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Market Definition

Market Definition . ICCA Competition Law Training . 4 February 2012. Overview . What is market definition and why it is important How to carry out a market definition assessment Market definition in a CCI case: key tips. What market definition is and why it is important.

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Market Definition

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  1. Market Definition ICCA Competition Law Training 4 February 2012

  2. Overview • What is market definition and why it is important • How to carry out a market definition assessment • Market definition in a CCI case: key tips

  3. What market definition is and why it is important

  4. What is Market Definition • The exercise of market definition consists in identifying the effective alternative sources of supply for the customers of the undertakings involved, both in terms of products/services and geographic location of suppliers (Notice, ¶13) • The main purpose of market definition is to identify the competitive constraints that companies face and it is a tool to identify and define the boundaries of competition between firms • In the EU, the 1997 Commission Notice on Market Definition sets out the EU methodology for defining the market – the Commission tends to adopt narrow market definitions

  5. Importance of Market Definition • Market definition is important to all aspects of competition law – in particular, before reaching a conclusion on dominance or effects of a merger, the relevant market must be defined • For example, in India, market definitions is an integral part of a S.3, S.4 and S.5 competition assessment • Market shares are only a proxy for market power but have significance in EU competition law …

  6. The significance of market shares under EU competition law Vertical Agreements 30% 25% R&D Risk of Dominance 40% 20% Joint production - specialisation Rebuttable presumption of dominance 50% 15% Commercialisation/joint purchasing 10% De minimis 100% © 2012 Baker & McKenzie 6 6

  7. How to carry out a market definition assessment

  8. Principles of Market Definition • The constituents of an antitrust ‘market’ are economic substitutes • Product Y is a substitute of product X if an increase in the price of X increases the demand for Y • Economic substitutes exert competitive constraints on each other • Antitrust ‘markets’ therefore exclude economic complements or independent products • The goal of market definition is to identify the strongest and most immediate competitive constraints faced by a firm or group of firms

  9. Sources of Competitive Constraint • Competitive constraints may be on either the demand side (substitutable products or services) or the supply side (substitutable capacity) • Competitive constraints require substitution in both the product and geographic dimensions • Demand side • Supply side • How will marginal customers react? • Will producers of other products divert capacity? • Product • Will customers buy from other areas? • Will firms in one area supply another? • Geographic

  10. The Hypothetical Monopolist Test (HMT) • Logic of the test • Is a “market” worth monopolising? • If yes, then the substitutes outside the “market” must be weak • If no, then the substitutes outside the “market” must prevent market power • Thus the group worth monopolising pulls in all of the relevant substitutes. • Start with the narrowest candidate market and assume that there is a monopoly supplier • Could this hypothetical monopolist profitably impose a “Small but Significant Non-transitory Increase in Price” (hence ‘SSNIP’) or will too many customers switch to demand-side or supply-side substitutes? • Yes Candidate Market = Relevant Market • NoCandidate Market < Relevant Market Include the closest substitutes and repeat the test

  11. Implementing the HMT: iterative process Potential substitute products 1 A B  C  2 Demand-side A+B+C D X A+B+C 3 S1  Supply-side A+B+C+S1 S2 X

  12. Using critical loss to implement HMT • Step (1)—Profits, output, and sales before the price change for hypothetical monopolist (e.g. products A and B). Price Profit = (£20 - £10) x 100 = £1,000 £20 £10 MC Quantity 100 © 2012 Baker & McKenzie 12

  13. Using critical loss to implement HMT • Step (2): How many units of sales would have to switch to substitutes to make a 10% price increase unprofitable? Suppose the answer is 16.7. Price £22 £20 £10 MC Quantity 100 83.3 • If fewer than 16.7 units of sales switch than a 10% price increase is profitable © 2012 Baker & McKenzie 13

  14. Types of evidence to implement HMT • Many types of evidence can be used to inform market definition. Economics helps to • Identify what evidence is/can be available • Rank types of evidence according to their reliability • Some examples: • Natural experiments, event studies • E.g. Impact of competitor store openings / closures • Surveys • E.g. Asking consumers the SSNIP question • Demand estimation • To estimate substitution parameters • Business documents

  15. Caveats! • Price discrimination • Market definition depends on the marginal NOT the average consumer • With price discrimination, every consumer may be marginal  Price discrimination can lead to narrow markets • The cellophane fallacy • In dominance cases in particular, risk of defining market too widely using HMT because price level is already above the competitive level  Need to adjust starting price level • The zero one fallacy • Not all products/services inside the market are equally close competitors • Products outside the market can exert competitive constraints  Don’t be overly seduced by market shares numbers!

  16. Market definition in a CCI case: key tips

  17. Market definition in a CCI investigation or merger • Review any relevant CCI decisions • Review any relevant decisions by the European Commission/EU Courts – they may have some influence with the CCI (even if not helpful, it is better to know what is out there, as CCI may refer to the EU cases) • Review any internal analysis / know how • Review any external studies e.g. published by 3rd parties • Consider the value of commissioning independent, economic analysis outside of the scope of an investigation

  18. Take-away points for General Counsel • Sometimes lawyers can’t give an ultimate answer on market definition – economic analysis can provide robust data to confirm/support a market definition assessment • Even if previous case law indicates a particular market definition, query whether this definition is still valid (e.g. in technology, markets may evolve quickly) • Think strategically - sometimes it is best not to commit to a particular market definition because it can be used against you in the future • Avoid any public statements (e.g. on your website) which commit you to a market definition • When the press talks about markets, it is usually not a competition analysis – important to identify relevant market, not the industry sector • Market definition can decide a case – e.g. if a market is defined more broadly, there may be no finding of dominance – therefore market definition can be the first line of defence

  19. Market Definition ICCA Competition Law Training 4 February 2012

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