Fundamentals of Competition Law and Digital Markets

Introduction

This assessment addresses the purposes of market definition in European competition law, guiding principles for market definition, types of evidence used for market definition, main pitfalls and limitations of market definition, and some challenges in applying market definition to multi-sided and digital economy markets.

In Europe, in the last quarter of the previous millennium, competition between undertakings through the production and sale of goods or services reached critical levels. This led the European Competition Commission (the Commission) to regulate the areas where competition occurred. For years, the fundamental market perspective served well. However, with the development of industry and technology, some misleading and erroneous notions emerged in the traditional sense of the market. To establish a suitable framework for defining the boundaries of competition, a new legal perspective and some new definitions in this context need to be formulated. This assessment will explore the topics mentioned in the first paragraph in detail based on the purpose of market definition.

Purpose of Market Definition

The Relationship Between Market Definition and Market Power

First, it can be noted that market definition is a tool to define and determine the boundaries of competition between firms. However, understanding the necessity of market definition can be challenging. According to former Competition Commissioner Mario Monti, market definition is a tool to identify potential competition concerns. This definition is also found in the Commission Notice on the Definition of the Relevant Market for the Purposes of Community Competition Law. These concerns include the restriction, prevention, or distortion of competition, abuse of dominant position, or certain aspects of mergers and acquisitions. To identify these concerns, undertakings must have a certain degree of market power. Therefore, the fundamental assessment in competition law is the market power of the undertakings under investigation. However, not every competition case requires a market definition.

To apply competition rules correctly, a proper market power assessment is necessary, and a suitable market definition is required for market power. According to the Commission Notice, by defining the market, it is possible to calculate market shares that will provide meaningful information about market power, thus making competition regulations applicable.

Meanwhile, defining the boundaries of a particular market affects market power and may lead to some misconceptions, as in the past. Drawing the boundaries of a market too narrowly or too broadly can provide misleading information about market power and ultimately lead to incorrect results in the application of competition law. To prevent these uncertainties and lack of transparency, a suitable framework for the concepts of market definition and market power should be evaluated.

Additionally, some guiding principles in the market definition process have been established by the Commission to contribute to the transparency of competition policy and decision-making processes.

Consequently, the purpose of market definition is to evaluate market power as accurately, directed, and realistically as possible. Therefore, the Commission has presented the concept of the relevant market with principles to minimize misleading and incorrect understandings about market power.

The Rise of the Relevant Market and Guiding Principles

This issue was also addressed in the AstraZeneca v Commission case. In defining the relevant market, "substitutability" is the key point for drawing the relevant market of the undertakings under investigation. The foundations of this key point were addressed in the 1973 Europemballage Corporation and Continental Can Company Inc. v European Communities Commission case. In this decision and the Market Definition Notice, it was assessed that the substitutability of goods or services should be determined by certain principles, such as demand and supply substitution.

As a result, in market definition, some guiding principles such as demand substitution, supply substitution, and potential competition have been evaluated and established to define the relevant product market and the relevant geographic market.

Substitutability

Before evaluating the guiding principles of market definition, it is essential to understand the concept of substitutability. Substitutability refers to whether some products can be substituted for other products or to what extent they can be substituted. Conversely, if certain products are not substitutable, it means they are not in the same relevant market. To evaluate substitutability in each case, the Commission has established some principles over the years. After defining the market in terms of product and geography, the market or markets are evaluated in detail through the principles outlined below.

Relevant Product and Geographic Market

In the Market Definition Notice, the general definition of the relevant product market is specified in terms of what it includes. Accordingly, a relevant product market comprises all products/services that are regarded as interchangeable or substitutable by the consumer due to their characteristics, prices, and intended use. The relevant geographic market encompasses the area in which the undertakings are involved in the supply and demand of products/services, where the competition conditions are sufficiently homogeneous and distinguishable from neighboring areas because the competition conditions are appreciably different.

The importance of the product market is that, in some cases, it is evident that the key point of substitutability for some products can be determined by the characteristics of consumers or products, prices, and intended use of products. In such cases, the Market Definition Notice serves as a guide to systematically and legally investigate the constraints of the relevant market and whether there is a restriction of competition within the meaning of EU competition law.

