On 7 July 2009, the Anti-Monopoly Commission under the State Council published the “Guidelines on the Definition of a Relevant Market” (the “Guidelines”). The Guidelines are the culmination of a process of review undertaken since publication of the first draft in January 2009, and the first attempt by the Ministry of Commerce (“MOFCOM”) at providing a “scientific and reasonable” definition to guide China’s Anti-Monopoly Enforcement Agency (the “AMEA”) through the process of enforcement and adjudication and render such process more transparent and certain. The AMEA is a three-pronged structure set up by the State Council whereby three important government bodies, previously with responsibility for areas now covered by the Antimonopoly Law (“AML”), were brought together to form China’s enforcement agency and to share in the proper implementation of this new piece of legislation. The three bodies are: (1) MOFCOM, responsible for handling pre-merger reviews; (2) the State Administration of Industry and Commerce (“SAIC”), with authority to investigate anti-monopoly agreements and abuses of market dominance excluding price-related agreements or abuses; and (3) the National Development and Reform Commission (“NDRC”) which administers the Pricing Law with its provisions on, inter alia, price fixing, price discrimination and false or misleading pricing.

Defining the relevant market is a precondition to a proper analysis of competitive actions and is critical to the process of anti-monopoly enforcement. It follows that the Guidelines are of considerable importance to the work of the AMEA.

Background

Despite the central role played by market definition in the analysis of competitive behaviour, prior to the AML becoming effective on August 1, 2008, the concept did not exist in Chinese laws and regulations. At that time, China had no comprehensive competition legislation, and anti-monopoly filings were dealt with by MOFCOM and SAIC under the 2006 Provisions on the Acquisition of Domestic Enterprises by Foreign Investors. The concept of “market definition” was relatively new and absent from China’s anti-monopoly legal framework. Consequently, filing parties were given the freedom to introduce into the review process through their submissions the definitions adopted in their own jurisdictions. Thus, EU companies used EU methodology for defining the relevant market and U.S. companies used U.S. methodology. As a result, in practice, prior to the introduction of the AML, premerger filings became no more than a formality and no filings were prohibited or had conditions imposed upon them. On the other hand, it provided MOFCOM and SAIC, now part of the AMEA, the opportunity to familiarize themselves with internationallyestablished concepts of market definition. The Guidelines borrow from this first-hand experience of other jurisdictions and adjust it to China-specific market conditions and stage of economic development.

Analysis

Article 2 of the Guidelines reiterates the function of defining the relevant market first found in the earlier draft:

A scientific and reasonable definition of relevant markets serves a critical role in identifying competitors and potential competitors, as well as determining a business operator’s market share and the extent of its concentration. It also serves to identify a business operator’s market position, assisting in analysing the impact of a business operator’s activities upon market competition, assessing whether a business operator’s behaviour is in violation of the law and the legal liabilities in case of violations etc. The Guidelines then set out the factors to be considered when defining a market. These include the product/service’s characteristics, its application, pricing and sales channels, as well as the geographic area within which different products/ services compete. Other factors may be relevant depending on the circumstances. For example, in cases involving intellectual property, considerations such as intellectual property rights, market innovation and the technology market are also taken into account.

According to the Guidelines, the approach to market definition should focus on analyzing product substitutability from both demand and supply perspectives, with the main focus on demand. The list of factors to be considered in the context of demand substitutability conforms to standard international practice. Here, the most notable amendment to the earlier draft is the introduction of a new factor, i.e., evidence showing that consumers switch to other products/geographic areas as a result of a change in price or other competition conditions. By contrast, to increase objectivity and alleviate concern that regulators may simply look to protect famous home-grown brands, the factor of brand loyalty was deleted. Indeed, the need to protect domestic entities and to enable them to enjoy the technological, financial and pricing advantages associated with size was discussed extensively by lawmakers when debating China’s readiness for the introduction of modern anti-monopoly legislation. Against the background that China’s ultimate goal is its own development and the innovation of its own industries, the issue is a sensitive one and has already manifested itself in the prohibition of Coca-Cola’s takeover of China’s Huiyuan Juice brand.

Chapter III of the Guidelines stipulates the general methods for determining relevant markets. It provides that, though various methods may be applied, demand substitution shall be applied first followed by supply substitution.

Demand substitution, in this context, means the extent to which products are interchangeable from a demand perspective. Under Article 6 of the Guidelines, supply substitution means the ability of a business operator to provide interchangeable products that are competitive in the short term without incurring substantial additional production cost.

Where the market scope is uncertain or is in dispute, the “hypothetical monopolist test” (or Small but Significant and Non-Transitory Increase in Price (‘SSNIP’) test) may be adopted. This involves examination of whether the hypothetical monopolist would be able to continuously and slightly (for instance, 5–10%) increase the product price during a period of more than one year in circumstances where other sales conditions remain unchanged. Any price increase would inevitably result in a degree of lost sales. If the hypothetical monopolist can still show profit, only the group of products in question would constitute the relevant product market. If, however, the level of product substitutability is such as to make the price increase unprofitable, the substitutable products would also be included in the relevant market. This analysis is then repeated with a larger group of products until the set of products is such that a price increase would be profitable. The relevant geographic market is determined through a similar process.

Comparison with EU

The Guidelines set out an approach to market definition which closely follows the well-established principles of market definition applied in the EU. This is perhaps unsurprising since, as mentioned above, the pre-AML regime allowed foreign undertakings to make submissions based on their own jurisdictions’ methods for defining the relevant market. This meant that the Chinese authorities already had considerable experience with these principles. The similarity in approach will be helpful to EU undertakings in their dealings with the AMEA. However, it does not guarantee that conclusions reached by the AMEA will ultimately be the same as those reached by the EC Commission or the different European national competition authorities.

The principles discussed in the Guidelines are broadly similar to the EC Commission’s Notice on the definition of relevant market (the “EC Notice”), albeit much less detailed. The EC Notice also covers a few areas not discussed in the Guidelines, such as recognition that a definitive conclusion on market definition may not be required in every case, a description of the evidence-gathering process the authorities are likely to take in order to carry out their analysis, and recognition that the usual principles need to be applied with care in some cases, e.g., in the case of primary and secondary markets and chains of substitution.  

The fact that the Chinese authorities have adopted a similar approach to that followed in the EU means that the EC Notice may be a helpful secondary reference point for guidance where the Guidelines are silent or lacking in detail.

Conclusion  

Overall, China’s approach to market definition is in line with common practice in established jurisdictions. Although practitioners and legal scholars expect China to lean towards the hypothetical monopolist test, now widely adopted by competition authorities around the world, the substitutability test is easier for the AMEA to apply in terms of the time framework and complexity of the analysis required. Considering that the three government bodies which make the AMEA are understaffed and, in particular, are short of experienced economists to conduct the more complicated hypothetical monopolist test, the Guidelines’ emphasis on substitutability is more suitable to China’s stage of development.  

Another potential issue will be how the three enforcement bodies manage to ensure consistency in the application of market definition. Initiatives to ensure coordination will be important for the smooth implementation of the Guidelines.