On 8 February 2024 the Commission adopted a revised Market Definition Notice (the Notice). This introduces new features, updates and clarifications in order to reflect new market realities, in particular the impact of digitalisation and the new ways of offering goods and services, and to bring the Notice in line with developments in the Commission’s practice and the EU courts’ case law. The previous version was published in 1997.

The Commission’s fundamental approach to market definition remains unchanged, and the Notice is not likely to change in the way the Commission approaches cases given that the revisions take into account its recent practice.

Nevertheless, the revisions are welcome, and are likely to be influential in other jurisdictions given the Commission’s reputation as a leading competition authority globally. The Notice sets out principles, and should therefore be sufficiently flexible to cope with many developments in technology and markets in future.

We explore some of the changes below. In particular, the Notice sets out how the Commission will approach markets for services that are provided free of charge and are monetised in other ways, such as through advertising or collection of personal data.

It also provides more guidance on geographic markets, with growing cross-border trade leading to broader geographic markets, and on the role of imports when defining the relevant geographic market.

The Commission makes it clear that, as well as market shares, other metrics may be relevant to assess an undertaking’s strength in the market, such as capacity or production, the number of suppliers, the number of contracts awarded, usage metrics, the number of website visits, downloads etc. Metrics used internally by businesses in their general course of business will be particularly relevant here.

Market definition plays a key role in the application of the EU competition rules, and the new detailed, up-to-date guidance on the Commission’s approach will increase transparency of the Commission’s policy and decision making. It will also assist businesses to assess their own market position in order to support compliance with competition rules.

The role of market definition in competition law

Market definition is a tool used by the Commission under both antitrust and merger control enforcement, in order to identify and define the boundaries of competition between undertakings.

It makes it possible to calculate market shares, which are used to determine the application of the EU block exemption Regulations, to assess an undertaking’s competitive strength, as a first screening tool to identify competition concerns, to assess whether there may be an effect on trade under Articles 101 and 102 TFEU, and to identify concentrations that may raise competition concerns under the EU Merger Regulation.

The Notice makes it clear that market definition is an intermediate step in the overall competitive assessment, but notably is not a mandatory step in every assessment.  As an intermediate step, the market definition needs to be up-to-date at the time of the relevant conduct or concentration, and based on the facts of the case.

Whereas past Commission decisions regarding a specific market may be a useful starting point to identify a relevant market, the Commission is not bound by definitions from previous cases and will always consider possible changes as a result of trends such as digitalisation, changes in value chains or in sourcing by customers, or the impact of globalisation.

Defining product markets

The Notice explains that undertakings are subject to three main sources of competitive constraints: demand substitution, supply substitution and potential competition.

Potential competition is not relevant for the definition of the relevant product market. It requires an analysis of additional factors such as the likelihood, timeframe and size of any market entry and how this affects or could affect the behaviour of undertakings involved. This is analysed in the competitive assessment.

Demand substitution

The main approach used by the Commission to define the relevant product market is assessing the substitutability of products from the perspective of the consumer. This is known as demand substitution.

On the whole, the general methodology for product market definition set out in the Notice has not changed substantially from the 1997 notice, and the SSNIP test (small, significant, non-transitory increase in price) remains a tool to define the relevant product market where price is the key parameter of competition. However, the Notice clarifies that the SSNIP test is mainly a conceptual framework for the interpretation of available evidence, and that there is no obligation on the Commission to apply the SSNIP test. Other types of evidence are equally valid to inform market definition.

As the SNIPP test is based on changes in price, its application is difficult when undertakings compete on parameters other than price, such as quality or innovation. It can also not be used in the context of zero monetary price products, as is the case in many digital markets. In such cases the Commission has relied on the qualitative characteristics of the relevant products and services, and applied the ‘small but significant non-transitory decrease in quality’ (SSNDQ) test. The SSNDQ test is applied as a conceptual framework for a qualitative assessment of demand substitution. The Commission recognises that the test is subject to several difficulties, including in relation to the quantification of quality.

In Google and Alphabet v Commission (Case T-604/18), the General Court confirmed that “the SSNDQ test did constitute relevant evidence for the purpose of defining the relevant market” while at the same time stating that “defining a precise quantitative standard of degradation of quality of the target product cannot be a prerequisite for the application of the SSNDQ test. All that matters is that the quality degradation remains small, albeit significant and non-transitory.” The case is on appeal to the EU Court of Justice.

