COMPETITION • EUROPEAN LAW • RESTRICTIVE AGREEMENTS
The concept of substitutability is the cornerstone of the definition of the product market in competition law. According to the Commission, “a relevant 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”. In Notice No 97/C 372/03 of 9 December 1997 on the definition of relevant market for the purposes of Community competition law, the Commission differentiates between demand-side and supply-side substitutability.
For the purposes of assessing demand-side substitutability (elasticity of demand), the Commission specifies that it consists in identifying the actual alternative sources of supply to which the customers of the undertakings in question may have recourse, in terms both of the products or services of other suppliers and of their geographical location. In effect, an undertaking or a group of undertakings cannot have a significant impact on the prevailing conditions of sale, such as prices, if its customers are in a position to easily switch to substitute products. To make that assessment, the Commission uses a range of criteria such as the technical characteristics or functions of the products or services, price, conditions of manufacture, use, marketing etc. This descriptive approach is sometimes supplemented by econometric analysis. Among the existing methods, the Commission can use the “small but significant and non-transitory increase in price” (SSNIP) test, which consists of determining whether consumers would switch to readily available substitutes or to suppliers located elsewhere in the event of a small (5-10%) but permanent increase in the prices of the products concerned in the territories concerned. If substitution is sufficient to remove the incentive for a price increase because of the resulting decline in sales, substitute products and additional territories are integrated in the relevant market. This is done until all the products and the geographical area selected are such that it becomes profitable to make small but permanent increases in relative prices.
Substitutability can also be analyzed from the supply side (elasticity of supply ) when its effects are equivalent to demand-side substitutability in terms of immediacy and effectiveness. Products are considered substitutable from the supply side when suppliers are able to redirect their production towards the products or services of the suppliers concerned, without incurring unsustainable costs or risks. If heavy investments or strategic revisions are required to achieve this, substitutability is ruled out. The switch must, moreover, be able to be carried out within a reasonable period of time.