Discover Your Boundaries – The European Commission's revised Market Definition Notice

At a Glance: What's New Since 1997

More than 25 years after the inception of its predecessor, the Notice can now build on an extensive body of case law, both in terms of Commission practice and principles derived from case law of the European courts. It is hardly any surprise then that the new document is significantly longer than the previous edition, with twice the number of paragraphs. They key developments in the new Notice are as follows:

• Recognition of non-price factors (innovation, quality, supply dependability, sustainability) in market definition.
• Enhanced emphasis on innovation-driven markets and pipeline products.
• Detailed guidance for dynamic and proactive assessments in markets poised for structural shifts due to technological or regulatory changes.
• Specific insights on digital market definitions, including multi-sided platforms and digital ecosystems.
• Expanded instructions on geographic market definitions, considering global, EEA-wide, national, or local perspectives and the influence of imports.
• Clarification that the Commission may request internal documents from companies, aiding in more accurate market definitions.
• Updated methods for market definition and calculation of market shares, including quantitative techniques and evidence valuation.

High Definition – The Notice's Role and Purpose

For decades, defining the relevant market has been a pivotal process for the European Commission, businesses, and their advisors. The definition of the markets delineates competitive boundaries—clarifying who competes with whom and in which arenas. Understanding these competitive constraints is crucial not just for merger evaluations but also for analysing unilateral behaviour and determining compliance with block exemption regulations. Market definition sets the stage for a subsequent more detailed competitive analysis, the latter incorporating factors like potential competition, entry barriers, and the impact of economies of scale. Thus, defining the markets correctly is foundational to enforcing competition law and assessing the legality of business practices.

Beyond the Price Tag: Highlighting Non-price Factors

In a major shift, the Notice now places a strong emphasis on non-price elements, such as innovation and (environmental) sustainability. These non-price parameters cover various aspects of competition, including innovation and quality attributes of products and services, such as sustainability, resource efficiency, durability, versatility, integration capabilities, brand image, security, privacy protection, availability, lead-time, supply chain resilience, reliability, and transport costs. For example, the Commission has already considered whether there may be different markets based on the technology used for production, namely zero waste and non-zero waste recycling technology (see also our summary of the Commission's new thinking on sustainability issues in EU merger control here). The Commission explicitly underlines the need for competition policy, including market definition, to contribute to the twin digital and green transitions (see the Commission's Communication from the Commission in November 2021 “A competition policy fit for new challenges”). However, the Notice also stresses that a 'hypothetical substitution' , which will be relevant for most of these non-price parameters, may be less reliable than evidence of actual substitution (as hypothetical demand substitution is unlikely to have any real impact on customers).

In addition, the Notice introduces a new chapter detailing how the Commission will apply the relevant market concept in specific circumstances such as multi-sided markets, innovation-intensive markets and pipeline products, aftermarkets, ecosystems and in situations of significant differentiation and price discrimination.

Map and Territory – How to define the geographic Market

The old Notice made only a brief reference to the possibility of markets having a global geographic dimension. The new Notice puts much more emphasis on this possibility. Parameters that may be taken into account when assessing the geographic market include, for example, distance-related factors affecting costs (e.g. relevant for airports, supermarkets, or petrol stations), quantities available or reliability of supply, customer preferences, purchasing behaviour, trade flows and shipping patterns. In addition, the Notice provides some illustrative examples of potential global markets and refers to previous cases where the Commission has found markets to be global, including IT services and civil aerospace products. Again, environmental costs may be one of the relevant factors in defining the geographic market.

The Notice also clarifies the Commission’s position on imports. It explains that "the mere existence of imports or the possibility of switching to imports in a given geographic area does not necessarily lead to widening of the geographic market to include the area from which the goods were or could be exported". Rather, in cases where there are significant imports, the decisive factor is whether trade between certain geographical areas or other supply and demand considerations are sufficient to create sufficiently homogeneous conditions of competition. Nevertheless, the competitive constraint from imports has to be assessed as part of the competitive assessment.

Listening to some R&D – The Importance of Research, Innovation and Pipeline Products

Throughout the Notice, innovation is consistently highlighted as a critical non-price competitive factor. Accordingly, the Commission has devoted a specific section of the Notice relating to market definition in the presence of significant R&D. In this section, the Commission provides useful guidance on how to assess markets where companies compete on innovation, including through pipeline products. It clarifies that while early innovation efforts may not immediately result in tradable products, they may still be relevant for identifying the boundaries within which companies compete. The Commission's stated objective is to avoid any loss of innovation competition, as evidenced by its decision-making practice in various sectors such as basic industries, chemicals, pharmaceuticals, and shipbuilding. This case law is referred to several times in the Notice, underlining the importance the Commission attaches to this issue in all its enforcement activities, including at the level of market definition.

In particular, the Commission will continue to carefully assess whether merging parties are close competitors in terms of their R&D efforts. This has been a noticeable trend in the Commission’s enforcement and public statements so far, and the Notice does not in itself imply that the Commission will increasingly intervene in this area (as highlighted in the Commission's Q&A). However, it is now clearer than ever that when analysing, for example, the feasibility of a merger, companies should not only consider whether their product offerings overlap upstream or downstream, but also the extent to which they are engaged in similar R&D initiatives.

