European Commission goes electric with forward-looking Market Definition Notice: five things worth hearing

The 1997 Market Definition notice has at last shuffled off stage. ?Despite the gaps in its repertoire, it was remarkable how it kept mostly in tune despite its venerable age.

While the new Notice might read like a lengthy 'how to' document on a technical area (which is often more art than science), it's an important document for business and advisers who know that market definition can make or break a case. ??Some controversial practices are now baked into it, but the end product certainly helps predict the Commission's approach (especially in digital, pharma and life sciences).? And there are multiple reminders that, when things get tricky (looking to future markets and predicting strength) a company's internal 'ordinary course' documents, metrics and SWOT analyses may tip the balance.

So, what’s new? In essence it has been updated to reflect the Court/Commission's decisional practice over the last 20 odd years.? Very obviously it seeks to address the "twin green and digital transitions" (para 3). ??

Its not about the money, money, money

When considering substitutability these days, the 'parameters of competition' are much wider than the price tag. They can include a product's degree of innovation/ quality in various guises: ?sustainability, efficiency, durability, value and variety of use, interoperability, image, security/privacy, availability, resilience of supply chain and transport costs ?(paras 15, 27, 50, footnote 73). This also means (especially with zero price products) that a Small but Significant Non-transitory Decrease of Quality might be more appropriate thought-framework than its analogue price-based relative, the SSNIP – para 30, and footnote 54).

Ch..ch..ch..changes : structural market transitions, pipeline products, innovation spaces and future shares

Significantly, the Notice warns that, when the case calls for a forward-looking assessment (which won't just be mergers of course) the Commission can take into account "expected transitions in the structure of a market" (para 210).

Here we are talking about things that affect general demand and supply in a market – and not just what individual competitors might or might not do. ?These sorts of' 'structural market transitions' can mean a different product market. That could go either way: broader to include pipeline products. Or narrower to cover a single molecule (given impending entry).? The same applies to geographic market – e.g., tech/regulatory changes could mean a new global scope to supply/demand (para 21 and footnotes 42, 43).

This is likely to be a contentious area – especially in the pharma sector. The Notice says it will only take short-term or medium-term changes into account where they change the general dynamics of supply and demand within the period relevant for the assessment. There will also need to be "reliable evidence" (footnote 45); "sufficient likelihood" that the projected changes take place; and that has to go beyond "mere assumptions". Market definition is just a first step and exactitude should not be overplayed. But this still seems like an area where the Notice will give the Commission and NCAs some interpretative leeway to define a market to tackle a perceived problem.

The Notice also dedicates a section to market definition in the presence of R&D. It flags that a pipeline product may join an existing product market or form a brand-new market. ?But there's no guidance on what might be the requisite 'time to market'. The Notice also covers 'innovation spaces' where the R&D process is not yet closely related to any specific product (para. 92 and footnote 125). While the Notice recognizes that innovation efforts tend to be global, a number of broadly defined factors can be invoked to define these spaces – e.g. the nature/scope of the innovation efforts, the objectives of the different lines of research, the specialisation of the different teams involved or the results of the undertaking’s past innovation efforts (para 92). The number of patents or patent citations is put forward later as a useful metric (para 108). Perhaps recognising the shortcomings to this approach, the Notice points out that the metrics used by the business may "prove particularly relevant" (para 108).

Consistent with the theme of forward-looking analyses, the Notice explains that, in markets undergoing structural transitions, or where a forward-looking assessment may be appropriate to capture market dynamics, market shares may be estimated for the future. Para 165 includes examples where market shares were calculated 7 and 8 years into the future.)

Paranoid Android: multi-sided markets and digital ecosystems

When it comes to multi-sided platforms, the Notice explains that it may be more appropriate to define separate markets (as opposed to a platform market) where there are significant differences in the substitution possibilities on the different sides of the platform. To assess that, the Commission will consider whether the undertakings offering substitutable products for each user group differ, the degree of product differentiation on each side, behavioural factors such as the homing decisions of each user group and the nature of the platform (e.g., whether it is a transaction or a matching platform) - para 95).

For zero price products, the following non-price factors will come into play when considering substitutability: product functionalities, intended use, evidence of past or hypothetical substitution, barriers or costs of switching, such as interoperability with other products, data portability and licensing features (para 98).

For digital ecosystems, the Notice borrows on aftermarkets methodology, characterising them as comprising a primary core product and several secondary (digital) products whose consumption is connected to the core product (e.g., by tech links/interoperability). ?So there may be read-across from aftermarket principles to digital ecosystems. ??When the secondary (digital) products are offered as a bundle, the Commission may also assess the possibility of that bundle constituting a relevant market on its own. ?

When it comes to measuring market strength in digital markets/ecosystems, the Notice lists usage metrics which may help – e.g. the number of active users, the number of website visits or streams, time spent or audience numbers, the number of downloads and updates, the number of interactions or the volume or value of transactions concluded over a platform (esp. where access is free) – para 108.

The World is Not Enough

The Commission remains resilient on globalisation – and when a geographically wider market definition is appropriate.? It will continue to assess whether the conditions of competition in different areas are sufficiently homogeneous. ?Paragraph 42 is key: " the mere existence of imports or the possibility of switching to imports in a given geographic area does not necessarily lead to a widening of the geographic

market to include the area from which the goods were or could be exported ".? ?The Commission might still include those imports in the relevant geographic market of course. The competitive constraint from imports can also be assessed in detail as part of the competitive assessment (para 44).

Careless whisper

The significant role of internal documents is apparent from the new Notice. ?'Ordinary course' documents will be "particularly relevant" - especially for conducting a forward-looking assessment (para 77). The Commission will have its eye on evidence showing that a company monitors the behaviour of certain competitors and will attach weight to strategic documents (like SWOT analyses) used to inform business decisions (para 80). Metrics used internally in company's general course of business and internally trusted market share estimates are also highlighted (paras 108, 112).

Market Definition Notice for competition cases (europa.eu)

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