Foundations of Competition Law on Market Definition

1. Introduction

This assessment evaluates the importance of market definition for Article 102 of the Consolidated Version of the Treaty on the Functioning of the European Union (TFEU), the historical roots of Article 102, the Market Definition Notice, and relevant case law. In doing so, the importance of ordoliberalism thought and detailed cases will be examined. Finally, the challenges of market definition due to digital actors and Article 102 cases, primarily in light of the Google Shopping case, will be evaluated.

2. The Story of Integrated Markets and Efficiency Concerns

Single Market Efficiency and Historical Roots of Article 102

The European Union's competition law and policy have developed over the years. In this process, it has been argued that competition law is an unclear legal area. In 1955, at Messina, France, Germany, Italy, and the Benelux countries (known as the "Six" Member States of the European Coal and Steel Community) agreed to create a common European market without customs restrictions. The participants at the Messina Conference aimed to "develop rules to protect free competition within the Common Market, particularly to eliminate all discrimination based on national origins." This was one of the first notable steps toward the integration of European markets, transforming into the internal market with the Treaty of Rome in 1957. According to the Spaak Report, the Six countries agreed to create a large area by merging their markets and thereby gaining economic power and stability.

In the 1930s, there was an economic thought known as the "Freiburg School" or "ordoliberalism." Some argue that the concerns of Article 102 are characterized by this concept. According to this thought, the freedom to compete should be one of the main goals of the market. Competition is necessary to ensure economic development and to promote a free market economy. Contrary to this concept, the problem of dominance is not prohibited for Article 102 cases. Because, according to ordoliberal thought, monopolism is harmful to competition.

According to the Spaak Report, the rise of goods production in the US and Communist countries disturbed the Six. Today, similar concerns can be seen in popular cases. In the twentieth century, the interests of consumers were not on the table for ordoliberals. On the other hand, the presence of consumer welfare concerns indicates that ordoliberalism may not be the only influential factor, regardless of how clear the Spaak Report's presentation on efficiency concerns is.

3. The Initial Legal Relationship of the Single Market and Article 102

The Importance of Market Definition

The story behind the idea of market definition is based on the need for efficient production in Europe. In this context, eliminating or minimizing anti-competitive behaviors in the common market is the main objective of competition law. Due to the importance of market definition for Article 102 of the TFEU, case law has been established by the European Council over the years. In this context, the first competition law interpretation on "abuse of dominance" was seen in the EU in the 1973 Continental Can v Commission case. The case was based on the issue of dominance, and the Court of Justice ruled that "the definition of the relevant market is of essential importance." In the case, the Commission found that the American company Continental Can, which acquired a German company, was dominant in the fish, meat, and metal caps markets. From this perspective, this decision was the first assessment of substitutability. However, this decision was annulled by the European Court of Justice due to the misdefinition of the market. On the one hand, Article 102, and on the other hand, the identification of the relevant market were the subjects of the study.

Fair market boundaries in terms of production and geographic areas are necessary for fair competition assessment. Because the outcomes of market boundaries will inevitably affect market power. This means that market power is not entirely a legal definition.

Initial Decisions and Interpretations

Over the years, the importance of the relevant market has been observed by competition authorities and doctrine. In this context, some important cases have occurred. As seen in the 1973 Continental Can case, the European Court of Justice recognized that "the definition of the relevant market is of essential importance." This showed that qualitative criteria (characteristics, price, and intended use) were used as tools to distinguish limited substitutability. This was the first necessity for the appropriate relevant market in Article 102 cases.

The second important decision in 1978 occurred in the United Brands case. The Commission's United Brands decision stated that some consumers could only eat soft fruits, but the elderly or very young could not consume bananas. This approach was widely criticized by the EU Courts, as it was noted that focusing on qualitative criteria such as characteristics, price, and intended use could lead to misunderstandings. As in the United Brands case, the EU Courts highlighted the presence of competition in the Hoffmann-La Roche case.

Consequently, over the years leading up to the European Market Definition Notice, the evaluation criteria of the EU Courts in the field of market definition related to Article 102 were developed on a case-by-case basis.

