On 8 February 2024, the European Commission ("Commission") updated its Market Definition Notice ("Notice") for the first time since its initial publication in 1997.
The revised guidance softens the rigidity of the Commission's earlier approach and grants it more flexibility in competition assessments – particularly in relation to digital and R&D intensive markets. Companies active in digital and tech sectors would be well-minded to pay close attention to the Commission's new approach to market definition.
Key among the changes is an overriding recognition that competition in digital markets (where a great deal of services are offered to consumers for free or at subsidised prices for "with ads" options) takes place in respect of factors other than price, such as innovation, quality, reliable supply and sustainability.
This comes in the context of a broader review by the Commission on its approach at ensuring more effective competition regulation of digital markets, including the publication of the Digital Markets Act (Regulation (EU) 2022/1925) on the 14 September 2022.
Why does this matter?
The way a market is defined impacts significantly on whether a breach of the competition rules has taken place or whether a merger is allowed. The narrower the market definition, the more the market power attributed to the undertakings concerned, which in turn has a significant bearing on whether a breach of competition rules is committed or whether a merger is allowed.
The Notice contains important detailed guidance on the principles and methodology of market definition. It is the starting point in any competition law assessment (be it an antitrust action under Articles 101 and 102 TFEU or merger control), and is a piece of soft law that is thumbed through, studied and assessed by competition practitioners and antitrust regulators around the world.
National competition regulators, like the Office for Competition ("Office") at the Malta Competition and Consumer Affairs Authority in Malta, also look to the Commission's notices for guidance in assessing cases brought before them locally, and it would be expected that the new Notice will guide the Office in its assessments going forward.
What is market definition?
Defining a market sheds light on the competitive environment in which players operate and compete on a market.
A market is defined through two main dimensions: the relevant product market and the relevant geographic market. The relevant product market represents all products and services that are sufficiently substitutable for the original product or service under review. The relevant geographic market, on the other hand, represents the specific area within which competition for the relevant product or service takes place.
Once the relevant market is defined, a competition enforcer can then move on to assess a party's market power in that specific market.
Key updates to the Market Definition Notice
- Non-price dimensions of competition
While the original Notice focused on price as the main factor of competition for market definition, the new Notice emphasises that competitive factors extend beyond just product characteristics, pricing, and intended use, incorporating elements like the degree of innovation and quality. Additional factors may include resource efficiency, durability, value, and a wide range of uses, as well as the product's potential to be integrated with other products. The image a product conveys, along with the security and privacy protection it offers, are also significant considerations.
Moreover, the revised Notice highlights the influence of behavioral biases on customer choices, such as the inclination to select the default option—seen in the European Commission's recent Booking.com/eTraveli merger decision, which identified customer inertia as a factor.
- Forward-looking market definitions
Forward-looking market definitions are particularly relevant in markets that are anticipated to experience significant structural changes, such as major technological advancements or new regulatory frameworks, which can substantially transform the overall market dynamics. For the Commission to consider these transitions, there must be "reliable evidence" indicating a "sufficient likelihood" that these structural shifts will occur, going beyond "mere assumptions that observed trends will continue or that certain undertakings will change their behavior", particularly where customers may already have sufficient visibility on pipeline products. The Commission refers, for example, to the fact that the market for a medicinal product could be expanded to include pipeline products that are currently in the later stages of clinical trials.
- Multi-sided Platforms
In a new chapter dealing with digital markets, the Commission notes that it will consider indirect network effects when treating multi-sided platforms, both when defining the relevant market as well as in the competitive assessment. A multi-sided platform may bring together a number of different user groups (eg holidaymakers, hotels, and other holiday service providers using the same platform), and a reaction by one group to changed supply conditions may affect other groups using the same platform, creating a feedback loop (ie indirect network effects). The new Notice recognises that there may be separate markets on each side of the platform, based on differences in substitution possibilities and substitution patterns. In other circumstances, the relevant product market may be defined as a whole.
- Digital Ecosystems
Digital ecosystems have become common in today's technological environment, and comprise of a primary core product and one or more secondary (digital) products or services whose consumption is connection to the primary product. Similar to after-markets, the revised Notice acknowledges the presence of digital ecosystems. In its assessments, the Commission will define them as either involving a single system market of primary and secondary products, or as multiple separate and distinct markets. Factors such as switching costs, network effects, and homing decisions will all be relevant in defining whether digital ecosystems constitute distinct or bundled markets.
- A changed understanding of the impact of market shares
The revised Notice notes that market shares based on sales volumes are not the sole indicator of a company's position on the market.
For instance, it refers to the following factors it may consider more relevant in certain sectors:
- In bidding or innovating markets, the number of suppliers or tenders awarded may be more relevant;
- In digital markets, usage metrics such as number of interactions on a platform, site visits, active users.
- In markets with significant R&D, the level of R&D expenditure and number of patents or patent citations.
Conclusion and outlook
Market definition continues to be central to competition assessments both at EU level as well as in the individual member states, including Malta. The Commission's changed methodology will be significant in the assessment of the existence of a dominant position and the assessment of potential anti-competitive behaviours, and is overall a welcome change that affords much-needed clarification. The Notice confirms approaches adopted in some recent decisions and case law, but leaves some factors open for assessment on a case-by-case basis and leaves room for flexibility in complex issues, particularly where this concerns an ever-changing digital market.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.