In 1997, the Commission published the Market Definition Notice. By publishing the Notice, the concept of the relevant market has found a detailed legal framework for assessment. According to the Market Definition Notice, the concept of the relevant market has two dimensions: product and geographic. These dimensions can be seen as part of the evidence in terms of calculating market shares and thus market power within the legal framework. In this context, the supply and demand structures should be evaluated together in the market definition process.

What is essential is that the definition of a relevant market for the investigation is a combination of product and geographic markets together. The primary purpose of evaluating the market from two different perspectives is to help determine the scope of the relevant market based on the likelihood of products being substitutes for each other using the relevant product market perspective. Therefore, the relevant product market perspective allows viewing the market from a broader perspective. This also helps the Commission see whether there is a significant reduction in competition through creating or strengthening a dominant position and the impact of the transaction under investigation. The Commission also tries to distinguish the relevant geographic market by examining the market shares of undertakings and their competitors.

However, this perspective alone is not sufficient. Therefore, the relevant product market and the relevant geographic market should be evaluated together and, where necessary, with certain principles such as demand substitution, supply substitution, and potential competition. In this context, when defining the relevant product and geographic markets, the guiding principles in the Market Definition Notice provide a detailed guide for defining the relevant markets.

Guiding Principles in Market Definition

Demand-Side Substitution

Essentially, demand substitution can depend on customer preferences, sales conditions, or prices. However, in terms of EU competition law, determining the effects behind these issues is key to adequately applying competition law. Demand substitution identifies which products customers consider as substitutes for other products. In short, demand substitutability serves to determine whether specific products are in the same market. The first efficient way to do this is to check consumers' reactions to price changes. In some cases, consumers may switch products based on price changes.

However, some economic determinations are necessary to see this shift and its effects in competition law. Consumers may react immediately and switch products, or in some cases, they may need time to react. These differences may be due to the quality or price of the product or the likelihood of substitute products. In this context, a calculation should be made using a small but significant, non-transitory increase in price (SSNIP test) for demand and supply substitution.

Supply-Side Substitution

Supply-side substitution can be considered if it has an equivalent effect to demand substitution. In the 1973 Europemballage Corporation and Continental Can Company Inc. decision, the concept of substitutability was presented as the perspective of substitutability in the process of defining the relevant market. In this case, it was shown that some assumptions could be made through the characteristics, price, and intended use of goods or services with the substitutability indicated in the relevant market. However, in the market definition decision, supply-side substitution (defining markets based on the characteristics of products) was used, leading to some misleading conclusions. With this decision, it can be evaluated that in some cases, purchasing behaviors can be as important as products, but it was seen that supply-side substitution was necessary but not sufficient in this decision.

On the other hand, before the Market Definition Notice, this issue was also seen in the 1978 United Brands decision. In the United Brands case, the initial decision by the lower courts on the relevant market was that bananas and other fruits were different markets. It was seen that there was too much focus on qualitative criteria, and these were used instead of complex economic evaluations. Specifically, bananas being different from other fruits as a type of fruit means that substitutability is low, and it was understood that substitutability needed to be examined more realistically in terms of "captive consumer." This approach showed that the instruments of the relevant product market, such as characteristics, prices, and intended use of products, were focused on. Therefore, EU competition law understood the importance of more complex market evaluations.

This behavior continued similarly in terms of demand substitution in the 1979 Hoffman-La Roche and 1983 Nederlandsche Banden-Industrie Michelin cases.

However, this approach showed that, in addition to references to products and services, the evaluation of competition conditions and the structure of supply and demand substitution is necessary. In the 2000 Volkswagen and 2012 MasterCard Inc and Others cases, it was seen that these criteria had many issues. In fact, this issue was observed in some aspects in the 1978 United Brands decision.

Potential Competition

In the Market Definition Notice, potential competition is indicated as a principle to be used when necessary. When supply-side responses are not sufficiently direct and immediate, they can be considered potential competition and therefore considered at the stage of the overall assessment of market power rather than in the definition of the relevant market. Potential competition also depends on entry barriers. On the other hand, the main issue of potential competition (from both demand and supply sides) is that it is outside the relevant market. Topics such as granting some privileges to dominant undertakings in terms of economic advantages, some sales or distribution networks, special technological developments, cost transition, long-term contracts, or difficulties in introducing a new product can be considered entry barriers and potential competition can be evaluated in this context. Exit barriers can also be examined in this way. In the presence of sunk costs, these issues affect potential competition, thus market power, and ultimately the definition of the relevant market.

