New EU Market Definition Notice for the digital era 

On 8 February 2024, the European Commission adopted a revised Market Definition Notice to reflect the "significant societal and technological changes" since the previous version was adopted in 1997. 

Key takeaways

• The European Commission's revised Market Definition Notice reflects the changes to society and technology since the previous version was adopted in 1997: in particular, the significant shift towards a digital economy and increasingly global trade.
• The Notice provides additional guidance on the European Commission's approach to market definition, in particular in relation to digital and innovation intensive markets.
• The revised Notice puts an increased emphasis on non-price parameters of competition, particularly innovation.
• In the revised Notice, the European Commission indicates that it may take into account anticipated changes to the structure of a market where the case requires a forward-looking assessment as a result of, for example, upcoming technological or regulatory changes.

Background

The European Commission began an evaluation of the Market Definition Notice in April 2020. It is the first time the Notice has been revised since it was adopted in 1997. The amendments are designed to reflect the significant changes since 1997, in particular increased digitalisation and cross-border trade. 

Market definition is an important step in the European Commission's assessment of mergers and many antitrust cases. By defining the market, the European Commission is able, in relation to any given case, to identify the relevant competitor and customer set, to assess levels of competition on a particular market and the relative strength of individual competitors. 

The Market Definition Notice is sector-agnostic: it provides principles which can be used when defining a market across all industry sectors, but has been updated to reflect several issues that are more relevant to digital and technology markets. 

Summary of the key changes

The revised Market Definition Notice is significantly longer than the previous version. It provides additional guidance on key issues including:

• the principles of market definition and how market definition is used for applying competition rules;
• non-price factors of competition (such as innovation, quality, sustainability etc.);
• the forward-looking application of market definition, particularly for markets which are expected to undergo structural changes as a result of, for example, technological or regulatory changes;
• market definition in digital markets, in particular taking account of multi-sided platforms and digital ecosystems;
• how the principles apply to innovation-intensive markets;
• geographic market definition, including how to factor in imports when defining a market;
• quantitative techniques, including the SSNIP (small but significant and non-transitory increase in price) test and the SSNDQ (small but significant and non-transitory decrease in quality) test; and
• the potential sources of evidence and their probative value.

The role of market definition

The revised Market Definition Notice explicitly sets out the role of market definition as a tool used by the European Commission to "identify and define the boundaries of competition between undertakings". Market definition enables the European Commission to identify relevant competitors and customers in the supply of goods and services, as well as to calculate market shares to assess an undertaking's relative competitive strength. 

The Notice states that market definition is an "intermediate tool to structure and facilitate the competitive assessment" but importantly it is not a mandatory step in all cases. The competitive assessment itself may take into account out-of-market activities, such as the impact of scale economies or network effects. 

General principles

The Notice sets out the general principles of market definition, including that market definition generally comprises product and geographic dimensions. This follows a similar approach to the previous version of the Notice.

The Notice explains that the European Commission is not bound by its previous decisions on market definition and will always consider whether the scope of the market has changed, including in light of broader changes such as digitalisation and globalisation. Similarly, the European Commission is not required to reach a definitive conclusion on market definition where the European Commission's conclusion would not change based on "various plausible market definitions". 

Geographic market definition 

One of the motivations for revising the Market Definition Notice is the increasingly global nature of trade. The revised Notice addresses this in a number of ways:

• It clarifies when markets can be global: markets are more likely to be global when customers around the world "have access to the same suppliers on similar terms" regardless of their location.
• Addressing when imports may be sufficient to establish a global market. The Notice explains how to assess actual or future imports and notes that the European Commission's competitive assessment should fully factor in any constraining effect of imports even where this is not sufficient to result in a global market.
• The Notice also refers to markets which the European Commission has previously concluded are likely to be global in scope. For example, IT services, civil aerospace equipment.
• Markets may be defined as global, with the exclusion of certain countries which have high barriers to entry.

Digital markets 

Reflecting the fundamental shift towards an ever-more digital world, the Market Definition Notice now provides specific guidance on issues particularly relevant for digital markets. 

Multi-sided platforms

Multi-sided platforms can pose difficulties for defining the relevant markets. Multi-sided platforms enable interactions between different user groups and create situations where demand from one user-group may influence demand from another, which can create network effects. 

Multi-sided platforms may also involve a product being supplied to a user group at a zero monetary price (i.e. for "free") to attract users to products offered on the other side of the platform. For example, a platform may provide social networking services for free to gain user numbers and attract advertisers (who pay to advertise on the platform).