4. The Need for Objective Market Definition in 20th Century Europe

Overview

Market definition provides information about goods and services that limit the behavior of undertakings and prevent them from acting independently of sufficient competitive pressure. It also provides a suitable reference to distinguish potential competition. In this context, economic terms are an essential part of legal assessment.

Economic Tools and Market Power

In reality, the concept of Article 102 only concerns dominance. In this context, the dominance area (region, place, market) of undertakings is the first step for the assessment of abuse. The Commission can evaluate the power of undertakings only by defining the market itself, as market power refers to the ability to maneuver in the market from an economic perspective.

Market power is the ability of undertakings to move prices profitably over a certain period. Short-term pricing above marginal cost and long-term pricing above total cost is considered market power by economists. Market power is measured by econometric methods (residual demand curve) or structured concepts (indirect method). Today, the structured approach is used by most competition authorities and the Commission. In short, the concept of the relevant market is different from the daily usage of the market. Today, there is a consensus that market definition must be based on business reality and case-based experiences for fair judgment.

Case Developments and Criteria

Over the years, the importance of the relevant market has been observed by competition authorities and doctrine. In this context, some important cases have occurred. In the 1973 Continental Can case, the European Court of Justice recognized that "the definition of the relevant market is of essential importance." This showed that qualitative criteria (characteristics, price, and intended use) were used as tools to distinguish limited substitutability. This was the first necessity for the appropriate relevant market in Article 102 cases.

In the 1978 United Brands case, the Commission's decision stated that some consumers could only eat soft fruits, but the elderly or very young could not consume bananas. This approach was widely criticized by the EU Courts, as it was noted that focusing on qualitative criteria such as characteristics, price, and intended use could lead to misunderstandings. In the Hoffmann-La Roche case, the EU Courts highlighted the presence of competition.

5. The European Market Definition Notice

Overview

With the publication of the Market Definition Notice (the Notice) in 1997, objectivity was provided in the Commission's market definition practices. As mentioned in previous cases, substitutability became important. The Commission published the Notice "to guide how the Commission applies the definition of relevant product and geographic markets." This was the modernization of the market definition framework from an economic perspective. Finally, the commercial context of the relevant market concept is different from the daily usage of the term, and the Commission acknowledged this difference in the 2010 AstraZeneca case.

The Policy Objectives and Cause-Effect Relationship of the Notice

In the first six paragraphs of the Notice, the Commission presents the purpose of the Notice. According to the Commission, market definition is "a tool to identify and define the boundaries of competition between undertakings." The Commission states that the primary objective of market definition is to systematically distinguish competitive constraints. Therefore, market power can be observed with meaningful information through market definition.

In most cases involving Article 102, the undertakings concerned claim that they are not dominant in the defined market or that the defined market is too narrow. This means they appear dominant when they are not. Especially in the digital market, undertakings tend to conceal their market power to avoid competition authority investigations. In the US Antitrust Subcommittee, Google's parent company Alphabet's CEO Sundar Pichai stated that Google operates in highly competitive and dynamic global markets. In the Google Shopping case, the Commission defined three different relevant markets: web search, search advertising, and comparison shopping markets, indicating that competitive pressure on Google's services could come from rival digital platforms or single-sided businesses.

Assessment of Product and Geographic Markets

As emphasized earlier, substitutability is one of the most important measures considered when defining the relevant market due to the traditional terms of EU competition law (definitions developed through the case law mentioned earlier). Substitutability refers to whether some products can be replaced with others or are substitutable to a limited extent. In this context, markets are evaluated in terms of product and geographic areas.

In the Notice, the general definition of the relevant product market is specified by its contents. Accordingly, the relevant product market comprises all products/services considered interchangeable or substitutable by consumers due to their characteristics, prices, and intended uses. The importance of the product market is clearly seen in some Article 102 cases, where the point of substitutability can be determined based on the characteristics, prices, or intended uses of the consumers or products.

The relevant geographic market comprises the area in which undertakings are involved in the supply and demand of products/services and where the competition conditions are sufficiently homogeneous and can be distinguished from neighboring areas due to appreciably different competition conditions.