Limitations and Pitfalls

At this point, it should be noted that in some cases, asymmetric substitutability may arise. This means that products can be substituted for each other but not in both directions. This can happen as in the 2007 Microsoft case. In this case, a streaming media player was substituted for a media player, but less powerful ones did not meet consumer demands. On the other hand, the SSNIP test has some limitations and cannot be applied to zero-price markets, multi-sided markets, tender markets, and markets subject to price regulations. Therefore, although the SSNIP test is a guide for market assessment, some cases have complex economic dynamics, and the SSNIP test cannot be applied in the presence of the cellophane fallacy. In short, some special assessments are necessary in market definition in dominant position cases.

In the presence of an existing monopoly price, the SSNIP test cannot determine market power. Because the SSNIP test may be insufficient in the presence of a price determined in a non-competitive situation, as in the Du Pont case. Recognizing the cellophane fallacy, the Commission avoided using the SSNIP test in the Mastercard case. In this case, it was clear that the fees applied by acquirers to merchants could be above the competitive level. In practice, the SSNIP test can be applied in situations where competition conditions are distorted. This has led to checking additional tools and evidence for determining the relevant market.

Possible Types of Evidence

In Market Definition, some issues have been presented regarding the assessment of the market through certain evidence. These tools are briefly market studies, consumer evaluations, perspectives of other competitors, and other tools. There is no strict hierarchy for evidence. The Commission may request written information from market participants and hold discussions with them.

From an economic perspective, joint analyses of consumer behavior, price correlation analyses, critical loss analyses, causality calculations, and shock analyses can be conducted. In this context, the entry of other competitors into the market or the introduction of new products can also be evaluated. On the other hand, price correlation analyses and critical loss analyses have some disadvantages in certain cases. However, in the Market Definition Notice, the issue of evidence is addressed in two dimensions: product and geographic. For the product dimension: consumer preferences, obstacles and costs of shifting demand to potential substitute products, different customer categories, and price discrimination. For the geographic dimension: historical evidence of ordering patterns to other regions, fundamental demand characteristics, views of customers and competitors, current geographic purchasing patterns, trade flows/shipment patterns, obstacles, and costs of redirecting orders to other regions. These are not hierarchical entities. On the contrary, the Commission can take help from any of these pieces of evidence on a case-by-case basis during the investigation process.

Challenges in Applying Market Definition in Multi-Sided and Digital Economy Markets

When firms need to compete to attract customers from different customer groups simultaneously. Sometimes undertakings may even provide products or services for free to subsidize customers on one side. Such a market definition is called multi-sided markets. On the other hand, the characteristic features of digital economy markets can be easily defined by dynamic competition, fluid substitutability, and the constant threat to existing products due to innovation.

There is a problem with applying market definition in multi-sided markets. Since these markets have multiple dimensions, neither the SSNIP test nor the critical loss test may be very efficient in defining the relevant market. In some cases, the SSNIP test or critical loss tests may refer only to one side of the multi-sided markets. In this scenario, the market may be defined too narrowly than necessary. To determine the most reasonable option: (a) whether the SSNIP test should be applied together or separately; (b) allocate the 10% price increase to other customer groups; (c) a price increase may affect both markets; and (d) the basis for the 10% calculation should be carefully examined in each multi-sided market case.

One of the best-known cases in multi-sided markets is the 2007 MasterCard MIF case. The case decided in 2007 concerned the setting of fallback MIFs applicable to cross-border transactions within the European Economic Area (EEA) by MasterCard. The Commission found the existence of a restriction of competition between acquiring banks that harmed merchants, and the Commission also decided that the multilateral cross-border fee should be removed. MasterCard appealed the decision to the Court of First Instance in 2008. In April 2009, MasterCard decided to temporarily reduce multilateral interchange fees (MIF calculation procedures are changing) to avoid violations. This case has also been mentioned in the limitations and pitfalls section of this article in terms of SSNIP.

