Market definition plays an essential role in competition law. It is particularly decisive in matters of abuse of a dominant position and merger control. How broad or narrow the definition of the product market and the geographic market is, will determine whether a company will be regarded as having a dominant position, and where that dominant position is characterized, its behavior will be closely monitored and its room for maneuver limited. Similarly, in the event of a restrictive definition of the markets, its market share will appear larger and it will often find it more difficult to carry out external growth operations or will have to carry them out under the constraint of substantial and costly commitments.

In its Communication on the definition of relevant markets of 9 December 1997, the European Commission underlines the “decisive influence on the assessment of a competition case” of the definition of the market on which the essential criteria for identifying competition concerns depend i.e. operators’ market share, effective competition, etc.

The Commission has launched an evaluation of its Communication and invited stakeholders to present their comments on its roadmap, in which it sets out the five criteria on which it intends to base its evaluation: effectiveness, efficiency, relevance, coherence, and added value of its Communication.

Please find attached the observations sent by Vogel & Vogel to the Commission as part of the consultation on improving the process of defining relevant markets and limiting the numerous perverse effects resulting from an overly restrictive definition of markets in term of both product and geographic markets.

Overall our view is that that the definition of markets is too often highly restrictive and out of step with reality and economic developments.

Reasons:

– a technical approach favoring substitutability on the demand side, while substitutability at the of supply and potential competition level should be taken into account at the market definition stage;

– the assessment of demand-side substitutability too centered around price elasticity of demand;

– insufficient consideration of the global dimension of certain markets and the globalization of the world economy;

– overly rigid analysis based on previous decision-making practice which is often obsolete but is always referred to in the decisions; in France, the abolition of the distinction between physical and online retail channels only dates back to 2016. Similarly, the French Competition Authority maintained in 2017 its analysis on the existence of a one and the same market encompassing broadband and very high-speed internet. Likewise, in the field of advertising, the maintaining of an isolated market for television advertising is obsolete in the light of the exponential development of internet advertising, in particular on video platforms;

– a habit developed by the decision-making practice both at European and French level, which consists in  the Authority discussing a new definition of the market while “leaving the question open” and making reference, for the purposes of analysis,  to the previous definition in such a way that operators are unable to determine which definition is applicable;

– insufficient timeframe considered in the context of the market analysis for merger operations. The Commission’s Alstom / Siemens decision illustrates the difficulties linked to this issue and the analysis of potential international competitors was quickly revealed to be inaccurate.

Restrictive decision-making practice in terms of market definition can lead to over-regulation and excessive interventionism by the supervisory authorities, which is detrimental to economic efficiency and development. It is also likely to place European industry at a disadvantage against competing industries, notably the US and China which have been able to acquire global positions of strength on their large national markets, with which European companies struggle to compete. The definition of markets that are too small and possibly obsolete thus leads to a loss of competitiveness compared to these global giants.

It is therefore important that the procedure for reviewing the Communication takes account of the observations of businesses and provides an opportunity for the European Commission to lay the foundations of a new more integrated competition policy based on economic reality, in support of other European policies, in particular industrial policy, since the Communication is centered on the existing link between the concept of relevant market and competition policy.

Find below our reply to the consultation

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The European Commission has launched an evaluation of its Communication of 9 December 1997 on the definition of the relevant market for the purposes of Community competition law (hereinafter the “Communication”), and has invited stakeholders to present their comments on its roadmap, in which it sets out the five criteria on which it intends to base its evaluation: effectiveness, efficiency, relevance, coherence, and added value of its Communication.

In our view this evaluation initiative is certainly comes at a timely juncture.

We are effectively reminded of the central role of defining the relevant market in competitive analysis, given that it determines the context of that analysis. In the Communication the Commission itself underlines the “decisive influence on the assessment of a competition case” of the definition of the market (Commission Notice on the definition of relevant market for the purposes of Community competition law, recital 4.) on which the essential criteria for the identification of competition difficulties depend: operators’ market share, effective competition, etc. However, as this concept is subject to limited review only by the EU judicature (Case T-370/17 KPN BV, para 59.), it is essential that the Commission’s analysis be as comprehensive as possible.

