Definition of Relevant Market

Arguably the most important step in the application of competition law to the conduct of companies is the definition of relevant market. Discuss.

Introduction

This piece will examine the definition of the relevant market as it applies to EU competition law and in doing so identify its place in the application of competition law to the conduct of companies. Part one will provide a clear analysis of the placing of relevant market in the scheme of EU competition law and part two will explore the various resources that are used to identify the definition of both the ‘product’ and ‘geographic’ relevant markets from the point of view of the Commission Declaration of 1997 and case law. This will reveal whether the ‘relevant market’ definition is significant enough to be categorised as the most important step in the application of competition law to the conduct of companies.

A. Relevance of the ‘relevant market’ to EU Competition Law provisions

EU competition law is governed by Articles 81 and 82 of the EC Treaty, and it is Article 82 that possesses the greatest affiliation to the definition of ‘relevant market.’ The initial part of the Article reads as follows:

“Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States…”

It is clear from the wording of the first part of Article 82 that there are three terms that require to be defined in order to fully understand the situation that triggers the intervention of competition law. The first is the undertaking which is the term used to describe the commercial enterprise that runs the risk of prohibition. The second is the effect on trade between member states and the third is the dominant position. It is the dominant position or market power concept that requires the identification of the ‘relevant market’ and the reason for this is that it is essential information for the purpose of ascertaining whether there is, firstly, dominance of that relevant market and, secondly, abuse. As stated by the court in Continental Can v Commission :

“…the definition of the relevant market is of essential significance, for the possibilities of competition can only be judged in relation to those characteristics of the products in question by virtue of which those products are particularly apt to satisfy an inelastic need and are only to a limited extent interchangeable with other products… ”

The above quote is also a key step towards the judicial understanding of the key considerations that go into the concept of ‘relevant market.

B. What is a relevant market?

There are currently two sources for the ascertainment of a definition of ‘relevant market’ that are valid under European law. The first is the 1997 Commission Notice on Market Definition and the second is the ratio decidendi of case law.

1. The 1997 Commission Notice on Market Definition

This test is an American import called the ‘Small, but Significant, Non-transitory Increase in Price’ (SSNIP) and is a hypothetical monopolist test that ascertains levels of demand substitution, which are the instances when consumers will transfer allegiance to another product as a result of price increases. If this occurs where there is a price increase of 5-10% it is concluded that the product and the substitution are part of the same market.

The analytical breakdown is largely limited to consideration of product and geographic dimensions.

a The relevant product market

The Commission defines this as:

“…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.”

The ideas of this declaration, namely substitution, characteristics, price and intended use are a direct result of the findings of the prior case law that will be examined below.

(b) The relevant geographic market

This is defined by the Commission as:

“…the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas.”

Again the concept of ‘conditions of competition’ are directly case law related as will be illustrated in part B.

(c) Critique

This system is really a summary of the findings of case law that do assist by being an unofficial codification of the key considerations that define the relevant market as well as the addition of an economic formula for the determination of elasticity within one market. Complications of this system are firstly that there is a great deal of reliance placed on the gathering of evidential data to create an accurate threshold for product substitution. This problem also existed under case law and is not solved by this declaration. Secondly, the occurrence of limited competition will yield inaccurate results as prices could be exorbitant before substitution ensues although once again, it will be shown with reference to the case law analysis that the ascertainment of the wrong market will produce skewed results. This in turn does however illustrate the singular importance of the relevant market definition as being a crucial factor that the Commission and the courts must get right in order to successfully apply provisions of competition law to the right cases!

A more immediate complication of the Commission Notice is that it is not binding and the Commission has been selective in its decisions as to whether or not to apply the SSNIP to cases .

2. ‘relevant market’ in accordance with case law

(a) Relevant product market

This is the designation of products that are in competition with one another on account of their interchangeable and substitutable nature with consumers, which means that they form part of the same market . Consumers therefore decide among these products, which suits them best and this is usually a determinant that considers price, aesthetic features and use of the product with the needs of the consumer. The case of Sockel GmbH v The Body Shop International plc is a recent affirmation of the essential requirement to identify the relevant market for the purpose of ascertaining a dominant position and the possibility of abuse as here, the action failed because the market was not adequately defined.

The following are the features that have been used in case law to ascertain the ‘relevant product market.’

(i) Demand Cross-elasticity/substitutability

The case of United Brands Co v Commission dealt with the concept of cross-elasticity of demand between fruits , which is the measurement of how likely a price increase is going to cause consumers to substitute with another product. It was argued in the case that bananas:

“compete with other fresh fruit in the same shops, on the same shelves, at prices which can be compare, satisfying the same needs: consumption as a desert or between meals… ”

This therefore would give rise to the possibility of high elasticity. This case also examined the physical attributes of the banana and determined that physically similar products will be interchangeable. The Commission focused on appearance, softness and seedless properties thereby determining that they met the needs of children, the sick and denture wearers and should be separated from the market of other fresh fruit.

This case therefore illustrates the complexity of the assessment of products in that a different analysis leads to designation into other markets. The ‘healthy eating’ group that desires fruit as a dietary choice would have no problem interchanging the specific specie to find the most economic option but the presence of different market groups of consumers clearly creates situations of elasticity in some groups and static in others. Another case of Hilti AG v Commission shows that the identification of the wrong market will have the result of ascertaining inelasticity where it is in fact present or vice versa. The result will inevitably be the wrong conclusion as to the ascertainment of dominant position and its abuse.

It seems that, if any one market is identified that results in inelasticity, the court will proceed to ascertaining dominance.

