European Commission's Revised Market Definition Notice for the Digital and Globalized Economy

On February 8, 2024, the European Commission (EC) published a Revised Market Definition Notice (Revised Notice), which aims to provide clarity on how the EC will define markets in a competition analysis in particular in light of the significant changes in digital markets, the effects of globalization, and the EU’s focus on innovation and sustainability. The Revised Notice addresses various competition parameters beyond price and provides guidance on evaluating competitive dynamics in an increasingly digitalized world, addressing specific challenges related to multisided platforms, digital ecosystems, and the role of innovation.

The Revised Notice updates a previous version from 1997 to expand on the EC’s approach to market definition, reflecting increased globalization, significant developments in digital markets, and the EU’s broader policy goals in terms of innovation and sustainability. It also reflects the EC’s prior decisions and related judgments of the European Court of Justice.

Market definition is a foundational tool used in competition assessments. Key principles include considering which products compete and what geographic dimensions apply to that competition. The Revised Notice restates longstanding principles on identifying effective competitive constraints but also seeks to acknowledge the dynamic nature of markets influenced by digitalization and globalization. In particular, the Revised Notice includes various competition parameters beyond price, such as sustainability, innovation, and quality, reflecting the EC’s approach to changing market conditions and enabling companies to assess competitive dynamics beyond traditional metrics. It also clarifies that market definition is a nonmandatory, case-by-case tool.

Further detail on the more significant changes in the Revised Notice are set out below.

Competitive Constraints and Market Dynamics

The Revised Notice identifies the utility of a conceptual framework such as the traditional Small but Significant Nontransitory Increase in Price (SSNIP) test to assess whether a business area constitutes a relevant product market. However, it recognizes that there is no obligation to apply the SSNIP test exclusively, and other types of evidence are equally valid for market definition. In the context of zero monetary price products or highly innovative industries, where companies compete on parameters other than price, such as quality or innovation, the Small but Significant Nontransitory Decrease of Quality (SSNDQ) test can also serve as a qualitative framework for assessing demand substitution.

Methodology and Evidence for Product Market Definition, including Forward-Looking Assessments

In comparison with the 1997 Notice, the Revised Notice introduces a broader range of evidence to determine product substitutability. In addition to traditional factors, the EC now also considers evidence of hypothetical substitution. This involves assessing how customers are likely to react to hypothetical changes in supply conditions.

Furthermore, the Revised Notice outlines that the EC may gather different sources of evidence, both qualitative and quantitative, in no particular hierarchical order. The reliability of evidence is paramount, with preference given to information from public authorities or supported by multiple sources. Internal documents, such as customer surveys, marketing studies, and business plans prepared in the ordinary course of business, are also considered highly reliable.

Methodology and Evidence for Geographic Market Definition and the Role of Imports

In terms of methodology for geographic market definition, the Revised Notice clarifies that markets can be defined based on either supplier location or customer location, depending on whether customer location influences product offering conditions (e.g., airport-related services are often defined on an “airport-by-airport” basis, i.e., by supplier location).

Regarding the role of imports, the Revised Notice explains that while imports are considered in the competitive assessment, they may not always influence market definition.
In terms of evidence used to define geographic markets, the Revised Notice expands on the use of indicators such as the presence of the same suppliers across geographic areas, similar market shares, prices, customer preferences and purchasing behavior, barriers and costs associated with cross-area supply, and trade flows. The same considerations on the gathering and evaluating of evidence set out above apply here.

New Chapter on Market Definition in Specific Circumstances

Unlike its predecessor, the Revised Notice addresses the following market definition challenges.

Significant Differentiation and its Impact on Markets

Significant differentiation among products, whether at the product or geographic level, can result in varying degrees of substitutability. The EC may therefore identify separate relevant markets within a continuum of differentiated products. Alternatively, broad market definitions encompassing differentiated products are also theoretically feasible, although the EC has generally rejected such wide definitions.

Customer Discrimination: Defining Distinct Market Segments

Discrimination between customers or groups when they are offered different prices or levels of quality for the same product based on specific customer criteria can lead to narrower, distinct markets. This is typically the case when (i) it is possible to identify which group an individual customer belongs to at the moment of selling the relevant product to that customer, (ii) trade between customers by third parties is unlikely, and (iii) the discrimination is of a nontransitory nature.

Innovation and Significant R&D Activities

In highly innovative industries characterized by substantial R&D activities, such as life sciences, a significant consideration in market definition is the classification of pipeline products. Visibility on the R&D process allows the EC to determine the likely substitutability of pipeline products with other products upon completion and market entry. This classification may either place pipeline products within existing relevant markets or allow for new markets limited to the pipeline product and its substitutes. In addition, the geographic dimension of such markets may need to reflect the scope of the underlying R&D efforts. Furthermore, when R&D processes are not closely tied to specific products but serve multiple purposes and feed into various potential products, defining market boundaries becomes relevant for assessing innovation competition. Factors such as the nature and scope of innovation efforts, research objectives, and geographic specificities are considered in the assessment.

Defining Markets in the Era of Multisided Platforms

The EC can define the relevant market either as a whole platform or separately for each side of the platform based on factors such as substitution possibilities and product differentiation. The existence of indirect network effects may render the assessment of demand substitution, particularly in the application of the SSNIP (or alternatives such as the SSNDQ) test, more challenging. Nonprice factors such as product functionalities, intended use, and switching costs are relevant for the assessment of substitution. While platforms may offer products at zero or negative monetary prices to attract users, the existence of a relevant market is still a pertinent consideration.

Aftermarkets, Bundles, and (Digital) Ecosystems: Expanding Market Definitions

In certain cases, the consumption of a primary product naturally leads to the consumption of a connected secondary product, known as an aftermarket. When defining relevant markets for both primary and secondary products, the EC considers the competitive dynamics within these connected markets. There are three approaches to defining these markets: as a system market, multiple markets, or dual markets, with the choice depending on factors such as customer behavior and product substitutability.

Ecosystems (particularly digital ecosystems), characterized by a core product and interconnected secondary products, are evaluated similarly. The EC examines factors such as network effects, switching costs, and customer lock-in when defining relevant markets within these ecosystems. The Revised Notice suggests that bundling of secondary products may also form a distinct relevant market.

Calculating Market Shares: A More Comprehensive Approach and Relevant Factors

The Revised Notice outlines the usefulness of market shares in assessing market power but recognizes that they are not the only indicator of market power. Other metrics such as capacity, number of suppliers, usage metrics, and reserves held can provide valuable insights into market shares. These metrics vary depending on the industry and specific products under consideration. For markets characterized by significant investments in R&D, such metrics as R&D expenditure or patents may be used to assess competitive positions.

In markets where products are significantly differentiated, market shares may provide a less reliable indicator of market power. In such cases, analyzing how closely suppliers compete becomes more relevant than assessing market shares alone. The EC may rely on segment shares or consider prices.

Thank you to Lisa Sopena and Piers Edinborough, both trainees in Sidley’s Antitrust and Competition practice, for their significant contribution to this Sidley Update.