Along with this case, a similar case was seen on October 3, 2007, as COMP/37.860 Morgan Stanley/Visa International and Visa Europe. The Commission recognized that the "two-sided nature" of card payment systems warranted a single relevant market definition, which was later revised, and the Commission began to define different relevant markets in cases involving two-sided platforms.

In the MasterCard case, it was explicitly stated that the Commission defined two relevant markets and strongly indicated that two-sidedness did not mean a single relevant market definition: "Two-sided demand does not require the existence of a single common product." The only thing the Commission could do was to leave the door open for a single relevant market definition when it came to two-sided intermediaries.

Another landmark decision for multi-sided markets is the 2017 Google Search (Shopping) case. In this case, the Commission could not apply the SSNIP test. It was meaningless due to Google's free service approach. In the Google Search (Shopping) case, the Commission assessed that Google was dominant in the general online search market. By using Google Shopping, Google gained an advantage in the comparison shopping market, and eventually, the Commission imposed a fine of 2,424,495,000 Euros on Google. Following these decisions, it is clear that the SSNIP test is inapplicable not only in monopoly markets but also in multi-sided markets, especially digital markets.

Perhaps multi-sided but non-transactional markets can be defined as a single market definition. However, it is evident that this practice has some confusion in the practices of competition authorities regarding market definition. As mentioned above, it is possible that the relevant market is potentially defined too narrowly. When defining two related markets, unfortunately, only a few decisions have correctly done so even when they recognized the two-sided nature of the market. This has led to some cases where the market has been defined too narrowly.

In conclusion, competition authorities have yet to adopt a clear approach in multi-sided digital economies. Some maneuvers can be seen in the decisions to define the market. The dynamic characteristics of such markets will always pose challenges against old-fashioned definition evidence. Therefore, some evidence should be updated not only for such markets but also for other market types mentioned in the Possible Types of Evidence section of this article and from both the supply-side and demand-side substitution perspectives.

References

Books and Articles

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

• Ezrachi Ariel, EU Competition Law: An Analytical Guide to the Leading Cases (Sixth edition, Oxford 2018)

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

• FilistrucchiL. D. Geradin, E. van Damme and P. Affeldt, 'Market Definition in Two-Sided Markets: Theory and Practice' [2014] 10(2) J of Competition Law and Economics

• Monti Mario, 'Speech by Mario Monti, Competition Policy European Commissioner Market Definition as a Cornerstone of EU Competition Policy Market Definition Workshop- Helsinki Fair Centre Helsinki 5 October 2001' https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_01_439 accessed 25 December 2019

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

• Jones Alison and Sufrin B. E. [2019] EU Competition Law: Text Cases and Materials (Seventh edn, Oxford United Kingdom Oxford University Press)

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

• Posner Richard A. and Landes William M. 'Market Power in Antitrust Case' [1980] Harvard Law Review Volume 94 March 1981 Issue 5 https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=2551&context=journal_articles accessed 25 December 2019

Cases

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

• Case 6/72 Europemballage Corporation and Continental Can Company Inc. v European Communities Commission

• Case 27/76 United Brands v Commission [1978] EU:C:1978:22

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

• Case 322/81 Nederlandsche Banden-Industrie Michelin [1983] ECR 3461

• United States v Eastman Kodak Co 853 F. Supp. 1454 (W.D.N.Y. 1994)

• Case T-201/04 Microsoft [2007] ECR II-3601

• COMP/34.579 MasterCard 19 December 2007

• Case T-321/05 AstraZeneca v Commission [2010] ECR II-2805

• Case T-461/07 Visa Europe v Commission EU:T:2011:181

• Case T-111/08 MasterCard Inc v Commission EU:T:2012:260

• Case C-382/12 P MasterCard Inc v Commission EU:C:2014:2201

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

• Case T-699/14 Topps Europe Ltd v Commission EU:T:2017

• AT39740 Google Search (Shopping) Decision 2017

Other Electronic Sources

• Treaty on the Functioning of the European Union

• Commission Notice on the Definition of the Relevant Market for the Purposes of Community Competition Law [1997] OJ C372/5

• European Community Merger Regulation 139/2004

• OECD Market Definition Policy [2012]