Updated EU market definition notice has business implications

The European Commission said its new market definition notice (notice) “reflects the significant developments of the intervening years” since the notice was last changed – when it was first adopted in 1997 – and cited “the increased digitalisation and the new ways of offering goods and services, as well as the interconnected nature of commercial exchanges” as particular examples.

The way a market is defined is important under competition law as it sets the parameters within which competition authorities determine whether there is fair competition between businesses and the market is working well for customers. In turn, those considerations shape the extent to which competition authorities will intervene in markets – whether to enforce competition law where there is an abuse of a dominant market position or presence of anti-competitive agreements, or how merger control is exercised, including whether commercial transactions like mergers or acquisitions are given the go-ahead.

For the first time, the European Commission has formally confirmed how various non-price factors may be considered when assessing how the market for certain products or services should be defined. Consideration will be able to be given to, for example, the level of innovation a product or service provides, as well as the degree of its sustainability, resource efficiency, durability, and the value and variety of uses it offers.

Further non-price factors potentially relevant to the assessment of a market include the possibility to integrate the product or service with others, the image it conveys, the security and privacy protection afforded to it, as well as its availability – including in terms of lead-time, resilience of supply chains, reliability of supply, and transport costs. The Commission said the list is indicative only and non-exhaustive.

The new notice is relevant to the definition of markets across all sectors, but some provisions have been included that are specifically relevant to digital markets – including specific guidance on market definition in relation to multi-sided platforms, digital ecosystems, market share calculation in zero-price markets, and the comparison of offline versus online markets.

For example, the notice addresses how markets might be defined in the context of the operation of multi-sided platforms – such as where demand from buyers on one side of the platform can have an influence on the supply of products and services on the other side of the platform, and vice-versa. In this scenario, the Commission has scope to define a product market broadly as being for all products offered by a platform or to distinguish separate product markets for products offered on each side of the platform.

On the issue of zero-price markets – where products or services are offered for free or at least without monetary compensation – which are particularly common in the context of multi-sided platforms, the Commission may assess the qualitative characteristics of the relevant products or services and apply the principles of the “small but significant non-transitory decrease in quality” (SSNDQ) method to assess switching behaviour of customers in such circumstances, instead of using the traditional “small but significant and non-transitory increase in price” (SSNIP) test that relies on the existence of monetary prices.

The notice also describes alternative metrics for the calculation of market shares besides sales figures, such as shares based on sales or capacity, or shares based on use metrics like the number of active users or website visits.

Innovation competition is another focus area in the Commission’s revised notice. It seeks to provide more guidance and transparency to companies by clarifying principles the Commission will apply when defining markets in R&D- and innovation-intensive industries. For example, the Commission may have regard to pipeline products; and may consider underlying research and development activity as a factor to the geographic scope of a market, meaning that the market does not need to be solely defined with reference to commercialised products or services.

The notice also explains the Commission’s approach to geographic market definition, such as when markets will be considered local, national, EEA-wide, or global, and how import competition factors into such assessment. In a speech accompanying the publication of the revised notice, the EU’s competition commissioner Margrethe Vestager said that “…the proportion of markets defined as worldwide in EU merger investigations has grown and grown over the years”. This, she added, has enabled the Commission to clear some mergers with “very high market shares” because of the competitive constraint imposed by imports.

The Commission said: “The revised market definition notice will support the Commission's efforts and those of national competition authorities in the European Economic Area (EEA) to define the relevant markets, which is an important step in many antitrust and merger cases. It is expected to enhance legal certainty and predictability, to lead to higher procedural efficiency for the authorities and to help companies comply with EU competition law.”

“Market definition is a first and important step in the assessment of a competition case, whose outcome however depends on other factors (e.g., the existence of market power, the effects of a given conduct, the impact of a concentration). That said, following a sound methodology in defining the relevant markets makes that assessment easier, by helping to structure the competition assessment and to focus the investigation on those aspects that matter,” it said.

Pinsent Masons competition law expert, Michael Reich, who is based in Munich, said: “The new notice not only systematises and structures over 20 years of the Commission’s and the Court of Justice of the EU’s decision practice on market definition, it also opens the rather rigid framework of analysis of its predecessor to a more flexible approach to market definition. It is particularly interesting to note that the notice specifically points out that different methods may be used depending on the market or the legal issue that is at stake.”

“The notice also provides very useful practical guidance to check whether the Commission will accept the parties’ view of the market definitions. In particular, the explanations in section three on the different kinds of evidence the Commission will typically seek to analyse and how much probative weight it may give to such evidence almost amount to washing instructions on how to proceed with the analysis of the relevant markets,” Reich said.

Pinsent Masons competition law expert, Tadeusz Gielas, who is based in London, said: “As well as focusing on digitisation and innovation, the notice expressly acknowledges that environmental sustainability characteristics of products or services may also be relevant to the Commission’s market definition assessment. It is another example of the EU’s wider green transition agenda being reflected in competition policy.”

“In the UK, the Competition and Markets Authority has also taken steps to ensure its approach, particularly in merger cases, keeps up with commercial, economic, and technological changes and realities. In March 2021, the CMA’s revised merger assessment guidelines signalled a more flexible approach, recognising the importance of digitisation and digital ecosystems, innovation, and non-price parameters of competition; while moving away from formal ‘bright line’ market definition and giving more emphasis to a broader competitive assessment,” he said.

Multinational businesses that are active in the EU and the UK will need to be aware of both the Commission’s and the CMA’s approach, including any areas of divergence.