The European Commission's Revised Market Definition Notice: A Defining Moment?

Modernising Market Definition

Market definition is a foundational concept and key tool for antitrust analysis. On February 8, the European Commission ("EC") published a final version of its Revised Market Definition Notice (the "Revised Notice").¹ The principles and detailed methodology now set out in the Revised Notice will guide and inform the EC's future conduct of EU merger control and antitrust enforcement cases.

The Revised Notice replaces guidance originating from 1997 (the "1997 Notice"). While the EC's basic approach to market definition has not fundamentally changed, the Revised Notice does address developments in the intervening 27-year period. These include the digitalisation of the economy, the increased prevalence and importance of innovation-led markets, enhanced commercial interconnectedness and cross-border trade flows resulting from globalisation, as well as the growing significance of sustainability considerations in an antitrust context.

The Revised Notice therefore departs from its predecessor insofar as it considers developments such as digital eco-systems, multi-sided platforms and supplies of goods and services at zero monetary cost, all of which were formerly unaddressed. It also takes account of the EC's own decisional practice and important judgments issued by the European Courts since 1997.

This alert focuses on five key aspects of the Revised Notice likely to be of foremost relevance to businesses and other affected stakeholders, summarised in outline below:

• Digitisation. New markets have emerged and many existing markets have been reshaped by digitisation; the Revised Notice looks to revise analytical practices in response.The EC recognises that the conventional focus on price as the key parameter of competition is potentially inappropriate when assessing digital markets, including in instances where goods or services may be provided at no monetary cost.Methodological reforms are introduced, with an increased focus in digital contexts on qualitative parameters of competition (including innovation and aspects of quality such as durability, sustainability, value and variety of uses).
• Assessment of evidence. Important guidance is provided as to the types of evidence that may be relevant for market definition purposes.Internal documents are identified as a key evidence source, with greater probative weight generally given to internal documents created before a relevant antitrust or merger control investigation is commenced.The Revised Notice serves to further underline the care businesses should exercise creating documents when regulatory investigations are reasonably foreseeable or in progress.
• Geographic market definition and globalisation. While the phenomenon of globalisation is recognised, and explanation given as to the circumstances in which global geographic markets may be defined, the Revised Notice marks an evolution in practice rather than dramatic change.There is no presumption in favour of wider (global) markets.Geographic markets will continue to be assessed by reference to the facts and evidence in each case (in this context, the Revised Notice gives specific guidance on the treatment of imports).
• Treatment of innovation-intensive sectors. When considering rapidly evolving industries subject to imminent structural transition, the Revised Notice recommends a "forward-looking" assessment that takes account of technological or regulatory changes.The Revised Notice also provides valuable guidance on the treatment of pipeline products and early stage R&D activities.
• Relevance of sustainability considerations. The Revised Notice includes bold statements recognising environmental sustainability as a non-price parameter of competition capable of influencing market definition.The EC can be expected to act on such statements in future as it undertakes new antitrust and merger control cases.The Revised Notice therefore confirms the EC's willingness to engage with businesses and affected stakeholders on sustainability issues.

Overall, the Revised Notice aims to offer accessible guidance and increased legal certainty as to how the EC defines markets for antitrust purposes, without being unnecessarily rigid. The EC regards market definition as "more like charting a coastline" than "drawing a line on a map".² This does not detract from the overall importance of market definition in many contexts. For instance, market shares can only be calculated once a relevant market has been delineated. Market shares are of wide-ranging utility, providing a basis for businesses and their advisors to identify, on an initial basis, the likelihood of competition concerns arising in relation to a merger or, conversely, determine whether their conduct may benefit under EU block exemption regulations.

1. Market definition responds to the digital transition

The 1997 Notice predates developments in the digital economy. While the Revised Notice acknowledges the value of the 1997 Notice, it also recognises its limitations in a digital context and seeks to address these. While the Revised Notice will not apply to the conduct of gatekeepers as defined under the Digital Markets Act ("DMA"), it will apply to the conduct of other digital players as well as behaviour of gatekeepers outside the DMA.³

The purpose of market definition, including in relation to digital markets in the context of merger control or antitrust enforcement, remains unchanged. Market definition provides a framework for structuring and facilitating competitive assessments, so that all relevant competitive constraints can be systematically identified and taken into account to assess whether a firm has market power.

Historically, variations in the price of goods and services and the corresponding reaction of consumers have been of prime significance in defining markets. A key evaluative tool in this context is the "small but significant non-transitory increase in price" ("SSNIP") test, which measures whether a hypothetical monopolist in a candidate market would find it profitable to implement a "small but significant non-transitory increase" in price (of approximately 5% – 10%).

