CH2: Market definition

What is market definition and why is it important in competition law?

Market definition is the process of identifying the relevant market in which firms compete.

• Competition law applies within defined markets.

• Market definition is essential for market shares to be estimated, and market power analysis to become possible.

• Market definition is not the final objective, but a preliminary step to assessing market power.

Why is market definition important under Article 101 TFEU?

For agreements between firms, market definition helps determine whether market shares fall below safe-harbour thresholds and whether agreements are likely to restrict competition.

Why is market definition important under Article 102 TFEU?

For abuse of dominance cases, authorities first need to determine whether a firm is dominant in the relevant market. Without market definition, dominance cannot be measured properly.

Why is market definition important in merger control?

In merger cases, market definition is a preliminary step used to assess whether the merger significantly increases market power in the relevant market.

What is the product market?

The product market asks which products are substitutes for each other.

Example: is there a separate market for apples, or a broader market for fruit?

What is the geographic market?

The geographic market asks over what geographic area firms compete.

Possible scopes include local, regional, national, or international markets.

Example: are apples sold in a local market or a Europe-wide market?

What additional dimensions may matter in market definition?

Depending on the case, other dimensions may matter because markets are often context-specific.

Examples include:

• peak versus off-peak periods,

• residential versus business customers,

• online versus offline distribution,

• forward-looking versus backward-looking analysis.

What is demand-side substitutability?

Demand-side substitution examines whether consumers would switch to alternative products after a price increase.

The focus is on customer preferences and willingness to substitute.

Substitutability can differ across consumers. For example, business travellers may not substitute trains with buses, while leisure travellers may be much more price-sensitive.

What is supply-side substitutability?

Supply-side substitution examines whether producers can easily switch production toward competing products.

The focus is on production technology, technological flexibility, and production capabilities.

Example: a producer of luxury handmade paper may not easily switch to toilet paper production.

What is the Hypothetical Monopolist Test, or HMT?

The Hypothetical Monopolist Test is the central framework used for market definition.

The key question is whether a hypothetical monopolist could profitably impose a small but significant non-transitory increase in price, called a SSNIP.

What are the steps of the Hypothetical Monopolist Test?

The process works step by step.

1. Start with a focal product.

2. Ask whether a monopolist controlling that product in a candidate market could impose a SSNIP.

3. If consumers switch away too much, the candidate market is too narrow.

4. Add substitute products consumers would switch to.

5. Repeat the process until the price increase becomes profitable. The final candidate market is the relevant market.

Why can the HMT be controversial in practice?

The HMT is simple only when there is a clear focal product and candidate market.

Identifying the goods that consumers would switch to can be controversial, especially when products are differentiated or when substitution is not obvious.

What is Critical Loss Analysis, or CLA?

Critical Loss Analysis is a practical implementation of the HMT. It compares the actual loss with the critical loss.

The actual loss: proportion of sales after a SSNIP where π_M< π_M before SSNIP

The critical loss: proportion of sales loss after SNNIP where where π_M = π_M before SSNIP

What happens if actual loss is greater than critical loss?

If actual loss is greater than critical loss, the SSNIP is unprofitable for the hypothetical monopolist.

The monopolist loses too many sales and the higher price no longer compensates for lost volume.

This means products outside the candidate market exert important competitive constraints and must therefore belong to the same market. The market must be widened.

What happens if actual loss is smaller than critical loss?

The SSNIP is profitable for the hypothetical monopolist. The candidate market is therefore a relevant market.

What is the effect of higher margins in Critical Loss Analysis?

Higher margins lead to a smaller critical loss.

This makes it easier for actual loss to exceed the threshold, meaning the SSNIP becomes unprofitable and the market may need to include substitutes.

What is the Cellophane Fallacy?

The Cellophane Fallacy occurs when the SSNIP test starts from prices that are already at monopoly levels.

The test may incorrectly find substitution (bc of higher margins & higher elasticity)

This makes the market appear broader than it really is and incorrectly suggests no market power.

What caused the Cellophane Fallacy in the US cellophane case?

In the US cellophane case, wrapping paper appeared to substitute for cellophane, but only because cellophane prices were already exploitatively high.

Starting from monopoly prices made consumers appear more willing to switch to alternatives.

What is the alternative approach to avoid the Cellophane Fallacy?

Use competitive prices as the starting point instead of current prices.

The major challenge is that determining competitive prices requires the full market power assessment, creating a circular problem.