6. The Limited Potential of the Notice and Assessment of Article 102 Cases

SSNIP Test and Practical Problems

The SSNIP test is a quantitative test. If sufficiently reliable data is available, it is generally applied to define the relevant market. However, in the absence of data, a qualitative assessment is made, considering all relevant evidence available to determine substitutability. In some cases, asymmetric substitution may occur, meaning products may be substitutable with each other but not in both directions. If the relevant products are not entirely homogeneous, demand substitution cannot distinguish substitutes.

On the other hand, the SSNIP test also fails in the absence of competition. If a monopoly price already exists, the SSNIP test cannot define market power. This is known as the "Cellophane Fallacy" and was mentioned in the Topps Europe case. Therefore, substitutability cannot be measured if the market lacks competition. This is a clear limitation of the SSNIP test.

In the AstraZeneca case, the General Court noted that the SSNIP test is not the only method to define the relevant market. It was examined that customers switch from one product to another, but the first product actually creates a unique competitive constraint against the other. Therefore, although there is no monopoly, the SSNIP test mismeasured substitutability, and consequently, market share, market power, and dominance.

Multi-Sided Markets and the Digital Economy

Determining the correct market is crucial. The failure to accurately delineate the boundaries of the relevant market can negatively impact consumer welfare. Therefore, carefully distinguishing the relevant market is the first step in competition law analysis. However, this is not a simple matter in the context of online platforms and the digital economy, as they have two-sided structures.

The first challenge is whether it is necessary to define separate relevant markets for both sides. Both sides of online platforms should be included in the relevant market definition. However, in previous cases related to online platforms, the Commission has not recognized the need to define separate relevant markets for different user groups. In the Microsoft/Yahoo merger decision, it was also not mentioned whether search users provided a market separate from the one reserved for advertisers.

The second challenge in determining the relevant market for online platforms is related to identifying substitutability. According to the Notice, demand and supply substitution are considered in defining product and geographic markets. In the context of online platforms, the definition of substitutability is often based on the functionality of the platforms, and the Notice does not include specific regulations for the particular characteristics of digital markets.

In the Google Shopping investigation, the Commission identified three different relevant markets: web search, search advertising, and comparison shopping markets. Defining relevant markets so narrowly based on functionality led to the conclusion that Google was dominant. However, since Google's web search and comparison shopping services have many common functionalities, it is not entirely clear whether these services constitute different markets.

7. The Google Shopping Case and Conclusion

In the Google Shopping investigation, the Commission identified three different relevant markets: web search, search advertising, and comparison shopping markets. Defining relevant markets so narrowly based on functionality led to the conclusion that Google was dominant. However, since Google's web search and comparison shopping services have many common functionalities, it is not entirely clear whether these services constitute different markets.

Conclusion and Evaluation

Market definition is often a contentious issue in the context of Article 102 of the TFEU. With the development of EU competition law, the Commission has faced many concerns. In this context, the primary concern of the EU has been to be less efficient than the US. Today, this assessment is not significant since the Communist bloc has collapsed.

With years of case developments and the Notice, it is now accepted that market definition is the most crucial tool for Article 102 cases. Any mismeasurement in market definition leads to incorrect market share percentages. This creates narrower or broader markets than necessary, resulting in the miscalculation of market power and dominance.

From the Messina Conference to the Spaak Report and the Google Shopping Case, the motivation of the EU must be observed very carefully, considering not only competition law but also economics. Today, despite the challenges of the tools in the current Market Definition Notice, the EU's approach to the digital economy and multi-sided markets, in general, will show that many shortcomings need to be addressed.

References

Cases

• Case 6/72 Europemballage and Continental Can v Commission [1973] ECR 215 EU:C: 1973:22

• Case 27/76 United Brands and United Brands Continental v. Commission [1978] ECR 207 EU:C:1978:22.

