• Jurate Markeviciute, Manager |
  • Caitlin Wilkinson, Partner |
  • Henry Smith, Associate Director |
10 min read

In early February 2024, the European Commission (the Commission) adopted a revised Market Definition Notice (the Notice) for merger and antitrust cases. The Notice represents the first revision to the market definition guidelines since the 1997 Notice, and draws together the Commission’s approach to market definition which it has in practice applied over the intervening period, providing plenty of references to case precedent to illustrate the Commission’s approach. The Notice reflects the considerable changes - in the more than 25 years since the previous guidance was published - in the way the modern economy and markets operate. For example, increased digitalisation of markets and increased levels of globalisation have markedly changed how products are offered to consumers, and which suppliers are able to compete to serve consumers in the European Union – and therefore have an important bearing on how the principles of market definition are applied in practice.

The Notice also reflects a number of themes which have been prominent in more recent years, in relation to the application of market definition to digital and other R&D intensive industries, as well as in relation to how evidence is gathered and assessed. In this note, we focus on three such themes in the revised Notice – the focus on digital markets, the approach to market shares, and the evidence the Commission will rely on – and provide some brief reflections on the approach the Commission has set out.

The Notice introduces and considers several aspects particularly relevant to digital markets

Digitalisation has been a key driver of market developments since the 1997 Notice. It has transformed existing markets in terms of the way products are offered to consumers, as well as created new ones, such as online social networking platforms. The Commission has been scrutinising digital platform markets with increased frequency across its case work, and developed a closer understanding of the dynamics and features commonly present in these markets – for example, network effects, zero prices to users and access to consumer data.

The Notice offers more guidance on how market definition will be applied to and adapted for markets with significant digital elements. In this section, we highlight three factors which are relevant to digital markets and given explicit consideration within the updated guidance: (i) the role of non-price parameters, (ii) multi-sided markets and (iii) ecosystems.

Greater focus on non-price competitive parameters

The Notice emphasises that firms often compete on non-price parameters, such as levels of innovation, or various different product characteristics (an emphasis that was lacking in the 1997 Notice). In these circumstances, the Notice recognises that implementing a traditional SSNIP variation of the Hypothetical Monopolist test could be challenging and/or produce misleading results – highlighting, in particular, markets characterised by ‘zero monetary price’ products and markets characterised by significant innovation. The Notice refers, instead, to the use it may make of an ‘SSNDQ’ test, which assesses how consumers would respond to small, but significant non-transitory decrease in quality.

The reference to the SSNDQ test in the Notice – not present in the 1997 Notice – is helpful, as this provides a robust framework (as does the SSNIP test in markets where competition focusses more heavily on price) for establishing the set of effective competitors. Of course, as the Notice recognises, implementing the SSNDQ test quantitatively is likely to be even more challenging than the empirical implementation of the SSNIP test (itself a challenging prospect in a number of markets).

Nevertheless, the SSNDQ framework remains the right one for the assessment, even if applied qualitatively. In this regard, the Notice is, however, less clear – suggesting that an SSNDQ test may be applied. The Notice refers to a number of potentially relevant non-price product characteristics, but limited specific guidance is given on how such product features would be assessed – or what might constitute an appropriately ‘small’ decrease in quality from which to assess customer switching behaviour. Case precedent as referred to in the Notice provides some guidance, but much will still be uncertain for companies in markets characterised by non-price competition as to exactly how these aspects will feed into market definition.

Guidance on market definition in multi-sided platforms

The Notice contains a new sub-section dedicated to multi-sided platforms – platforms that connect two or more customer groups (e.g. hotel booking websites, social media platforms, payments systems). The Notice highlights the challenge when it comes to market definition for multi-sided platforms, given the presence of indirect network effects, such that the reaction by one side of the market to a change in supply conditions may then affect the other side(s) of the market, amplifying the impact on the business of the change.

The Notice explains that the EC may define a product market for the products offered by the platform as a whole, or it may define separate (although interrelated) product markets for the products offered on each side of the platform. The Notice then provides some high-level guidance on the sorts of factors that might tend towards defining one market, or separate markets, related to the extent to which there are significant differences in the substitution possibilities on the different sides of the platform.

Another challenge with multi-sided platforms (including, but not limited to, digital platforms), is the existence of zero monetary prices, or even negative prices, often offered by platform operators in order to attract users on one side so as to maximise monetisation of the other side of the platform. In this regard, mention is again made to the SSNDQ test (see above), alongside a number of factors upon which the Commission will focus (including product functionalities, substitution patterns, costs of switching related to interoperability with other products). Here, as above, the Notice gives the Commission significant flexibility in whether or not – and even more so how – the SSNDQ will be applied.

Complex dynamics of ecosystems is acknowledged

The Notice also includes a new sub-section on ‘after-markets, bundles and (digital) eco-systems’, providing guidance on how market definition will be approached in these circumstances. After-markets exist when the consumption of a durable (primary) product leads to the consumption of another connected (secondary) product, and the Notice highlights that in such a scenario, the competitive constraints imposed by market conditions in the respective connected markets will be taken into account when defining markets.