The Notice explains that the European Commission's approach to multi-sided platforms will vary depending on the facts of a particular case. In particular, the European Commission may conclude that there is a single product market for the products offered by the platform (i.e. encompassing multiple user groups) or it may conclude that there are separate but interrelated product markets (i.e. separate markets for the products offered on each side of the platform). Relevant factors of the European Commission's assessment include: whether the undertakings offering substitutable products for each user group differ, the degree of product differentiation on each side, behavioural factors and the nature of the platform (e.g. whether it’s a transaction or matching platform). The European Commission will also consider indirect network effects when relevant, either at the market definition or competitive assessment stage.

Where a service is offered for "free", non-price parameters are particularly important. 

The Notice recognises that certain tools (for example the SSNIP test) may not be relevant for defining the market for multi-sided platforms which often involve products or services being offered for free. Instead, the European Commission may also consider the SSNDQ test when assessing the switching behaviour of customers of the zero-price product. The SSNDQ test involves considering whether customers would switch as a result of a small but significant non-transitory decrease in quality. The Notice quotes from the General Court judgment in Case T-604/18 Google and Alphabet v Commission that "defining a precise quantitative standard of degradation of quality" of the product is not a prerequisite for the use of the SSNDQ test. The Notice recognises that the European Commission may also consider a range of other evidence, including product functionalities; substitution (either past or hypothetical); and barriers and costs of switching (including the extent to which a product is interoperable with other products, data is portable and there are licensing features).

Digital ecosystems

After-markets arise where the consumption of the primary product leads to consumption of another connected product (the secondary product). For example, the sale of gas turbines is connected with subsequent servicing of those turbines (as considered by the European Commission in Case M.7278 GE/Alstom). The Notice observes that there are generally three approaches to defining product markets involving secondary markets:

• a system market comprising both the primary and the secondary product. This may be more appropriate where customers are more likely to take the whole-life costs into account when purchasing the primary product or where there are no / few suppliers who specialise in the secondary product(s) only;
• as multiple markets, i.e. a market for the primary product and separate markets for the secondary products associated with each brand of the primary product. This may be more appropriate where customers of the primary product are locked-in to using a restricted set of secondary products only; and
• dual markets, i.e. a market for the primary product and a market for the secondary product. This may be more appropriate if secondary products are compatible with all (or most of) the primary products.

In other circumstances, consumers may prefer to consume several products together as a bundle and the European Commission may consider whether the bundle constitutes its own product market, distinct from the individual products. 

The Notice indicates that digital ecosystems can be considered to consist of a primary (core) product and several secondary products which are linked to the core product. The above principles may therefore also apply to digital products. Noting that not all digital ecosystems will fit the approach for after-markets or bundles, the Notice indicates that the European Commission will take into account factors such as network effects, switching costs and single or multi-homing decisions when defining the relevant market. 

Innovation-intensive markets

As recognised in the Notice, "innovation is often a key parameter of competition". Reflecting this, the Notice includes a section focusing on how to define markets "in the presence of significant R&D". The European Commission highlights that it may take into account various potential outcomes of R&D processes. 

For pipeline products, the European Commission may conclude that the pipeline products belong to:

• an existing product market (i.e. together with existing products with the same intended use(s)) as it has in previous pharmaceutical cases; or
• a new product market. This may be the case where several undertakings are developing the same or comparable pipeline products or the product is expected to significantly alter the industry's dynamics.

For R&D processes which are not (yet) closely related to a particular product and which may ultimately feed into various products, the European Commission indicates that it may still be relevant to identify the boundaries of competition to assess whether there could be a loss of innovation competition. Relevant factors for this assessment may include: the nature and scope of the innovation efforts, the objectives of the research, the specialisation of the teams involved and results of past innovation efforts. 

In a merger control context, this means companies will need to consider the extent to which they are engaged in similar R&D projects (even where the R&D is not yet focused on developing a particular product), as well as potential overlaps between their existing products. 

Comments

The European Commission has indicated that it expects the revised Notice to "enhance legal certainty and predictability", as well as improving "procedural efficiency". The revised Notice includes significantly more detail than the previous version: it is a useful consolidation of the principles arising from the European Commission's decisional practice in the last 25 years. Despite this additional clarity, there is still plenty of scope for uncertainty, particularly as to how multi-sided platforms, digital ecosystems and innovation markets are defined in practice, which will depend on the facts of the specific case. The Notice also concludes by highlighting that the European Commission's interpretation of market definition concepts will continue to develop. 

Companies, particularly in the digital sector and research-intensive industries, should carefully consider the updated Notice when constructing arguments on market definition.