In many markets, price remains a key parameter of competition and the EC's established methodology, including the SSNIP test, will continue to be relevant.

The Revised Notice proposes new bases of assessment in respect of digital markets, where non-price parameters of competition are more likely to be relevant. For instance, in many digital markets, goods and services are provided at zero monetary cost (with costs instead borne by advertising, monetisation of consumers' personal data or by other means). In this context, the SSNIP test is of potentially limited use. Multi-sided platforms, connecting multiple groups of users where demand from one group influences demand from the other group – for example, retail platforms that connect consumers, advertisers and sellers – raise particular challenges for conventional methods of market definition.

Responding to these challenges, the Revised Notice emphasises the significance of competition in respect of aspects of product innovation and quality, including "sustainability, resource efficiency, durability, value and variety of uses [and] the possibility of integrating the product with other products...".⁴ The Revised Notice endorses the use of a "small but significant non-transitory decrease in quality" ("SSNIDQ") test.

Further, the Revised Notice departs from a narrow focus on primary markets and provides specific guidance on the assessment of aftermarkets (involving secondary goods which cannot be separated from a primary set of goods), bundles (where consumers may prefer to buy several products together even though the consumption of one product is not dependent on a primary product)⁵ and (digital) ecosystems (consisting of a primary core product and various secondary products whose consumption is connected to the core product by, for example, interoperability or other technological links).⁶

2. Guidance on relevance and assessment of evidence

The EC uses varied sources of information and types of evidence to define relevant markets. It has broad discretion to request such information in its competition law investigations, subject to important limits.⁷ Its findings are based on an overall assessment of all available evidence in the case in hand.

The Revised Notice includes an important acknowledgement that no rigid hierarchy is applied to differing types of evidence or sources of information. When assessing the probative weight to be afforded to evidence, the primary consideration is its likely reliability. Evidence will most likely be viewed as reliable where it comes from public sources or is supported by multiple sources (including market participants with differing perspectives and interests – e.g., suppliers and their direct customers). Evidence will likely have greater probative weight if it can be established that it has not been influenced by the EC's investigation – i.e., evidence that predates an investigation, or in a merger control context it precedes discussion between merging parties of the transaction subject to investigation.

The internal documents of parties subject to investigation often constitute key evidence. The Revised Notice provides welcome guidance on the treatment of internal documents. Those internal documents prepared in the ordinary course of business are viewed by the EC as likely to best set out how parties view the market, as opposed to documents prepared in response to or in contemplation of an EC investigation. Contextual factors are relevant to the assessment of individual documents, including the identity of authors, the intended addressees, and the date and purpose of a document.

Marketing studies and customer surveys are specifically cited as valuable by the EC. Competitor monitoring and benchmarking reports, as well as strategic documents such as business plans, are identified in the Revised Notice as likely to provide key insights into the competitive constraints that inform market definition. These observations confirm the caution that businesses should exercise when preparing internal documents and disseminating these within an organisation.

3. Geographic market definition – evolution, not revolution

Competition in relation to the supply of a given set of goods or services may occur on a local, national, regional, EEA-wide or global basis. The Revised Notice recognises that the key consideration for geographic market definition is whether there are "sufficiently homogenous conditions of competition" across an area.⁸ Factors such as distance, transport costs, switching costs, customer preferences and purchasing behaviour, will inform the geographic market definition.

In updating the 1997 Notice, the Revised Notice acknowledges the phenomenon of globalisation, with trade flows in recent decades increasingly occurring on a cross-border basis while many barriers and impediments to free trade have diminished in significance. Bearing in mind such developments, the Revised Notice explicitly recognises that that the EC will identify a global geographic market "when customers around the world have access to the same suppliers on similar terms regardless of the customers' location...".⁹ This is a departure from the 1997 Notice, which did not address at length the likely existence of global markets.

This shift in outlook reflects the position of the EC in many key cases, in which it has defined global markets – or global markets excluding certain territories where products are not sufficiently similar.¹⁰ In a speech accompanying the publication of the Revised Notice, Executive Vice-President and Competition Commissioner Margrethe Vestager recognised that broader geographic markets have increasingly been adopted by the EC, and specifically that in merger cases the proportion of markets defined as operating on a worldwide basis has "grown and grown over the years".