Beyond possible methodological improvements to the detailed analysis in the Notice (1), we regard it as important to call on the Commission, in the context of its evaluation, to go beyond the Notice, in particular as regards the practical methods of analysis and competition policy (2).

Contents :

1. Possible methodological improvements in the Communication

a) Two competitive constraints excluded from the analysis

b) Demand-side substitutability analysis must evolve

c) The definition of relevant geographic markets does not allow effective account to be taken of global markets

2. The Commission’s evaluation should also cover certain practical methods of applying the Communication

a) Increased rigidity of analysis

b) Insufficient time scale for merger rules

1. Possible methodological improvements in the Communication

In general, the Communication has contributed to some extent to a better transparency of the analysis of the Commission and the competition authorities and has created a certain degree of legal certainty by giving operators the analytical tools necessary to analyze the market. In the same way, it has been able to provide greater coherence between the Communication and European and national decision-making practices, and bring added value, also appear to be met. However, the effectiveness criterion, particularly with regard to the consideration of market developments, would appear to be severely lacking, leading to legal uncertainty which is bad for companies, excessive interventionism, and the maintenance of divergences between European and national law and thus insufficient added value

a) Two competitive constraints excluded from the analysis

Within the framework of the Communication, the basic principles of the definition of the markets center in particular around the identification of the competitive constraints of which there are of three types: demand-side substitutability, supply-side substitutability and potential competition (Commission Notice on the definition of relevant market for the purposes of Community competition law, recital 13).

The Commission excludes the last two criteria from the analysis of the relevant market and does not consider them before the competition analysis stage as it regards those criteria as exerting a less immediate competitive constraint and requiring the analysis of additional factors (Commission Notice on the definition of relevant market for the purposes of Community competition law, recital 20. Supply-side substitutability is only taken into account by the Commission when it defines markets in situations “in which its effects are equivalent to those of demand substitution in terms of effectiveness and immediacy”).

However, the failure to consider potential competition and supply-side substitutability in the first stage of the analysis is likely to lead to an excessively narrow definition of the market.

This limiting of the definition of the markets leads to an increased interventionism by competition law as well as legal uncertainty, at both European and national level: positions, behaviors or transaction which would not pose difficulties on more broadly defined markets are subject to the risk of sanctions. However, that risk depends in part on the assessment by the competition authorities and they can use broader or narrower market definitions according to their objectives and the competition policy pursued.

By way of illustration, the French Competition Authority, in Decision No 12-D-10, defines the relevant markets as being the sale of high-end dry dog food in the specialized distribution sector and the sale of dry cat food in specialized distribution sector (Decision No. 12-D-10 of 20 March 2012 relating to practices implemented in the dog and cat food sector, para 149 et seq), an excessively narrow market which has enabled it to sanction the practices of anticompetitive agreements analyzed by superimposing four cumulative criteria limiting the size of the market.

Furthermore, the exclusion of the analysis of potential competition at the stage of defining the relevant market limits the effective and rapid consideration of market developments. Future competitive constraints are therefore not considered sufficiently in advance of the analysis, which reduces their impact and distorts the competitive analysis.

It would be helpful to clearly utilize the three criteria at the market definition stage.

b) Demand-side substitutability analysis must evolve

In the Notice, substitution on the demand side is centered around price elasticity of demand.

This single dimension does look outdated today: the digitalization and globalization of the economy have led to major changes in consumption patterns, and innovation has also become an important factor in competition. This criterion does not allow insight into free-of-charge activities due to the use of advertising.

c) The definition of relevant geographic markets does not allow effective account to be taken of global markets

The geographic market is defined according to an analysis at national, EU or EEA level. This methodology does not allow the inclusion of global markets, which are nonetheless likely to constitute a competitive pressure on the European or national markets. Even if the Commission is not competent to rule on the competitive situation outside the territory of the Union, it must take into account the global dimension of certain markets with regard to the globalization of the economy.

