On July 7, 2009, the Anti-Monopoly Commission of the State Council of the PRC (AMC) posted the final Guidelines on Defining the Relevant Market (the Guidelines) on the central government’s website. The Guidelines lay out the basic rules antitrust enforcement authorities will use in defining the relevant market, an aspect of antitrust analysis which is critical to enforcement efforts. They also clarify the definition of a relevant market and provide methods to ascertain its scope. This edition of China Antitrust Update outlines the key points set forth in the Guidelines, and is followed by a full text translation of the posted document.
Although Article 12 of the Anti-Monopoly Law of the PRC (AML) attempts to define the relevant market,1 its vagueness has frustrated antitrust enforcement authorities in their enforcement efforts. The AMC, empowered by the AML to unify and coordinate enforcement of the AML, identified this vagueness as an obstacle to effective antitrust enforcement and issued the Guidelines in an attempt to mitigate it.
The Guidelines evolved from a previously publicized draft that was introduced in the January 2009 issue of our Antitrust Update. This final version of the Guidelines significantly preserves the structure and language of the draft, but fine-tunes the text of the provisions.
Function of the Relevant Market Definition
As an initial matter, the Guidelines confirm that defining the relevant market is the first step in analyzing the lawfulness of potentially anticompetitive conduct, regardless of whether the conduct concerns an agreement among competitors, the abuse of dominant market position or a merger of enterprises. The relevant authorities must identify the scope of the market before they can fill in the factual details crucial to antitrust enforcement, such as the market share, market concentration and possible anti-competitive effects.
Classification of the Relevant Market
The Guidelines set forth two aspects of the relevant market: product market and geographic market. The product market is comprised of a group of products (or services) that buyers consider to be close substitutes in terms of characteristics, intended uses and price. The geographic market is defined as the geographic areas in which buyers may obtain these substitutable products. Depending on the circumstances, other factors also may play a role in determining the relevant market. For example, when production cycle, lifetime, seasonability, fashion, or a fixed period of intellectual property protection constitutes an inevitable characteristic of a product, time will be an important factor in defining the relevant market. Additional factors such as the existence of intellectual property and innovation may be taken into account when defining the relevant market in antitrust cases involving technologies.
Basic Methods for Defining the Relevant Market
Under the Guidelines, the basic method for defining the relevant market is substitution analysis. This means that when defining the relevant market antitrust enforcement authorities should first consider demand substitution, which requires reviewing the product and its substitutes from the perspective of the consumer. Where supply substitution has a constraining effect on business operators’ behavior similar to that of demand substitution, the authorities should also consider supply substitution in defining the relevant market.
The Guidelines list a number of factors – none of them decisive – that may be considered when defining the relevant product market by demand substitution. These factors include any evidence that consumers shift to other products due to price change, the overall characteristics of the product or its intended uses, differences in price, and distribution channels. Other important factors, such as consumer preference for or reliance on the product, should also be considered.
When analyzing supply substitution, antitrust enforcement authorities may consider factors such as business operators’ production process and techniques, difficulties in switching to another line of products, and the time and costs associated with the production switch.
The Guidelines similarly list factors that may be considered in defining the relevant geographic market. From the demand substitution perspective, these factors include any evidence that consumers shift to other products due to price change, the transportation cost and characteristics of the product at issue, the areas and venues where the majority of buyers choose their products, the sales distributions of the major business operators’ products, and regional trade barriers. From the supply substitution perspective, the authorities may consider factors such as any evidence that operators in other areas react in response to price change, the promptness and feasibility of alternative supplies, and the cost of shifting orders to business operators in other areas.
Hypothetical Monopoly Test
The Guidelines introduce the Hypothetical Monopolist Test (HMT), also known as a Small but Significant and Non-Transitory Increase in Price (SSNIP), which is a routine part of US and EU antitrust enforcement efforts, to assist the reviewing authorities in determining the relevant market.
Under the test, the relevant product market is determined by examining whether a hypothetical monopolist would be able to maintain price increases of its product on a small scale (generally 5 percent – 10 percent) continuously (usually over one year) if conditions relating to the sales of other products remain the same. If the price increase leads to product substitution, which would thereby deprive the hypothetical monopolist of its profit, the reviewing authority will expand the relevant market to include these substitutable products and redo the foregoing analysis. This process is repeated to include more products until the substitution effect diminishes and the hypothetical monopolist would profit from a price increase. The relevant market can be identified as the final group of products.
According to the Guidelines, antitrust enforcement authorities may determine the geographic market through a similar process. Under the HMT, the relevant geographic market will be identified as the geographic area where the hypothetical monopolist would continuously profit from a small price increase.
The HMT, though useful, has limitations. The benchmark price derived in the HMT assumes sufficient competition; however, in some markets the current price is hardly competitive. Thus the Guidelines point out that the test may not draw reliable market boundaries in cases in which dominant market positions are abused or concerted action exists. Under such circumstances, the reviewing authorities should adjust the current price to bring it closer to the competitive price. In addition, the Guidelines note that the HMT should be implemented in a flexible way according to the facts of the case, consumer groups, and regional characteristics.
Compared to the previous draft, the Guidelines place more emphasis on defining the relevant market from the consumer perspective. This inclination is evident in several provisions. In addition, the Guidelines specifically urge business operators to gather objective proof to determine the relevant market. Although this seems to indicate an improvement in terms of transparency and objectivity in enforcement efforts, the Guidelines fail to require antitrust enforcement authorities to use such proof.
(Unofficial Translation by Hogan &Hartson LLP) Appendix