Overall, the Commission will assess the underlying reasons why customers would or would not substitute one product for another in order to identify the parameters that are most relevant for the choices of customers. A variety of parameters can drive such choices, in addition to the product’s price, such as its level of innovation or its quality. The Notice recognises, for example, that customers may take into account whether a product is manufactured using more or less sustainable technology (e.g. zero-waste, non-zero-waste recycling, or low-carbon technology). It also notes that differences between distribution channels, including online and offline channels, or the regulatory framework, may also be relevant. Furthermore, customer choices may be subject to behavioural biases, such as a tendency to choose the default option provided. The Commission can therefore take into account a wide variety of factors.

Supply substitution

The Notice explains that supply substitution can be relevant for product market definition when suppliers use the same assets and processes to produce related products that are not substitutes for customers, and where this leads to similar conditions of competition across the range of such related products.

The necessary conditions for the market to be broadened based on supply substitution are that most, if not all, suppliers are able to switch production between products in the range of related products, without incurring significant additional sunk costs or risks, have the incentive to do so when relative prices or demand conditions change, and can offer all products in the same range effectively in the short term.

Sufficiently strong supply substitution may typically arise when undertakings market a range of qualities or grades of a particular product. Supply substitution can also be relevant for market definition when customers purchase bespoke products.

Defining geographic markets

The Commission defines the relevant geographic market by assessing whether conditions of competition are sufficiently homogeneous for the effects of the conduct or concentration to be able to be assessed. The Notice recognises that markets can range from local to global, depending on the facts of the case. When customers around the world have access to the same suppliers on similar terms, regardless of the customers’ location, the relevant market is likely to be global.

The Notice also clarifies the role of a range of factors in defining geographic markets, such as market shares, prices, customer preferences, purchasing behaviour, switching costs and other barriers to supplying customers in different areas, transport costs and trade flows.

As far as imports are concerned, the possibility of switching to imports in a given geographic area does not necessarily extend the geographic area to include the area from which the goods are exported, as customers located in the different areas may face different conditions of competition. The Commission should, however, fully factor any constraints faced from imports in its competitive assessment.

The Notice also flags that structural transitions that may affect specific markets can be taken into account when defining the relevant market, including transitions that may be related to globalisation. For example, expected changes in a regulatory framework may allow for a wider geographic market definition where relevant.

Gathering and evaluating evidence

The Commission uses various sources of evidence in order to define markets and it does not apply a rigid hierarchy of different sources of information or types of evidence.

The Notice contains additional guidance on possible sources of evidence and their probative value.

The Notice states that evidence used by the Commission to define markets should be reliable. This is likely to be the case where the evidence comes from public authorities, or is supported by multiple sources (including by market participants with conflicting interests). The Notice also addresses the challenges relating to evidence in the case of forward-looking assessments and where market definition is based on changes in competitive dynamics. In such instances, expected changes must be supported by reliable evidence that demonstrates, with a sufficient level of likelihood, that they will materialise.

When assessing the evidential value of documents, the wider context of the documents should be taken into account to assess their relevance. Evidence will have greater probative value where it is clear that the evidence was not influenced by the Commission’s investigation. This will be the case for example where evidence pre-dates discussions of a concentration or conduct, and pre-dates the Commission’s investigation. Other factors that may be relevant include the identity of the authors and potential addressees, and the purpose of the documents.

In addition to submissions by the undertakings involved, the Commission will gather evidence from industry participants, and may commission surveys of a representative sample of customers or suppliers. The Notice provides that surveys must be designed carefully in order to obtain meaningful responses. For example, questions should be clear and should not induce responses in a particular direction, and the range of response options should be sufficiently comprehensive.

Market definition in specific circumstances

Market definition and significant differentiation

Where there is significant differentiation for the same range of products the Commission may identify different relevant markets across that range of products.

Product differentiation occurs where characteristics of the products are relevant for the customer’s choice, and can include design, brand image, technical specifications, durability, level of service or any other specific feature. Geographic differentiation occurs where the location of the individual customer and supplier matters for the customer’s choice.

Market definition and significant price discrimination

Where there is price discrimination between customers or customer groups for the same product, for reasons unrelated to costs, the Commission may define narrower, separate relevant markets. This will typically be the case where it is possible to identify clearly to which group an individual customer belongs at the moment of selling the relevant product, trade among customers or arbitrage by third parties is unlikely, and the price discrimination is of a lasting nature.