2. The Commission’s evaluation should also cover certain practical methods of applying the Communication

Apart from the legal and economic indications specified in the Communication, the competition authorities’ analysis of the relevant markets reveals some weaknesses.

a) Increased rigidity of analysis

In terms of market definition, the decision-making practice is mainly based on previous decisions. If this practice has allowed a significant degree of legal certainty, it has at the same time led to an excessive tightening up of the decision-making practice, making it hard for competition authorities to take account of market developments.

In France, the removal of the distinction between physical and online retail channels only dates from 2016 (Competition Authority decision No 16-DCC-111 of 27 July 2016 on the acquisition of sole control of Darty by Fnac, in which the Authority, after further analysis of the actual conditions of competition in the market, found that the physical and online retail distribution channels for brown and gray electronic products were one and the same market).

Similarly, the French Competition Authority maintained in 2017 its analysis on the existence of a single market encompassing high speed and very high-speed broadband (Competition Authority Opinion No 17-A-09 of 5 May 2017 on a request for an opinion from the Regulatory Authority for Electronic Communications and Postal Services relating to the fifth cycle of analysis of the high-speed and very high-speed wholesale broadband and capacity services markets, paras 55 et seq).

At the European level, we note the difficulties encountered by the Commission in understanding multi-sided digital markets. In the Google Shopping decision (Commission decision No AT.39740 of 27 June 2017, Google Search (Shopping)), the Commission thus defined two markets concerning (i) the market for general search services, and (ii) the market for comparative shopping services. These narrow boundaries, based on a classic methodology and disconnected from economic reality, have led to the absence of any consideration of some market competitors: the market for general search services does not therefore take into account specialized search engines, and the market for comparative purchasing services excludes platforms on which purchases are possible and includes in the market only pure comparison shopping services.

Likewise, in advertising, maintaining an isolated television advertising market appears to be obsolete in view of the exponential development of internet advertising, in particular on video platforms.

We have also noted a habit developed in the decision-making practice both at European and French level, which consists in the authorities pursuing a new market definition while “leaving the question open” and referring, for the purpose of the analysis, to the previously established market definition. This practice is likely to affect legal certainty for operators, who are unable to determine which definition is applicable.

b) Insufficient time scale for merger rules

Certain decisions have cast light on the fact that an insufficient timescale has been considered in the context of market analysis for merger operations. In effect, potential competition is not taken into account in the context of the definition of the relevant market, and even in the context of competitive analysis, it is only taken into account within the limits of a two-year time horizon.

However, merger control presupposes a prospective analysis of the market. Such a limited period of time, incorporated late in the analysis, leads to the exclusion of certain potential competitors who are likely to disrupt the market in the short or medium term. It is essential, in terms of merger control, that the analysis be more future-oriented.

The Alstom/Siemens ruling (Commission decision M.8677 of 6 February 2019, SIEMENS / ALSTOM) illustrates the difficulties associated with this timeframe, whereas the analysis of potential international competitors quickly proved to be inaccurate.

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The restrictive decision-making practice as regards the definition of markets thus leads to strict regulations likely to disadvantage European industry compared to competing industries, in particular American and Chinese industries (As an example, in Decision No 19-DCC-157 concerning the creation of a joint venture by the three main French free-to-air channels, the French Competition Authority merely used the delimitation of existing markets without drawing any consequences from the evolution of the non-linear television markets and despite the finding of changes in the market, did not choose to settle the question. The Authority thus demanded strict commitments making the realization of the operation extremely complex (Decision No 19-DCC-157 of 12 August 2019 relating to the creation of a joint venture by France Télévisions, TF1 and Métropole Télévision)),which have been able to acquire powerful globalpositions in important national markets, with which European undertakings struggle to compete. The overly restrictive definition of potentially obsolete markets thus leads to a loss of competitiveness for European companies when faced with those global giants.

This evaluation is also therefore an opportunity for the European Commission to lay the foundations of a new more integrated competition policy based on economic reality, in support of other European policies, in particular industrial policy, since the Communication is focused on the existing link between the concept of relevant market and competition policy (“The concept of relevant market is closely related to the objectives pursued under Community competition policy”).

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