Nederlandsche Banden-Industrie Michelin N.V. v Commission looked at the intended use of the product in which the court determined that there were two separate markets for original-equipment tyres, which are purchased in bulk and replacement tyres, that are ordered singularly on a requirement basis. The intended use therefore had a direct impact on quantity that affected the price. It was however argued in this case that the Commission had not correctly defined the relevant market and for this reason had engineered an overly large market share for Michelin that gave rise to an indication of market dominance. Although this was rejected by the court, it gives rise to this crucial juncture of defining the relevant market.

Commercial Solvents v Commission also looked at intended use which in this case had the effect of narrowing or identifying the market by the need for a specific raw material and not the general fact that the anti-TB drug could be manufactured from other chemicals that form part of one product market.

(ii) Supply substitutability

This is the concept of analysing the elasticity of manufacturers on the supply side is of equal importance to the demand side for the reason that there is interchangeability of target purchasers given the correct marketing strategies and innovations. The supply side of product market was analysed in Europemballage Corp and Continental Can Co Inc v Commission where the decision of the court had to be quashed as a result of failing to recognise the ‘simple adaptation ‘ of ‘glass and plastic containers ‘ that would create ‘serious counterweight ‘ to the product market profile.

(b) Relevant Geographic market

This second aspect of the relevant market examines its geographic extent. This is important from the point of view that the Commission is then able to identify the potential competitors of an undertaking and ascertain whether there is dominance within a ‘substantial part of the community.’ The boundaries of the geographic area can be very straightforward. In United Brands Co v Commission it was stated that for Article 82 of the EU Treaty to apply, it must:

“…presuppose the clear delimitation of the substantial part of the EC in which it may be able to engage in abuses which hinder effective competition and this is an area where the objective conditions of competition applying to the product in question must be the same for all traders. ”

Therefore in United Brands it was found that characteristics and conditions of markets will separate them into mere localised markets as opposed to being Europe-wide. Price differences between the geographic locations is therefore not a key factor.

As with the relevant product market, the courts face equal controversy where the ascertainment of a relevant geographic market is complex. This led to criticism in the case of Nederlandsche Banden-Industrie Michelin N.V. v Commission in which the Commission argued in favour of a different market for the differing needs serviced by each subsidiary as opposed to the global market, however it was not adequately argued that consumers could look outside a area like the Netherlands thereby yielding a higher elasticity.

Conclusion

From comparison of parts one and two it is clear that there exists a paradox between the status and the definition of ‘relevant market.’ In answer to the above question, the ascertainment of the relevant market is the fundamental ingredient to the calculation of a dominant position under Article 82 of the EU Treaty as it is the relevant market itself that it the subject matter of this domination. The relevant market is therefore the most important step in the application of Competition law to the conduct of companies.

However, there are two factors that form strong criticisms of the definitions of ‘relevant market.’ The first is the ridiculous presence of two sources, namely case law and the non-binding yet persuasive Commission Notice of 1997, which is really only a mere summary of the flawed conclusions of case law. It therefore continues to be the case that the interpretation of data and judicial assertions of both the product and geographic relevant markets are complex economic issues that carry too many possible relevant markets for the purposes of administering justice. As stated above, the best that the courts can do with this faulty method is identify many relevant markets for one product and ascertain whether there is inelasticity in at least one of them.

Bibliography

Legislation

EU Treaty (Nice Version, 2001)

Case Law

Continental Can v Commission C-6/72 [1973] ECR 215

Hoffmann-La Roche v Commission C-85/76 [1979] ECR 461

Sockel GmbH v The Body Shop International plc [2000] UKCLR 262

United Brands Co v Commission Case 27/76 [1978] 1 CMLR 429

AG v Commission T-30/89 [1991] ECR II-1439

Nederlandsche Banden-Industrie Michelin N.V. v Commission Case 322/81 [1985] 1 CMLR 282

Commercial Solvents v Commission [1974] ECR 223

RTE v Commission T-69/89 [1991] 4 CMLR 586

BBC v Commission T-70/89 [1991] 4 CMLR 669

British Leyland plc v Commission C-226/84 [1987] 1 CMLR 185

Sealink/B&I-Holyhead: Interim Measures [1992] 5 CMLR 255

Tetra Pak 1 (BTG Licence) 88/501 OJ L117/1, 1997, [1997] 2 CMLR D1

Soda Ash-Solway 91/299 (1991) OJ L152/

Napier Brown-British Sugar 88/518 (1988) OJ L374/1

1998 Football World Cup 2000/12 (2000) OJ l5/55

British Airways 2000/74 (2000) OJ L30/1

AGB Oil Companies operating in the Netherlands (77/327/EEC) , OJ L117/1

BP v Commission C-77/77 [1978] 3 CMLR 174

Commission Publications

Commission Notice on the definition of the relevant market for the purpose of Community Competition Law OJ C372/5, 1997

Text Book Publications

BJ Rodger & A MacCulloch, “Competition Law and Policy in the EC and UK” (Cavendish Publishing, 2004)

M Furse, “Competition Law of the EC and UK,” (Oxford University Press, 4th edition, 2004)

K Middleton, BJ Rodger and A McCulloch, “UK & EC Competition Law,” (Oxford University Press, 2003)

Articles

Arnull, “Competition, the Commission and Some Constitutional Questions of More than Minor Importance,” [1998] 23 ELRev 1

DR Price, “Abuse of a Dominant Position-The Tale of Nails, Milk Cartons and TV Guides,” [1990] ECLR 80