Definition of relevant market
This notice provides guidance as to how the Commission applies the concept of relevant product and geographic market in its ongoing enforcement of European Union (EU) competition law. By making public the procedures followed by the Commission regarding market definition and by indicating the criteria and evidence on which it relies to reach a decision, the Commission expects to increase the transparency of its policy and decision-making in the area of EU competition.
Commission notice on the definition of relevant market for the purposes of Community competition law [Official Journal C 372 of 9.12.1997].
In the event of a suspected infringement of the competition rules, the first element to be considered is the relevant market. Defining the relevant market means determining the scope of the competition rules in respect of restrictive practices and abuses of a dominant position (Regulation (EC) n° 1/2003) as well as the scope of the merger regulations (Regulation n° 139/2004).
In accordance with the principle of transparency, the notice explains the method used by the Commission to define a relevant market on a case-by-case basis. This analysis, which incorporates both the product and the geographical dimensions of the relevant market, can be used to determine whether there are actual competitors which are capable of constraining the behaviour of the firms in question and to assess the degree of real competition on the market.
Definition of relevant market
The relevant market combines the product market and the geographic market, defined as follows:
- a relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer by reason of the products' characteristics, their prices and their intended use;
- a relevant geographic market comprises the area in which the firms concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homogeneous.
Analysis for the definition of relevant market
In recent years, the Commission has identified a number of criteria which can help it to analyse the behaviour of firms in the market and the specific conditions of the relevant market. However, this methodology may give rise to different results depending on the type of competition problem involved. Therefore, a structured analysis which is also flexible enough to take individual circumstances into account is necessary.
In a preliminary analysis, the Commission attempts to define the product market by investigating whether product A and product B belong to the same market. It also tries to determine the geographic market by producing an overview of the breakdown of the market shares held by the parties in question and by their competitors, the prices charged and any price differentials.
Once the product market and the geographic market have been defined, the Commission carries out a more detailed analysis based on the concept of substitutability. Firms subject to a competitive system must respect two major constraints: demand substitution and supply substitution. A market is competitive if customers can choose between a range of products with similar characteristics and if the supplier does not face obstacles to supplying products or services on a given market.
The substitutability criterion enables research to be targeted on any substitute products, thus making it possible to define the relevant product market and geographic market with a greater degree of certainty. Only in the final stage is the relevant market analysed to determine the degree of integration in the markets of the European Union (EU).
Thus the Commission carries out an assessment of demand-side substitutability (i.e. of customers) and supply-side substitutability (i.e. of suppliers). In the first case, the question is whether customers for the product in question can switch readily to a similar product in response to a small but permanent price increase (between 5 % and 10 %). In the second case, the question is whether other suppliers can readily switch production to the relevant products and sell them on the relevant market.
However, this criterion of interchangeability does not take account of the conditions in which the firms in question operate. Therefore it is necessary, for instance, to examine the conditions of access to the market thus defined. In this connection, the Commission carries out an assessment of product dimension and the geographic dimension of the relevant market, taking account of:
- the recent past: in certain cases it is possible to analyse evidence relating to recent price variations, for example in terms of substitution between two products or in terms of the customer response;
- the results of specific studies: elasticity of demand for a product can be assessed by conducting econometric and statistic tests. It is also useful to assess the geographic market in the light of a series of factors (such as culture, language, etc.) which impact on local preferences;
- the views of customers and competitors: the Commission may contact the main customers and competitors of the firm in question with a view to gathering factual evidence and estimating their reaction in the event of price variations within the geographic area;
- consumer preferences: the Commission may ask the firms in question to commission market studies before launching a product on the market or fixing its price. It may also contrast the purchasing habits of customers on the relevant market with those of other customers on a separate geographic market in so far as the conditions are the same;
- barriers (regulatory or others) and costs associated with switching demand to other products or areas;
- different categories of customer and price discrimination: a distinct group of customers may constitute a narrower, distinct market when such a group could be subject to price discrimination.
With the aim of eliminating trade barriers and creating an integrated European market, the Commission examines whether the relevant market complies with the EU rules.
Before drawing its conclusions, the Commission may consult the main firms in the sector on the limits of the product market and geographic market. Where appropriate, the Commission may also carry out an on-the-spot inspection.
Calculation of market share
The definition of the relevant market in both its product and geographic dimensions allows the market operators (suppliers, customers, consumers) to be identified. On that basis, the total market size and the market share of each supplier can be calculated with reference to their sales of the relevant product in the relevant area.
Companies' estimates, studies commissioned from industry consultants or trade associations or the companies' turnover figures help to calculate the total market size and the market share of each supplier. If sales are usually the reference whereby market shares are calculated, there are nevertheless other indications that, depending on the specific products or industry in question, can provide useful information, such as capacity and the number of players in bidding markets, etc.