COMPETITION • EUROPEAN LAW MERGERS

In current decision-making practice, definition of the market represents the first step of the competitive analysis, which is always prospective, taking into consideration the foreseeable changes of behavior and of the structure of the market. Thus, the market definition used in the context of the review of State aid is not binding on the competition authorities when they are ruling on the compatibility of a merger with the internal market. The definition of the relevant market is established according to principles similar to those of the law on dominance. As the market is only one aspect for the measuring of monopoly power, the competition authorities frequently decline to choose between various market definitions after having found that the notified transaction would not be held incompatible, even by adopting the narrowest definition or that the new entity would not be in a dominant position, regardless of the market retained. Furthermore, the fact that two products do not belong to the same market does not prevent one from exerting competitive pressure for the competitive assessment of the proposed merger.

According to the Commission, a product market “comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products’ characteristics, their prices and their intended use”. The degree of interchangeability or substitutability is assessed in view of the characteristics of the products concerned (performances, price etc.) as viewed by users. This descriptive approach is sometimes supplemented by an econometric analysis. Among the existing methods, the EU authorities mainly resort to the quantitative test of cross-elasticity of demand, which consists in calculating the existing ratio between the price variation of a product and the sales of another (see Elasticity of demand).

In defining the relevant market, the EU authorities refer less to supply-side substitutability which they use as additional assessment factor. According to the Notice on the definition of relevant market, substitutability may be analyzed from the supply-side where it produces effects equivalent to those of demand substitutability in terms of effectiveness and immediacy. The analysis of supply-side substitutability in defining the market, often relevant when the undertakings present a whole range of qualities and types for the same product, may give rise to the interpretation that the market includes all demand and supply-side substitutable products, even if for a final consumer or a specific group of final consumers, their differences in quality do not render the products substitutable. Two products or services must be regarded as substitutable from the supply side where suppliers are able to switch production to the relevant products or services without incurring significant additional costs or risks: where substitution requires significant investments, too much time or strategic revisions, substitutability will not be found. There is no supply-side substitutability between products where they are manufactured from wholly different raw materials, or where their manufacture requires the use of distinct manufacturing technologies and equipment, different production processes, specific plants or they require marketing efforts to re-position the products or the acquisition of specific experience and know-how. Likewise, difficulties in developing a new customer base, or the marketing of a new product, the concentration of production on one segment or the significant costs of research and development required by the entry to a declining market, reduce supply substitutability. By contrast, where it is sufficient to resort to simple conversion processes, supply is substitutable.

Own consumption which consists in an undertaking producing a product or rendering a service necessary to its own activity is not part of the supply on a market. In fact, the concept of relevant market implies that effective competition might exist between the products which belong to it. The Commission thus considers that the overall market for contract group catering should not include group catering carried out by bodies themselves where they do not represent an alternative for customers seeking group catering provided by a third party.

The digital revolution which is impacting the economy has led the Commission to question its criteria for defining the relevant market. The Competition Authority is keen to take better account of potential competition from players who are not located on the relevant market but who are likely to counterbalance the market power of the undertaking concerned when defining the product or service market, and recommends a differentiated and case-by-case assessment of the geographic market according to the products or services. This pragmatic approach, which takes into consideration the interdependencies between the different services, is particularly justified in the innovative digital sector where the delimitation of the market may prove difficult or quickly obsolete and where a too narrow definition of the relevant market, leading to the characterization of automatic dominant positions, could lead to too many systematic convictions.