The European Commission’s Revised Market Definition Notice: A Reflection of Current Market Dynamics

Rationale of Revisions

On 8 February 2024, the European Commission (the "EC") released a revised version of the Market Definition Notice ("Revised Notice"), following a review process that started in 2020 and involved feedback from various stakeholders. The Revised Notice stands as the first update to the Market Definition Notice since its introduction in 1997.

The revision was intended to align the Market Definition Notice with new market realities and developments in case practice and EU case law, particularly in response to notable shifts in digital markets, the impacts of globalisation, and the EU's emphasis on innovation and sustainability. The Revised Notice deploys a range of competition parameters beyond price (such as sustainability, innovation and quality) and offers guidance on assessing competitive dynamics in an evolving digital landscape. It specifically addresses challenges associated with multisided platforms, digital ecosystems, and the pivotal role of innovation in this context.

Changes Introduced by the Revised Notice

The Revised Notice entails the following main implications:

Expanded Scope of Competition Analysis

The Revised Notice emphasises the significance of considering competitive factors beyond product characteristics, price and intended use. It highlights parameters such as the level of innovation and quality. For instance, it explains how innovation can be a relevant factor in defining markets for R&D intensive industries, such as biotechnology or digital services. Factors like resource efficiency, value, durability, product integration possibilities, versatility in uses, conveyed image, and security and privacy protection may also be pertinent distinctions.

The Revised Notice provides more accessible guidance with a detailed structure and specific examples, such as the definition of the relevant market for online search advertising or for pharmaceutical products.

The Revised Notice also clarifies the use of quantitative techniques for market definition, such as the SSNIP (small but significant and non-transitory increase in price) test, and their limitations and complementarity with qualitative evidence. For example, it discusses how to apply the SSNIP test in zero-price markets or in markets with significant differentiation.

Geographical Market Definition

The Revised Notice expands the guidance on defining the geographic market, including the factors for defining markets as global, European Economic Area-wide, national, or local, and how to treat actual or future imports in market assessments. For example, it outlines how to define geographic markets for online retailing or for cement products.

Instructions for Digital Markets

The inclusion of specific guidance on digital markets tackles the challenges and opportunities arising from digital platforms and digital ecosystems. Businesses in these sectors can use customised advice to navigate regulatory assessments more effectively, particularly in understanding intricate matters such as multisided platforms, innovation competition, and market share calculation in zero-price markets. For instance, the Revised Notice explains how to assess demand and supply substitution in multi-sided markets, such as online marketplaces or social networks, and how to use alternative metrics for calculating market shares, such as the number of active users or website visits.

The Revised Notice emphasises that, in specific scenarios, digital ecosystems can be conceptualised as consisting of a core product and several interconnected secondary products. These secondary products are linked to the primary product through technological links or interoperability. The Revised Notice maintains flexibility in the market definition of ecosystems, highlighting that the European Commission (EC) has the option to define them either as a unified "system market", which includes both primary and secondary products, or as multiple separate and distinct markets.

Prioritisation of "Innovation" and "Research & Development"

The EC offers valuable advice on evaluating markets characterised by competition through innovation. It emphasises that, even though initial innovation endeavours might not yield immediately marketable products, they remain significant in delineating the competitive landscape for companies. The EC aims to prevent any detriment to innovation competition, as reflected in its decision-making approach across diverse sectors, including basic industries, chemicals, pharmaceuticals, and shipbuilding.

The EC's ongoing practice involves a thorough examination of whether merging entities closely compete in terms of their research and development activities, which is evident in the EC's enforcement actions and public communications. However, it is noteworthy that the Revised Notice does not inherently suggest an escalating inclination for the Commission to intervene more frequently in this particular area. It only aims at providing more guidance and transparency to companies that are involved in such innovation-intensive markets, by clarifying the principles applied to defining markets in R&D intensive industries.

Forward-Looking Market Definitions

The Revised Notice states that the EC is empowered to consider "expected transitions in the structure of a market" when conducting a forward-looking assessment.

The guidance concerning forward-looking market definitions underscores the value of anticipating changes in the market, such as the green and digital transitions. For example, it discusses how to define markets for electric vehicles or for cloud computing services. This enables companies to adapt their strategies proactively in light of evolving market conditions and regulatory shifts. The EC is authorised to scrutinise short-term and medium-term shifts in market structure, particularly when there is "sufficient probability that new types of products are about to emerge." In its forward-looking assessment, the Revised Notice specifies that the EC will take into account the internal documents of market participants that are especially pertinent in supporting considerations regarding changes in market structure.

Impact and Calculation of Market Shares

The Revised Notice highlights the significance of market shares in evaluating market power while acknowledging that they are not the sole indicator. Additional metrics, including capacity or production, number of suppliers, number of contracts awarded, usage metrics and reserves, can offer valuable insights into market dynamics. The relevance of these metrics varies based on the industry and the specific products being examined. The Revised Notice further elucidates that in markets experiencing structural shifts, such as technological or regulatory changes, or when a forward-looking evaluation is necessary to grasp evolving market dynamics, estimating future market shares may be warranted to account for anticipated changes.

Conclusion

Given that the EC collaborated closely with the EU Member States' national competition authorities and other significant jurisdictions during the review process, it is anticipated that this collaboration will contribute to fostering international alignment in approaches to market definition. As regards Türkiye, given that the current Guidelines on the Definition of Relevant Market of the Turkish Competition Authority is fairly similar to the Market Definition Notice of the EC, we would expect that the Turkish Competition Authority will be updating such guidelines by integrating the revisions introduced in the Revised Notice in the near future, with a view to improving its market definition practice in parallel with the EC.