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On July 12, 2021, the European Commission published a Staff Working Document (“SWD”) summarizing the result of the public consultation launched by the Commission on the revision of the 1997 Market Definition Notice (“Notice”). The public consultation was designed to assess whether the Market Definition Notice still serves its purpose in the modern European Union market and how the Notice has performed since its adoption. The consultation started in March 2020. The evidence collected includes, among other things, input from stakeholders, EU national competition authorities’ advice, and an external evaluation support study.
What stands out from the SWD is that, overall, the involved stakeholders still find the Notice relevant, efficient, effective, and coherent. Moreover, the report does not posit the urgent need to update the Notice and emphasizes the central role of market definition practices, including in the EU digital economy. In this respect, the evaluation results stand in contrast to commentators advocating the need for an increased role for theories of harm and identification of anti-competitive strategies in digital market cases over a more diluted importance of market definition. On the contrary, the SWD seems to reaffirm the current central role of market definition practices in antitrust assessments.
Nevertheless, the SWD addresses some issues related to the Notice that require revision or clarification. In this respect, the main issue raised by the SWD is that the Notice does not reflect recent practices of the Commission and the Court of Justice of the European Union (“ECJ”) in assessing and defining relevant markets in the digital sector and in the context of globalization of the economy.
In order for the relevant product market to be assessed, it first must be defined. According to ECJ case law, the relevant product market comprises all products and services regarded as substitutable by users under what is known as “demand-side substitutability.” However, the Notice also states that “supply-side substitutability” must be taken into account when defining the scope of relevant markets, and its effects are equivalent to those of demand-side substitutability: this notion refers to a manufacturer’s ability to start producing and marketing a product in a short timeframe in response to a (hypothetical) price increase for the same product by the firm(s) already offering it. In this respect, the SWD reports that several National Competition Authorities (“NCAs”) pointed out that that the Notice does not clearly explain concepts and criteria that are pivotal to correctly determining whether supply-side substitutability applies to market definition in specific cases. For instance, the concepts of “significant additional costs,” “short term,” “effectiveness and immediacy,” and other terms—which are relevant when it comes to testing the equivalence of supply-side substitution and demand-side substitution—lack specificity and can be interpreted in different ways, potentially producing inconsistencies in case law.
Some respondents from the digital business community suggested that EC practice be aligned with that of United States, where supply-side substitutability is expressly excluded from market definition by the FTC’s Merger Guidelines and is taken into account only at the subsequent step of assessment of the impact of the transaction on competition, once the relevant markets have already been identified based on demand-side substitutability. According to these business-oriented stakeholders, the Notice should rather weigh significant innovation and technological developments over supply-side substitutability. On the other hand, the SWD emphasizes that that view is inconsistent with the economic theories and best practices applied by the Commission and the ECJ.
RELEVANT GEOGRAPHIC MARKETS AND GLOBALIZATION
Even if evaluation results indicate that the Notice still adequately describes assessment of geographic markets in the context of globalization, few business-oriented stakeholders are seeking wider geographic market definitions. These respondents asked the Commission to consider global markets and competitive pressure from imports from outside the EU more widely when assessing the relevant market, so as to make mergers in Europe easier and promote domestic unicorn companies. The Commission faced the same complaints after it prohibited the Siemens/Alstom deal. That decision led to a joint Franco-German manifesto seeking a more open and global approach in the assessment of relevant markets with a view to fostering creation of internal market “champions” capable of competing effectively with global non-EU players.
On the other hand, other respondents advocated continued rigorous competition law enforcement to the benefit of European businesses. According to the SWD, the past Commission practice shows that competitive pressure from imports—while not sufficient to widen the scope of relevant markets beyond EU borders according to demand- and supply-side substitutability—is nonetheless considered in the substantive assessment of the competitive impact of a transaction on relevant markets (for instance, when considering whether and to what extent potential competition from outside a certain geographic market is a constraint upon actual competitors), even though this aspect is not explicitly covered in the Notice. Moreover, statistics show that with increasing frequency the Commission has considered wider geographic markets in line with the trend of increasing globalization of the European economy.
Zero-price markets (i.e., markets where there is no monetary price for the transaction) are an increasingly common phenomenon in the digital economy. Several respondents noted that the Small but Significant and Non-transitory Increase in Price (“SSNIP”) test—used to assess whether and how potential competitors would react to a hypothetical monopolist’s price increase for a certain product/service—cannot be properly carried out for most digital markets, since there is currently no guidance in the Notice on how to apply that test in zero-price markets. Some NCA pointed out that the Notice fails to consider the Small but Significant Non-transitory Decrease in Quality (“SSNDQ”) and Small but Significant Non-transitory Increase in Cost (“SSNIC”) tests, which serve similar needs and would allow the Commission to identify properly the relevant market even when price is not the most significant competition parameter. (Other relevant parameters may be privacy standards, amount of advertising, service quality, and the like.)
Although the SWD stresses the central role the SSNIP test still plays in EU and international market definition practices, it also confirms that the Notice does not bind the Commission to use the SSNIP test in all circumstances, and indeed the Commission has often carried out different tests in its practice, depending on the specific circumstances of the case.
Multi-sided markets (i.e., markets where companies operate as intermediate economic platforms between two or more different user groups, generating network effects) are also increasingly common, and are often associated with the absence of a monetary price on one side (e.g., the Google business model, where it provides online search for free on the consumer side, then benefits from the personal consumer data it acquires by monetizing it, namely by selling advertising services on the business-user side). The stakeholders pointed out at length that the Notice does not provide sufficient guidance in defining the relevant markets in that context. However, according to the SWD, the Commission practice shows that, although this goes unmentioned in the Notice, zero-price markets in the digital space also should be assessed as relevant markets, as they are an integral part of a platform’s profit-maximizing strategy and thus of its economic rationale for establishing certain conduct.
The SWD also points out that the support study and the practice of NCA do not endorse the classic distinction between transaction and non-transaction multi-sided platforms (i.e., considering a single market for transaction platforms, as opposed to separate ones on each side for non-transaction platforms). Rather, these stakeholders suggest a case-by-case approach, where any distinction should be based on the platform typology, the business model, and other factors, such as substitution possibilities across the various user groups. In the context of market definition in multi-sided platforms, some respondents to the public consultation also opined that the profitability of a hypothetical SSNIP should also take into account any network effects that result from the reaction of users on the other side of the market.
Now, the Commission will analyze the evaluation results and assess whether changes to the Notice are needed. Thus, the Commission’s next steps are not yet known. Regardless, the process will probably take several months.
It is worth noting that market definition is of pivotal importance in the current digital economy landscape. Depending on the criteria established for identifying relevant product markets where digital platforms operate, the latter (e.g., any of the GAFAM) may be deemed either dominant operators in narrowly defined markets or effective (actual or potential) competitors in wider markets comprising a range of different but contiguous digital services offered to consumers. In this respect, the way supply-side considerations are factored into the analysis of relevant markets by the Commission and the NCA could be decisive in determining one outcome over the other. Notably, along these lines one might deem it relevant to assess whether the consent requirements set forth in data protection rules (namely, the GDPR) exert constraints over a digital platform’s ability to exploit data collected from users in relation to certain services to quickly set up a digital offer for different or novel services or products.
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