Market Definition in EU Competition Law - Universität Würzburg 8. Mai 2019, 16h15-18h00 Dr. Manuel Kellerbauer

Market Definition
         in EU Competition Law
                                       Universität Würzburg
                                    8. Mai 2019, 16h15-18h00
                                     Dr. Manuel Kellerbauer
The opinions expressed are those of the speakers. They do not necessarily reflect the views of the European Commission.
     Company conduct is referred to for illustrative purposes and does not necessarily reflect companies' actual conduct.

VIII. Market Definition

1. Why do we define markets?

2. What is a Product, what a Geographic market?

3. What are Demand Side / Supply Side Substitutability?

4. What is a "SSNIP Test"?

Why do we define markets?
Main purpose:

Find out how much market power a company has

This depends inter alia on other companies exerting
so called “competitive constraints”

Allows us to calculate market size and market shares
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Why do we define markets?
Market definition often determines outcome:

• Procedural consequences (e.g. in EU merger control)
• Shapes substantive analysis, in particular:
   –   Dominant Position (Art. 102 TFEU)
   –   Appreciable effect of restricting competition (Art. 101 TFEU)
   –   Safe harbour (Block Exemption Regulations)
   –   Compatibility with internal market (EU Merger Control)

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Case Study: Peach Delight
Fruit Ltd sells a fruit called “Peach Delight”, a cross
between a peach and an apricot. It has a 50 % share of
the total Peach Delight market in the EU, but only a 5 %
share of the total market for fresh fruit.
Can Fruit Ltd lawfully
- Agree with retailers that they do not sell other fruit?
- Charge retailers 7€/kg if costs amount to only 1€/kg?

What is a relevant market?
Notice on Market Definition, Recitals 7 and 8:
• Relevant product market
   "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."

•   Relevant geographic market
    "The relevant geographic market comprises the area in which the undertakings
    concerned are involved in the supply and demand of products and services, in
    which the conditions of competition are sufficiently homogeneous and which can
    be distinguished from neighbouring areas because the conditions of competition
    are appreciably different in those areas."

See also Art. 9(7) EUMR                                                            6

Demand and supply side substitution
• Demand Side Substitution (product market)
   Starting point and most effective disciplinary force
  - Can Customer switch to other product or service?
  - Relevant factors: product characteristics; intended use; preferences;
     image of product, price.
• Supply Side Substitution
   Immediacy and effectiveness must be equivalent to DSS
  - Can supplier switch product or service that customer needs?
  - Relevant factors: Time and costs incurred for switching

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Case Study Supply Side Substitution
Siemens and Alstom want to combine their high-speed train
business, hoping to create a European industrial champion that
would become a global leader in the industry.
The parties argue that they would not acquire a dominant
position because new entry from China would represent a
competitive constraint on the merging parties. Where Alstom
and Siemens fight over the production of 35 high-speed trains a
year, the Chinese company makes 230; where the European
high-speed market stagnates, China plans to add another
3,200km to its 25,000km network.
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Case example
     Do Male/Non-male deodorants belong to different product markets?

Considerations: packaging, marketing, presentation in retail outlets, price difference

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SSNIP Test
Substitutability? A speculative experiment called SSNIP Test

We postulate a hypothetical small but significant (5-10%) non-
transitory increase in prices

What are likely reactions of customers to that increase?

Would they switch to substitutes or to suppliers located
elsewhere?

How many would switch? Enough to render increase unprofitable?

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SSNIP Test example
Example:Are still, sparkling and flavoured water part of same product market?

• Start with narrowest possible market (e.g. still water) and test if a
  hypothetical company that is the only seller would be able profitably to
  institute SSNIP or whether sufficient customers would switch to closest
  substitute
→ No, price increase unprofitable, sufficient customers switch to sparkling w.

• Then consider a wider market by combining still water with its closest
  substitute (sparkling water) and test if only seller of both still and sparkling
  water could profitably institute a SSNIP.
→ Yes, price increase profitable. Not enough customers switch to flavoured w.
Conclusion: the relevant market includes still and sparkling water.
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The toothless fallacy
Are Bananas and other fruit in the same market?

"The banana has certain characteristics, appearance, taste,
softness, seedlessness, easy handling, a constant level of
production which enable it to satisfy the constant needs of an
important section of the population consisting of the very young,
the old and the sick"
ECJ, Case 27/76, United Brands, § 31

But: What is the percentage of elderly people, children and sick
persons in overall percentage of customers? What if the rest
(perhaps 90%) could switch to apples or oranges?
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The cellophane fallacy
What if due to a company's market power, the prevailing price
is already substantially above the competitive price?

A small increase can then cause many customers to stop buying.

➢ Taking account of prevailing prices can lead to overly wide
  markets and underestimate actual market power
➢ SSNIP test should not be only method of defining markets.

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Case Study: Ink Cartridge
Printer manufacturer HP uses microchips to ensure that only its own ink
cartridges can be used in its printers. HP's market share on the printer market
is 33%. Canon and Epson both also have 33 % each.
Ink cartridge producer Pelikan files a complaint arguing that
1)HP abused the collective dominant position it has, together with its
competitors Canon and Epson, on the market for printers. Due to the
oligopolistic market structure, the three companies have a strong interest in
aligning their behaviour. HP "tied" its cartridges to its printers.
2)HP abused the dominant position it has, individually, on the secondary
market for ink cartridges that fit into its printers by raising barriers to entry
that excluded competitors.
Can the Commission reject the complaint?

Digression: Discretion in dealing with Complaints
Union interest in taking up a complaint depends inter alia on:
–the significance of the alleged infringement in view of the
functioning of the internal market
–the probability of establishing an infringement
–the scope of the investigation required
No conclusive assessment is required, but Commission must
consider all matters of fact and of law brought to its attention
Case T-24/90, Automec v Commission, [1992] ECR II-2223, §86;
Case C-450/98 , IECC § 57; Case T-427/08, CEAHR, §§ 65-121.

Digression: Collective Dominance
Legally independent entities "present themselves or act together
on a particular market as a collective entity" in view of
–structural or commercial links or (indirect) communications

–interdependence on oligopolistic markets as a result of which
undertakings have a strong interest to align their behaviour

Read Case C-396/96, Compagnie Maritime Belge, §§ 36-42.

Digression: Collective Dominance
Collective dominance based on structure of the market requires:
1.Each undertaking must be able to know the others' behaviour to
monitor whether they are adopting the common policy;
2.Tacit coordination must be sustainable over time due to an
incentive not to depart from common policy on the market;
3.Foreseeable reaction of current and future competitors or
consumers must not jeopardise expected results
Case T-193/02, Laurent Piau, §§ 28-59; Case T-342/99, Airtours, §§ 62-294 (EUMR);
Case C-413/06, Bertelsmann, §§ 119-134 (EUMR).

Dominance on secondary markets
If there is a close link, competition on the primary market
can constrain companies' behaviour on the secondary market.
Constraints on the primary market are to be taken into account if:
1.customers can make an informed choice on primary market, in
particular regarding a calculation of the life time costs,
2.customers are likely to make such an informed choice accordingly,
3.in case of policy of exploitation, a sufficient number of customers
would adapt their purchasing behaviour within a reasonable time.
Read Competition Policy Newsletter 1999 No 1 (Feb), pp. 35-37,
Case T-296/09 EFIM and http://europeanlawblog.eu/?p=1925