Cutting through Complexity – Digital Markets, Aftermarkets, Bundles and Ecosystems

Recognising the complexity of certain markets, the Notice provides entirely new guidance on several markets and economic phenomena that have become increasingly important in recent years. In these cases, there are several ways in which markets can be sliced and diced.

• Multi-sided platforms: In the case of multi-sided platforms, the Commission may define a relevant product market for the products offered by a platform as a whole, in a way that encompasses all (or multiple) user groups, or it may define separate (although interrelated) relevant product markets for the products offered on each side of the platform. The Notice also explicitly addresses the issue of zero-price markets, which are common in the context of multi-sided platforms where products or services are offered without monetary compensation, and therefore by definition cannot be characterized by price competition. The Notice now clarifies that in such scenarios, traditional tools such as the SSNIP test – which essentially focuses on the impact of a price increase – may not be helpful. Instead, the Commission may use the "SSNDQ" test as an alternative, as it has done in the past, for example in the context of app stores. The SSNDQ test makes it possible to assess the switching behaviour of customers in response to a small but significant non-transitory decrease of quality. This is relevant for highly innovative sectors as well as for “free” products.
• Aftermarkets, bundles and (digital) “ecosystems”: In response to stakeholders' request for further clarification on after-markets, the Notice also explains that there are generally three possible ways to define relevant product markets for primary and secondary products: (i) as a system market comprising both the primary product and the secondary product; (ii) as multiple markets, i.e., a market for the primary product and separate markets for the secondary products associated with each brand of the primary product; and (iii) as dual markets, i.e., the market for the primary product on the one hand and the market for the secondary product on the other.

The Notice also explains the circumstances in which each of these market definitions may be appropriate and provides guidance on the application of these principles to bundles and digital ecosystems. In particular, with regard to digital ecosystems, the Commission indicates that where secondary (digital) products are offered as a bundle, it may consider whether the bundle constitutes a separate relevant market. It recognises that not all digital ecosystems lend themselves to an after-market or bundle market approach. In any event, it may take into account elements such as network effects, switching costs and single or multi-homing decisions in its market definition.

A Care for your Share – How to determine Market Positions

Compared to the meagre three paragraphs in the previous version, the Notice now provides more detailed guidance on the Commission's approach to calculating market shares, in particular to alternative methods of calculation beyond the "classic" approach of looking at sales volumes. These methods include the assessment of capacity, production volumes, number of suppliers, tenders won, number of active users, number of visits, time spent, number of viewers and downloads, as well as the level of R&D expenditure. In addition, the Notice outlines scenarios where the Commission may opt for certain alternative measures to calculate market shares. For example, the Commission considers the number of downloads and updates to be particularly useful for determining market shares in multi-sided platform contexts. The Notice also addresses potentially relevant alternative measures for transport markets, the mining sector, markets characterised by the strategic importance of capacity and markets with a high degree of product differentiation.

The only Constant is Change – The Commission’s Position on new Developments

Finally, the Notice also provides guidance on how to define a market that is expected to undergo structural change, i.e. a market where the general dynamics of supply and demand, and therefore the general responses to changes in relative supply conditions, are expected to change. The Notice provides that expected structural market transitions may be taken into account where the case calls for such a forward-looking assessment. There must however be reliable evidence – more than mere assumptions – that there is a sufficient likelihood that the projected structural changes will actually take place. The Commission may also request internal documents from the companies concerned, in particular those prepared in the normal course of business, to substantiate this assessment.

As regards changing parameters in general, the Commission wishes to emphasise that it will not be bound by its precedents. It will “always be attentive to possible changes driven by broader trends such as digitalisation, shifts in value chains on in sourcing by customers, or developments in the degree of globalisation of commercial exchanges”. Overall, the authority underlines its commitment to assess each case on its merits, taking into account the unique circumstances of the market and the potential changes in competitive dynamics over time.

The Way forward

The new Notice has been a long time coming, and while it does not reinvent the wheel, it is a welcome facelift to a very important piece of EU competition (soft) law, incorporating extensive feedback from a wide range of stakeholders. In addition to academics and business, these stakeholders also include other competition authorities – suggesting that there may be a good chance of a more aligned approach to market definition globally (or at least within the EU). In any event, the Notice provides a comprehensive memorandum on market definition, incorporating decades of emerging enforcement practice and academic insights. As such, it will make a valuable contribution to the transparency and objectivity of competition law enforcement.

At the same time, the Notice is of course a mere compendium of the status quo, with the Commission striving not to lag behind and to adapt its enforcement practice, including its approach to market definition, to new developments in the economy and the competitive behaviour of different market players. In light of this, one can only hope that it will take the Commission less than two and a half decades to produce the next update. It is the Commission’s stated aim to “increase the transparency of its policy and decision-making when applying Union competition law” – and this is indeed a task best performed by a comprehensive document.

In any event, companies and their advisers must now carefully study the Notice and assess its implications, in particular for their merger plans and their compliance with competition law. Even if the Commission should accelerate its own "innovation cycle" in market definition, the Notice will remain the gold standard for many years to come.

Authored by Elena Wiese, Kyra Harmes, and Florian von Schreitter.