Noting these observations, the Revised Notice charts an evolution in practice and does not signify a dramatic revolution in EC policy. Geographic markets will continue to be assessed by reference to the facts and evidence in each case. Globalisation has not led to a presumption in favour of wider (worldwide) market definitions. In this regard, the treatment of imports is instructive. The Revised Notice makes clear that the mere existence of imports or the possibility of switching to imports in a given geographic area is not necessarily sufficient to broaden a geographic market to include the source of such imports. Conditions of competition in the areas of export and delivery of goods or services may vary significantly. Imports may instead be a key factor when the EC assesses conditions of competition within a market (with imports capable of imposing competitive pressure from outside the boundaries of a defined market to which they do not belong).

4. Innovation in focus: forward looking application of market definition

As a general proposition, when considering an appropriate market definition the EC will take into account the competitive conditions prevailing at the time relevant conduct occurs or a merger is being assessed. The Revised Notice acknowledges that this conventional methodology is not necessarily appropriate in rapidly evolving industries, especially those characterised by rapid technological progress (e.g., in the digital sector), or the introduction of new or newly developed products or processes.

In relation to dynamic industries and sectors, the Revised Notice proposes a more flexible approach than is normal. It is noted that where structural changes are expected, such as technological or regulatory transitions that will have an effect on the general dynamics of supply and demand in a market (as opposed to merely affecting individual businesses), it may be legitimate to consider expected changes in competitive dynamics over a longer or shorter period than is typical.¹¹

For the EC to adopt such an approach, there "must be reliable evidence that there is a sufficient likelihood that the projected structural changes will take place".¹² The Revised Notice makes clear that the EC will not act on the basis of inference or assumption.

A similar focus on rapidly-evolving industries and sectors informs the approach outlined in the Revised Notice to innovation and markets characterised by frequent and significant R&D activity (e.g., life sciences, pharmaceutical, digital and technology markets). While such characteristics are often relevant to the substantive assessment of competition, the Revised Notice explains that they may also inform the EC's approach to market definition. The complicating factor, addressed in the Revised Notice, is the uncertain outcome of innovation efforts and R&D activities.

The Revised Notice contrasts pipeline products with early innovation efforts. While pipeline products are not yet available to consumers, their intended use may be sufficiently well specified that the EC can ascertain the likely degree of substitutability between established, commercialised products and pipeline products if brought to market. This may enable the EC to include pipeline products in an existing product market, or to define a new product market. By contrast, early stage R&D activities may serve multiple purposes and, if ultimately successful, serve as an input into varied different products. While the Revised Notice acknowledges that such uncertainty may make it difficult to identify a conventional product market corresponding to such activities, it emphasises that early stage R&D may instead inform the assessment of "innovation competition" more broadly. For this purpose the nature and scope of innovation efforts, the objectives of different lines of research and particular areas of R&D specialisation may help determine the parameters within which innovation competition occurs.

5. Sustainability – laudable intentions; limited detail

The EC is committed to pursuing environmental sustainability goals through initiatives in all relevant policy areas, including competition policy. Most notably, in 2023 the EC published revised antitrust guidelines on horizontal cooperation between businesses that included a specific chapter considering sustainability agreements.¹²

Consistent with this overarching policy position, the Revised Notice emphasises the importance of sustainability considerations as a non-price parameter of competition, potentially capable of affecting market definition. This is an important reform and perhaps best characterised as a statement of intent. The Revised Notice does not contain detailed guidance as to the specific circumstances in which sustainability factors will be relevant. This detail is likely to emerge as the EC's decisional practice develops, with the EC underlining its willingness to engage with businesses and other affected stakeholders on sustainability issues.

Key takeaways

The world has changed significantly since 1997 and the Revised Notice succeeds in updating – rather than re-inventing – the EC's approach to market definition. Some revisions, particularly in relation to digital markets and innovation-intensive sectors, are bold and eye-catching. They serve to codify the significant evolution seen in the EC's thinking and practices in recent years.

While the Revised Notice is not formally binding on national competition authorities in the EU, the Revised Notice is likely to be highly influential and viewed as instructive by agencies across EU Member States.

Looking further afield, the Revised Notice in Europe follows the Department of Justice and the Federal Trade Commission releasing revised joint merger guidelines in December 2023. These revised guidelines advocate a more flexible approach to market definition, providing the US agencies with the discretion to focus primarily on the competitive assessment rather than the formal delineation of appropriate markets. In 2021, the UK Competition and Markets Authority revised its merger assessment guidelines, which included adjustments regarding market definition comparable in nature to those seen recently in the US. These different approaches will need to be carefully navigated and businesses should engage with regulators and encourage a joined-up approach where appropriate.

The Antitrust team at Mayer Brown can assist with all aspects of antitrust and merger investigations and the resulting liaison with competition authorities around the world.