• Case 85/76 Hoffmann- La Roche & Co. AG v Commission of the European Communities EU:C:1979:36

• Case 322/81 Nederlandsche Banden-Industrie Michelin v Commission [1983] ECR 3461 EU:C:1983:313

• Case No COMP/M.5727 Microsoft/Yahoo! Search Business Commission [2010] Decision C (2010) 1077

• Case T-321/05 AstraZeneca v. Commission [2010] EU:T:2010:266

• Case T-699/14 Topps Europe v Commission [2017] EU:T:2017:2

• Case No AT.39740 Google Search (Shopping) [2017] Commission Decision C (2017) 4444

• United States v El du Pont de Nemours & Co 351 US 377 [1956]

Books

• Alison Jones and B. E. Sufrin, EU Competition Law: Text Cases and Materials (Seventh ed. Oxford United Kingdom Oxford University Press)

• David Bailey (Attorney) and Laura Elizabeth John, Bellamy & Child European Union Law of Competition (8th ed. Oxford University Press 2018)

• Dennis W. Carlton and Jeffrey M. Perloff, Modern Industrial Organization (4th edn Pearson Addison Wesley 2005)

• Jonathan Faull and Ali Nikpay, The EU Law of Competition (3rd Edn)

• Luis Ortis Blanco, Market Power in EU Antitrust Law, Hart Publishing Ltd. 2012

• Pınar Akman, Concept of Abuse in EU Competition Law, Hart Studies in Competition Law 2012

• Richard Whish and David Bailey, Competition Law (Ninth ed. Oxford United Kingdom: Oxford University Press; 2018)

Articles

• Christian Bergqvist, Google and the Search for a Theory of Harm, (2018) 39 European Competition Law Review 149

• D. Hildebrand, Using Conjoint Analysis for Market definition: Application of Modern Market Research Tools to Implement the Hypothetical Monopolist Test, 29 World Competition 317

• Daniel Mandrescu, Applying EU Competition Law to Online Platforms: The Road Ahead-Part 2, (2017) 38 European Competition Law Review 410

• Hans Vedder, Competition Law and Consumer Protection: How Competition Law can be used to Protect Consumers Even Better – Or Not?, European Business Law Review 2006

• Inge Graef, Stretching EU Competition Law Tools for Search Engines and Social Networks, (2015) 4 Internet Policy Review 1

• Gormsen L.L., Article 82 EC: Where Are We Coming From and Where are We Going to?, The Competition Law Review. 2006 2(2): 9-11

• Raimundas Misejevas, Some Thoughts Concerning The Main Goals of Competition Law Jurisprudencija, 2013 Vol 20 Issue 2

• Lapo Filistrucchi and others, Market Definition in Two-Sided Markets: Theory and Practice, (2014) 10 Journal of Competition Law and Economics 293

• Lianos I., Some Reflections on the Question of the Goals of EU Competition Law, Centre for Law Economics and Society. CLES Working Paper Series 2013

• Magali Eben, Fining Google: A Missed Opportunity for Legal Certainty?, (2018) 14 European Competition Journal 129

• Richard A. Posner and William M. Landes, Market Power in Antitrust Case, [1980] Harvard Law Review Volume 94 March 1981

• Oliver Budzinski and Annika Stöhr, Competition Policy Reform in Europe and Germany – Institutional Change in the Light of Digitization, (2019) 15 European Competition Journal 15

• Sebastian Wismer, Christian Bongard and Arno Rasek, Multi-Sided Market Economics in Competition Law Enforcement, (2016) 8 Journal of European Competition Law & Practice 257

• Simon Burgess and Geoffrey Edwards, The Six Plus One: British Policy-Making and the Question of European Economic Integration, International Affairs (Royal Institute of International Affairs 1944 1988

Other Sources

• Market Definition Notice [1997] OJ C 372/5

• Competition Directorate- General of the European Commission, Market definition in a globalised world, Competition Policy Brief No 2/2015

• Directorate Generale Competition discussion paper on the application of Article 82 of the Treaty to exclusionary abuses [2005]

News

• CNBC, The US House Antitrust Subcommittee hearing featuring testimony from Amazon CEO Jeff Bezos, Apple CEO Tim Cook, Facebook CEO Mark Zuckerberg, and Google CEO Sundar Pichai: Link

• Medianama, Sundar Pichai Google Big Tech: Link