The Relevance of Relevant Market

The Relevance of Relevant Market


Relevant market – defining it is very important while determining dominance. Market definition is an important step to establish dominance but it provides challenges for competition authorities. Agencies must cope with incomplete information even after carefully gathering whatever is available.

The competition authorities require reasoned, even if not definitive, approach on what to include in and exclude from the relevant market – for instance, the possibility of rapid technological changes and introduction of new products that would expand or contract the relevant market within a short duration.

In this issue ­

We have discussed how separate markets are assessed differently albeit on the basis of standard economic factors

DEFINING RELEVANT MARKET

Market definition provides a framework for competition analysis. For example, market shares can be calculated only after the market has been defined and, when considering the potential for new entry, it is necessary to identify the market that might be entered. Market definition is usually the first step in the assessment of market power. A market definition should normally contain two dimensions: a product and geographic area.

The main objective of market definition: to identify actual competitors capable of constraining behavior of other players and of preventing them from behaving independently of effective competitive pressure. This helps in determining any Anti competitive practices.

RELEVANT MARKET AS ASSESSED IN FOREIGN JURISDICTIONS

European Union


Relevant Market = product market + geographic market.


 

The relevant market combines the product market and the geographic market, defined as follows:

A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer by reason of the products’ characteristics, their prices and their intended use;

A relevant geographic market comprises the area in which the firms concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homogeneous.

Criteria to define relevant market

In recent years, the E.U Commission has identified a number of criteria, which can help it to analyze the behavior of firms in the market and the specific conditions of the relevant market. However, this methodology may give rise to different results depending on the type of competition problem involved.

In a preliminary analysis, the Commission attempts to define the product market by investigating whether product A and product B belong to the same market. It also tries to determine the geographic market by producing an overview of the breakdown of the market shares held by the parties in question and by their competitors, the prices charged and any price differentials.

Then the Commission carries out a more detailed analysis based on the concept of substitutability – demand substitution and supply substitution. Checking which products that are substitutes for consumers – within a particular area – thus making it possible to define the relevant product market and geographic market with a greater degree of certainty. Only in the final stage is the relevant market analyzed to determine the degree of integration in the markets of the European Union (EU).

However, its also important to examine the conditions of access to the market to the Firms operating in the market. In this connection, the Commission carries out an assessment of product dimension and the geographic dimension of the relevant market, taking account of:

  • Price variations The recent past
  •  The results of specific studies: econometric and statistic tests to assess (such as culture, language, etc.) local preferences;
  •  The views of customers and competitors
  •  Market studies before launching a product for data on Consumer preferences
  •  Barriers (regulatory or others) and costs associated with switching demand to other products or areas
  •  Different categories of customer and price discrimination: in case of distinct group of customers

 

CASE STUDIES – HOW DIFFERENT COMPETITION AUTHORITIES DEAL WITH RELEVANT MARKET ANALYSIS ­


LEADING CASE LAWS

Times- Picayune Case 1953: It was observed that “For every product substitutes exist. But a relevant market cannot meaningfully encompass that infinite range”.

United Brand Vs Commission: It was observed that “The degree of substitutability is evaluated having regard to all the features of the products involved and all the factors which influence consumer choice”.


UNITED STATES OF AMERICA

Hoffmann-La Roche Vs Commission: It was observed that “the concept of the relevant market in fact implies that there can be effective competition between the products which form part of it and this presupposes that there is a sufficient degree of interchangeability between all the products forming part of the same market in so far as a specific use of such products is concerned forming part of the same market in so far as a specific use of such products is concerned”.

Under US Antitrust law also – The Boundaries of a relevant product market are determined principally by the reasonable interchangeability of use of the products – products that are reasonably interchangeable in use generally compete with each other and are thus part of the same market. Sales of producers in other markets may be included in the market if those producers can quickly and cheaply shift to supply the market in response to a higher price for products in the market, a principle called “supply-side substitutability.”The relevant geographic market is the area to which customers can reasonably turn for sources of supply.

