On May 24, 2009, the Anti-Monopoly Committee of the State Council issued the finalized Guidelines on Relevant Market Definition (Guidelines). However, the Guidelines were not posted on the Ministry of Commerce website until July 7, 2009.
Functions of Relevant Market Definition
The Guidelines emphasize the importance of defining the relevant market. In the works of anti-monopoly law enforcement, such as prohibiting monopoly agreements among business operators, prohibiting the abuse of dominant market position and controlling the concentration of business operators that has resulted or may result in eliminating and restricting competition, issues related to the relevant market definition may be involved.
Defining the relevant market in a scientific and reasonable manner plays an important role in key issues such as recognizing competitors and potential competitors, determining the market share of the business operators and the degree of market concentration, deciding the market position of the business operators, analyzing the impact of the business operators’ behaviors on market competition, judging whether the business operators’ behaviors are illegal or not, and assessing the legal liabilities they must bear if their behaviors are illegal. As a result, the relevant market definition is usually the starting point of conducting an analysis on competitive behavior and an important step of anti-monopoly law enforcement.
Concept of Relevant Market
“Relevant market” refers to the product scope and geographic scope within which the business operators compete with each other in a certain period regarding particular products or services (hereinafter collectively referred to as products). In the practice of anti-monopoly law enforcement, it is usually required to define the relevant product market and the relevant geographic market.
“Relevant product market” is a market composed of a group or a category of products that are considered by the consumers to have a relatively close substitution relationship based on factors such as characteristics, uses and prices of the products. These products demonstrate a relatively intense competition relationship, which may be considered as the product scope within which business operators compete with each other in anti-monopoly law enforcement.
“Relevant geographic market” is a geographic area within which consumers acquire the products that have relatively strong substitution relationships. Such a geographic area demonstrates a relatively intense competition relationship, therefore it may be considered as the geographic scope within which business operators compete with each other in anti-monopoly law enforcement.
The Guidelines emphasize that in the anti-monopoly enforcement of technology trade, license agreements or other issues involving intellectual property rights, the relevant technology market may need to be defined along with the influence of factors such as intellectual property rights and innovation, which may also be taken into account.
Basis for Relevant Market Definition
The Guidelines provide that the scope of the relevant market is mainly determined according to the substitution degree of the products or the geographic area of concern. Two kinds of substitutions should be taken into account: demand substitution or supply substitution.
Methods for Relevant Market Definition
Different methods of analysis may be used according to the specific circumstances. In relevant market definition, demand substitution analysis may be conducted based on factors such as characteristics, use and price of products, while supply substitution analysis may be conducted when necessary. However, if the market scope for competitive business operators is unclear or difficult to determine, the relevant market can be defined through analysis using the “hypothetical monopolist test”.
The anti-monopoly law enforcement agency encourages business operators to define the relevant market according to specific conditions of the case by using objective and true data and through the economic analysis method.
Whichever method is taken to define the relevant market, it must take into account the products’ basic attributes of meeting consumers’ needs at any time, based on which rectification can be made on a significant deviation that occurred in the relevant market definition.
From the perspective of demand substitution in relevant product market definition, factors to be considered include, but are not limited to, the following aspects: evidence showing consumers shift to, or consider a shift to, purchases of other products due to a change of the products’ price or changes of other competitive factors; the products’ overall characteristics and uses, including exterior shapes, peculiarities, qualities, technical features, etc.; the products’ price variance; and the products’ distribution channel.
Other important factors include the consumers’ preference for or reliance on the products; barriers, risks and costs associated with a switch to substitutes by a large number of consumers; and whether differential pricing exists.
From the perspective of supply, the following factors are commonly considered in the relevant product market definition: evidence showing other business operators’ reactions over competitive factor changes such as a price change; the business operators’ production process and crafts; difficulties in relation to a production switch; the time required for a production switch; extra costs and risks in relation to a production switch; the competitiveness of the products supplied after switch; and the marketing channels.
Main Factors to be Considered in the Definition of Relevant Geographic Market
From the perspective of demand substitution, factors to be considered include, but are not limited to, the following aspects: evidence showing consumers shift to, or consider a shift to, other geographic areas to purchase products due to a change of the products’ price or changes of other competitive factors; the products’ transportation cost and transportation characteristics; the actual regions in which the majority of consumers choose their products and the product-distribution locations of the main business operators; and trade barriers among geographic areas, such as tariffs, local regulations, environmental factor, technological factor, etc.
Other important factors include the consumers’ preferences in a particular area and the amount of products transported into or out of this geographic area.
From the perspective of supply, the following factors are commonly considered in the relevant geographic market definition: evidence showing other business operators’ reactions over competitive factor changes such as a price change, and the instantaneity and feasibility of supply or distribution of the relevant product by the business operators in other geographic areas (for example, the costs associated with switching the orders to operators in other geographic areas).
Hypothetical Monopolist Test
The hypothetical monopolist test usually begins with the relevant product market definition. Starting with the product (target product) supplied by the business operator concerned in the anti-monopoly examination, it hypothesizes that the business operator is a monopolist aiming at profit maximization (hypothetical monopolist), and the issue that will be analyzed is whether the hypothetical monopolist is able to maintain price of the target product at a small-scale increase (normally 5 to 10 percent) continuously (normally one year), provided that the sales conditions of other products remain the same. The price increase of the target product will result in consumers’ shifting to other closely substitutable products, which consequently leads to a sales reduction for the hypothetical monopolist. Subsequent to the increase of the target product price, if the hypothetical monopolist is still able to achieve a profit after experiencing a sales reduction, the target product constitutes the relevant product market.
If the price increase leads the consumers to shift to other products having a close substitution relationship, rendering unprofitable the price increase by the hypothetical monopolist, such close substitutes shall be added into the relevant product market, forming a product group that consists of such substitutes and the target product. Thereafter, an examination shall be conducted on whether the hypothetical monopolist would still make a profit after the price increase of the product group. If the result is affirmative, then the new product group constitutes the relevant product market; otherwise, the aforesaid analytical process shall continue.
With the expansion of the product group, the products inside and outside the group become increasingly less substitutable. Eventually, a particular product group emerges in which the hypothetical monopolist can attain profit through a price increase. Hence, the relevant product market is defined.
Methods for the definition of relevant geographic market and the definition of relevant product market are identical. It starts from the geographic area concerned in the anti-monopoly examination (target geographic area), within which business operators carry out operational activities; the issue to be analyzed is whether it is profitable for the hypothetical monopolist to maintain the price of relevant product in the target geographic area at a small-scale increase (normally 5 to 10 percent) continuously (normally one year), provided that the sales conditions of other geographic areas remain the same. If the result is affirmative, then the target geographic area constitutes the relevant geographic market. If the massive substitution in other geographic areas makes the price increase an unprofitable act, the geographic area must be expanded until the price increase finally becomes profitable, which is then defined as the relevant geographic market.
Click here for an unofficial translation of the Guidelines by MWE China Law Offices.