An extract from The Dominance and Monopolies Review - 7th edition

Market definition and market power

i Market definition

Market definition serves as an analytical framework to assess market power and competitive effects. A relevant market for the purpose of EU competition law circumscribes the sources of competitive constraint faced by companies under investigation. The Commission's Market Definition Notice provides guidance on the Commission's approach to market definition for all areas of EU competition law, including the application of Article 102 TFEU, as the Guidance Paper is silent on the topic. The relevant product market comprises all those products or services 'which are regarded as interchangeable or substitutable by the consumer, by virtue of the products' characteristics, their prices and their intended use'. This definition draws on the principles established by the Court of Justice in Michelin, holding that:

for the purposes of investigating the possibly dominant position of an undertaking on a given market, the possibilities of competition must be judged in the context of the market comprising the totality of the products which, with respect to their characteristics, are particularly suitable for satisfying constant needs and are only to a limited extent interchangeable with other products.

The Commission acknowledges that qualitative differences only allow it as a first step to limit the field of possible substitutes. Actual interchangeability is assessed by the hypothetical monopolist (SSNIP) test. This asks whether a hypothetical monopolist could profitably impose a 5 to 10 per cent permanent price increase over the candidate products without a sufficient number of consumers at the margin switching to other products to render the price increase unprofitable.

A number of EU court judgments have discussed basic principles of market definition in the context of Article 102 TFEU cases. Some of these cases are relatively old and remain quite general. The Commission's decisional practice and court case law in other areas of EU competition law, including merger control, provide additional insight that is also relevant for Article 102 TFEU cases.

ii Dominance

The application of Article 102 TFEU requires the company under investigation to have a high degree of market power that is referred to as 'dominance'. The Court of Justice has described dominance as 'a position of economic strength' that provides a company with 'the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of its consumers'.

Despite the ubiquitous nature of this dictum (it is cited in virtually every Article 102 TFEU decision and judgment), it provides limited guidance for companies to understand whether they hold a dominant position. It does not explain, for example, how 'independently' an undertaking must be able to behave or when the threshold of 'appreciable extent' is crossed. What is clear is that no single factor is determinative in assessing a company's dominance. Nor does dominance require that there is no competition on the relevant market.

The Guidance Paper equates the concept of competitive independence with the ability to profitably raise prices above the competitive level. Unlike in the context of merger control, where the question is whether the merged entity will prospectively gain power to raise prices, in Article 102 TFEU cases the question is whether the company under investigation already has such power. This does not require the Commission to show that the company could raise prices beyond the level that it currently charges (this is known as the 'cellophane fallacy'). If the company has market power, it will already charge above the competitive level at the profit maximising point. Direct proof of dominance would therefore involve comparing the company's prices with what is expected to be the competitive price level. Because determining the competitive price level as a review benchmark is hard, case law has developed indicators for the existence of dominance. The Guidance Paper classifies these broadly into criteria relating to: constraints imposed by competitors (i.e., an assessment of market structure and market shares); constraints imposed by the threat of expansion and entry; and constraints imposed by the bargaining strength of customers.

Market shares

In the Akzo judgment, the Court of Justice established a (rebuttable) market share presumption for dominance under which a company is assumed to be dominant if it holds a market share of 50 per cent or more in the relevant market. The rationale is that shares of sales indicate whether a company can 'more easily pursue a pricing policy independent of competitive conditions' and therefore is 'able to control prices'. The Guidance Paper notes that dominance is 'not likely if the undertaking's market share is below 40 per cent.'

That said, even above the 50 per cent threshold it is necessary to consider the particular nature and competitive dynamics of the relevant market when assessing market shares. For example, in bidding markets characterised by a limited number of large orders, temporary high shares do not indicate market power. Similarly, in markets subject to a high degree of innovation or where services are offered for free, market shares are not a proxy for market power, either.

Expansion and entry

Any presumption of market power that might accompany a high market share is inapplicable in markets where competitors are able to meet rapidly the demand from customers who want to switch away from the firm with the largest share. In other words, lack of barriers to entry and expansion can prevent a dominant position if a company faces no current competitive constraints, but the existence of barriers will not create a dominant position if a company already faces competitive constraints. As recognised in the Guidance Paper, 'an undertaking can be deterred from increasing prices if expansion or entry is likely, timely and sufficient'. In assessing this likelihood, the Commission considers barriers that prevent timely entry or expansion. These can take the forms of legal barriers (such as legislation conferring a statutory monopoly, or intellectual property rights), or barriers such as economies of scale or scope, technological advantages or network effects.

Buyer power

Customers with sufficient countervailing bargaining strength can prevent a company from exercising market power. Buyer power, however, may not negate dominance where a strong buyer can protect only itself, but not the entire market.

Generally, exercising buyer power requires the buyer to have viable competitive alternatives to the dominant company, or the ability to develop such alternatives. Even a large buyer will have little or no power if it has no alternative supply options to which it can realistically turn. That said, in some instances, buyer power may also come from the buyer's ability to retaliate against the seller. For example, in the case of patent licensing, a patent owner may be constrained by the patent portfolios of licensees if it is vulnerable to countersuits in the event of overcharging for its own patents. In the case of a multi-product firm that serves the same buyers in different product markets, buyers may constrain the firm's ability to charge supra-competitive prices in a dominant market by threatening to switch their purchases in non-dominant markets.