internal documents, surveys, public information) and types of evidence. The EC does not apply a rigid hierarchy of different sources of information or types of evidence (see para. 76).

VI.   Outlook

As pointed out by Executive Vice-President Vestager: “If something happens every 25 years, it deserves attention.” The Revised Notice provides guidance and clarification on various topics such as the importance of non-price parameters. It also acknowledges that in some circumstances, a forward-looking assessment of competitive conditions is required, and it covers markets undergoing structural transitions and of course also markets that are innovation-intensive. The Revised Notice is of great relevance for companies assessing the competition law compliance of their conduct as well as the feasibility of potential mergers. At the same time, the extended guidance on possible sources of evidence and their probative value (see para. 78) underlines yet again that companies need to be aware that product market definition requires a fact-intensive case-by-case assessment.