The Notice goes on to explain the circumstances when a single ‘system’ market comprising both the primary and secondary product is more likely to be defined. These include circumstances when customers take whole-life costs into account when purchasing the primary product; the level of expenditure on the secondary product is high relative to the price of the primary product; there is a higher degree of substitutability between primary products; and when there are few suppliers specialised only in the secondary product(s). Similarly, the Notice provides a very high-level description of how market definition may be approached when, rather than products being dependent on one another as in the case of after-markets, consumers still prefer to consume products together as a bundle.

As recognised by the Notice, digital ecosystems share some characteristics with other, more traditional, after-markets products – where a primary core product is linked to several secondary digital products whose consumption is linked to the core product. The Notice then suggests that the Commission may apply similar principles to those applied to after-markets (or product bundles) when defining digital ecosystem markets, though also states that not all digital ecosystems fit an after-market or bundled market characterisation. Factors such as network effects, switching costs and single / multi-homing decisions, it is noted, will be relevant in defining the relevant product market.

Overall, therefore, the Notice provides limited guidance on how market definition is likely to be approached in ecosystem markets. This general level of uncertainty surrounding the approach to market definition of digital ecosystems is consistent with statements in the report by Commissioner Vestager’s three experts, on the future of competition policy in the digital era. That report, indeed, went further in suggesting that market definition be downplayed in such markets, replaced by a more direct focus on theories of harm. Significant uncertainty therefore remains on how the Commission will approach market definition in such markets, and even the extent to which markets will be formally defined – businesses and their advisors will have to play close attention to how practice evolves, with decisions such as the Booking.com / eTraveli case and the General Court judgement likely to be important markers for the Commission’s approach.

The notice reflects emerging use of a wider range of different metrics for market shares, but general emphasis on the shares has decreased

The Notice rightly recognises that market shares are not the sole indicator of an undertaking’s strength in market. Downplaying the role of market shares may be particularly relevant in dynamic and innovative markets, bidding markets or where the products are significantly differentiated, with varying degree of closeness of competition between products. The Commission acknowledges that other pieces of evidence that are typically considered in the competitive assessment, such as closeness of competition or barriers to entry, may be more informative than market shares.

Nevertheless, market shares can still play an important role (and in particular where the products are less differentiated) and in its revised Notice, the Commission acknowledges that reliable metrics can extend beyond a simple share of sales. As captured in the Notice, recent precedent has demonstrated that a more analytical and creative view can be taken to accurately capture how users engage with the product – for example, time spent or apps downloaded, particularly where customers or a group of customers receive services for free (e.g as in the social platforms). The Commission’s list includes not only the metrics that are particularly relevant to digital markets, but also captures other benchmarks, such as number of patents, number of trips to or access rights such as slots at airports. The Commission also states that market shares may be estimated into the future, where the assessment is forward-looking.

The Notice emphasises the reliability of evidence rather than the type

The Notice includes an expanded (and clearer) section on the Commission’s approach to gathering evidence and defining markets in practice. The Notice includes an overview of how the Commission will evaluate evidence, emphasising the reliability of evidence as being the key consideration, as well as the need to base its decisions on the entirety of the evidence base, especially where evidence may be conflicting.

The Commission also lists different types of internal documents that it may request. Internal documents may be in particular relevant in future-looking assessment (e.g. a new product has just launched), where the historical evidence may not capture product substitutability. With a higher number of cases in digital and other innovative markets, it is likely that internal documents will play an increasingly important role in both market definition and in competitive assessment. In order for the right conclusions to be reached and the right analysis to be conducted, it will be crucial, however, that the Commission scrutinises these documents through the lens of an appropriate an analytical framework – seeking to draw conclusions from documents to test or refute testable specific hypotheses or propositions, for example.

So, what does this mean?

Much of the Notice provides a formalisation of what has been relatively well-established Commission practice over the decades since the previous guidance was published. This welcome consolidation of case precedent and case law will serve as a useful tool for businesses and their advisors when engaging with the Commission on a range of cases.

Alongside this, the Notice sets out considerations relevant to some more recent trends in the Commission’s case work – the application of market definition to the particular characteristics of digital markets; the use of market shares in markets where products are more differentiated and competition takes place over non-price dimensions including quality and innovation; and the emphasis on the use of internal documents.

While the inclusion of these considerations is also welcome, the Notice is – perhaps inevitably – very high-level in many of these areas. For example, in relation to digital platforms and ecosystems, there remains significant flexibility and therefore uncertainty over how the Commission will deploy market definition. Forthcoming decisions, and the approach taken in future cases will be crucial in continuing to provide insight on how the Commission will approach these issues in certain markets. It will be interesting to see the extent to which the Commission pursues an approach grounded in the – in our view still appropriate – framework of the hypothetical monopolist (or SSNIP / SSNDQ test), or whether the Commission moves to a looser, and potentially less predictable, approach.