Market definition and significant investments in R&D

The Notice flags that the specificities of highly innovative industries characterised by frequent and significant investment in R&D may be relevant for market definition. Given the outcome of innovation efforts in terms of final products can be uncertain, the Commission may factor in various potential outcomes of R&D processes in its assessment.

The Notice gives the example of pipeline products, where there may be sufficient visibility on their R&D process to establish with which other products the product is likely to be substitutable. The intended use of the pipeline product and its projected substitutability with other products will play a particular role in defining the relevant market.

Market definition and multi-sided platforms

In the case of multi-sided platforms (which support interaction between different groups of users) the Commission may define a relevant product market for the products offered by a platform as a whole, or as separate relevant product markets for the products offered on each side of the platform. The Notice identifies that the Commission will define separate markets where there are significant differences in the substitution possibilities between the different sides of the platform.

Multi-sided platforms often offer products or services for free to users on one side of the market while monetising the same services on the other side of the market. In such cases the SSNIP test would not work and the Commission will instead focus on non-price factors such as product functionalities, intended use, evidence of hypothetical substitution, barriers or costs of switching. It may also apply the ‘SSNDQ test’, which as noted above assesses the switching behaviour of customers in response to a small but significant non-transitory decrease of quality.

Market definition and after-markets, bundles and digital ecosystems

After-markets are markets where consumption of a durable product, the primary product, leads to the consumption of another connected product, the secondary product. The Notice describes three alternative ways in which the Commission could define relevant product markets in such cases:

  • As a system market including both the primary and secondary product
  • 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
  • As dual markets, with a market for the primary product and a market for the secondary product

The Notice provides guidance on the relevant circumstances for deciding which of these approaches the Commission may take.

The Notice considers that digital ecosystems can, in certain circumstances, be seen as consisting of a primary core product and several secondary (digital) products whose consumption is connected to the core product, for example through technological links or interoperability.

When considering digital ecosystems, the Commission may therefore apply similar principles to those applied to after-markets in order to define the relevant market. Where the secondary (digital) products are offered as a bundle, the Commission may also consider the possibility of that bundle constituting its own relevant market.

As not all digital ecosystems will fit an after-market or bundle approach, the Commission will also take into account, where relevant, other factors when defining the relevant product market, such as network effects, switching costs (including factors that may lead to customer lock-in), and single or multi- homing decisions.

Market shares

Market shares are typically based on sales or purchase volumes, but the Commission recognises that, depending on the specific products or the industry in question, other metrics can offer complementary or more useful information to determine market shares. These can include capacity, production volumes, number of suppliers, usage metrics such as the number of users, website visits or streams, time spent or audience numbers, number of downloads etc. In markets where there are significant investments in R&D, the level of R&D expenditure or the number of patents may be used as a relevant metric.

The Commission also recognises that market shares are not the sole indicator of an undertaking’s strength in the market and that other factors such as barriers to entry or expansion, including those resulting from scale or network effects, access to specific assets and inputs, as well as product differentiation will also be relevant depending on the specific facts of the case. Where there is a significant degree of product or geographic differentiation, analysing how closely suppliers compete may be more relevant than assessing market shares.

Market share information may be provided in the form of estimates by the undertakings involved if precise market shares are not available to them. The Commission will in addition, or alternatively, use other sources of information on market size and market shares where necessary for the purposes of its assessment.

As a general rule, the Commission relies on market shares calculated over one year reference periods. It will usually collect data for at least three years, and in the context of antitrust enforcement, for the duration of the conduct under investigation.

Conclusion

The Commission will keep the Notice under review and will further develop its interpretation of the key concepts for defining relevant markets in its decisional practice, taking into account developments in the markets and in competition dynamics, evolutions in best practices and in line with the case law of the EU Courts.

During the review process the Commission has also worked closely with the national competition authorities of the Member States and in other key jurisdictions, which should contribute to international alignment in approaches to market definition.

Contacts

Kyriakos Fountoukakos
Kyriakos Fountoukakos
Global Head of Practice, Competition, Regulation and Trade, Brussels
+32 2 518 1840
Peter Rowland
Peter Rowland
Of Counsel, Brussels
+32 2 518 1847
Kristien Geeurickx
Kristien Geeurickx
Professional Support Consultant, London
+44 20 7466 2544