Sensitivity analysis can help by testing with lower prices, lower elasticities, and different scenarios to assess robustness.

Why are differentiated products difficult for market definition?

Market definition becomes more difficult when products are differentiated because substitution exists along a spectrum and there is no clear market boundary.

Some substitutes are closer than others. As a result, market definition and market-power assessment begin to overlap.

What are two-sided markets and why do they complicate market definition?

Two-sided markets are markets where demand on one side depends on demand on the other side.

This creates indirect network effects. The HMT becomes more complicated because products on each side are complementary rather than substitutable.

Example: fewer merchants accepting cards reduces value for cardholders, and fewer cardholders reduces value for merchants.

How can price discrimination affect market definition?

When prices differ by customer type, such as students, business users, or leisure travellers, this may indicate separate relevant markets.

Different consumer groups may face different sets of substitutes.

Price discrimination does not always mean separate markets, but it can be a useful signal to examine different consumer segments.

What is an example of price discrimination and market definition?

Student train tickets versus business tickets.

Students have lower willingness to pay and may see buses as a viable alternative.

Business travellers are less likely to consider buses as a substitute.

This may suggest different competitive constraints for different customer groups.

What are asymmetric markets?

Asymmetric markets are market relationships where substitution is not symmetric.

Example: individual travel products may constrain package holidays, but package holidays may not strongly constrain individual travel products.

This shows that substitution relationships are not always symmetric.

What is non-price competition in market definition?

Non-price competition refers to competitive dimensions other than price, such as quality.

The SSNIP logic can be applied to non-price dimensions using SSNIQ, meaning Small but Significant Non-transitory Increase in Quality.

This is particularly relevant for platforms and cases where price is zero.

What are the main challenges with applying SSNIQ?

The main challenges are:

• defining what constitutes quality,

• establishing comparable metrics for quality increases,

• determining what represents a 5 to 10 % quality change.

It requires creative approaches with strong justification.

What is an example of using a non-price approach to market definition?

An example: analyzing a past incident where a product became unavailable, such as a product recall, as a proxy for a quality decrease.

The challenge is not only the analysis itself, but justifying the methodology and explaining why it informs substitution patterns.

Why is the market definition framework often applied qualitatively rather than quantitatively?

The framework is typically applied qualitatively rather than quantitatively due to data limitations.

Success requires a compelling narrative and evidence-based reasoning even without perfect data.

Why is product inclusion sometimes difficult when broadening markets iteratively?

When broadening markets iteratively, the order of product inclusion is not always obvious.

This is especially true for differentiated products, where products do not need identical characteristics to exert competitive pressure.

How should the market definition framework be adapted for differentiated products?

For differentiated products, the framework requires more flexibility.

Authorities must consider characteristics beyond price.

Products do not need identical characteristics to exert competitive pressure. Asymmetric substitution is possible.

If focal product consumers would switch to another product, that product should be included even if substitution is not bidirectional.

Why are market definition results sensitive to assumptions?

Results are highly sensitive to key assumptions such as margins and elasticity.

Even margin calculation involves judgment about which costs to allocate.

What types of evidence are used in market definition?

Types of evidence include:

• competitor views and reports,

• internal business documents,

• consumer surveys,

• natural experiments

• event studies,

• price correlation analysis

• multiple evidence sources with consistent results.

Why are competitor views and internal documents useful in market definition?

Competitor views and reports are particularly valuable in merger contexts.

Internal business documents, such as strategy presentations and business plans, show how companies view their competitors.

Why are consumer surveys useful in market definition?

Consumer surveys allow direct questions about substitution behaviour and willingness to switch.

They help identify which products consumers would consider alternatives.

What are natural experiments or event studies in market definition?

Natural experiments or event studies analyze what happened when a product exited the market or became unavailable.

They help reveal actual substitution patterns.

What is price correlation analysis?

Price correlation analysis examines whether prices of different products move together.

Correlated prices suggest substitutability, but they are not definitive proof. Different price patterns do not conclusively prove that products are in separate markets.

Why is using multiple evidence sources important in market definition?

Multiple evidence sources with consistent results provide stronger conclusions than a single type of evidence alone.

When can market definition be left open?

Precise market definition can be unnecessary when the competition assessment conclusion is the same under any plausible market definition.

Then Commission may analyze multiple scenarios without definitively choosing one.

What is an example of market definition being left open?

An example is app stores.

Whether the market is defined as global or national may not materially affect the dominance assessment.