UNITED KINGDOM

Market is defined as :­

Product Market – Demand side substitutability – The price increase must be large enough that a response from customers is reasonably likely, but not so large that the price rise would inevitably lead to a substantial shift in demand, and so lead to markets being defined so widely that market shares convey no meaningful information on market power. The OFT will normally consider a price 5 to 10 per cent above competitive levels to be small but significant. Following the price rise, customers may switch some of their purchases from the focal product to other substitute products.

Supply Side substitutability – If prices rise, undertakings that do not currently supply a product might be able to supply it at short notice and without incurring substantial sunk costs. This may prevent a hypothetical monopolist profitably sustaining prices 5 to 10 per cent above competitive levels.

Geographic markets are defined using the same process as that used to define product markets. The geographic market may be national (i.e. the United Kingdom), smaller than the United Kingdom (e.g. local or regional), wider than the United Kingdom (e.g. part of Europe including the United Kingdom), or even worldwide.

AUSTRALIA

In Australia the relevant provision dealing with relevant market is Section 4E of the Competition and Consumer Act 2010, which states that: For the purposes of this Act, unless the contrary intention appears, market means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first mentioned goods or services.


LEADING CASE LAWS

Re Queensland Co Op Milling Association Limited and Defiance Holdings Limited (QCMA)[1]

The identification of markets must be the essential first step in assessment of present competition and likely competitive effects. In our view the usefulness of the “market” concept goes beyond the determination of market concentration of the identification of ravenous relationships between sellers. …We take the concept of a market to be basically a very simple idea. A market is the area of close competition between firms or, putting it a little differently, the field of rivalry between them (if there is no close competition there is of course a monopolistic market). Within the bounds of a market there is substitution – substitution between one product and another, and between one source of supply and another, in response to changing prices. So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive.

In the Matter of Fortes cue Metals Group Limited [2]

It is often difficult, and sometimes impossible, to define with any precision the relevant dimensions (product, geographic, functional and temporal) of a market. On occasion, it can be particularly difficult to describe the relevant product market and its geographic borders. The process often involves judgments as to matters of degree that can be difficult to measure.

As regards the product market, the notion of substitution refers on the demand side, to a customer’s practical ability to switch from one product to another and, on the supply side, to the capacity of a supplier to switch production Geographic markets are defined in an analogous manner. One identifies tentatively a small geographic area such that a hypothetical firm that is the only present producer of the relevant product or service is not able to profitably impose a price increase. If the product or service could be obtained elsewhere, an attempt to raise the price could not be profitable and the tentative geographic area would be too small. The geographic area is expanded until the hypothetical monopolist’s price increase would be profitable.


SOUTH AFRICA

An important issue in competition analysis either in cases of anti-competitive behavior or assessing whether a merger will substantially reduce competition is to define the relevant market with two dimensions: Product and Geographical area. The key to market definition is substitutability. Relevant market is any product or group of products and any geographic area in which collective action by all firms (as through collusion or merger) would result in a profit maximizing price that would significantly exceeded the competitive price. The SSNIP (Small but significant and non-transitory increase in price) test is widely used to define relevant market.

IN CONCLUSION

Defining  markets is often difficult, however, is essential. The process in which the relevant market was established, is a pre-cursor. The greater the uncertainty in defining the relevant antitrust market, the less likely it is that the relevant market is a proper reflection of existing competitive constraints and the less weight should be given to market share as an indicator of market power relative to other factors. In the next issue, we would be discussing competition issues in the relevant market of a particular sector.


[1] (1976) 8 ALR 481; (1976) ATPR 40–012

[2] [2010] A CompT 2


Contributors

Shreyas Bhushan, a IV year law student at the National University of Advanced Legal Studies, Cochin (NUALS)

Swarnmala Singh, Final year law student at Amity Law School, Noida.


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