Understanding Relevant Markets & Defining Market Power
Defining the relevant market plays a critical role in competition law, focusing on market power and competitive effects. Through the SSNIP test, it identifies substitutes, competitors, and constraints, aiding in analyzing market concentration and consumer welfare.
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Presentation Transcript
Understanding Relevant Markets(RM)
Defining Relevant Markets SSNIP Test, etc Determining Market Power-Concentration Indices Consumer Welfare-Criteria Case study
Defining the Relevant Market is a central and often critical role in the application of competition law Crucial for assessing market power Provides a context within which competitive effects can be analyzed.
Identifies those products and services which are close substitutes to the products or services offered by the parties under investigation and therefore provide an effective competitive constraint. Identifies the competitors of the undertakings involved that are capable of constraining their behavior in the market.
Key Benefits Focusesattention of the regulator and interested parties on the main competitive constraints which exists between products and regions Enablescalculation of market shares and market concentration
Relevant market has two dimensions: the productmarket and thegeographicmarket. The product market dimension considers those products that provide an effective competitive constraint on those products produced by the partiesunder investigation. The geographic market dimension considers the competitive constraints that sources located in one region pose for those firms located in the same region as
the enterprises under investigation. In a nutshell, the relevant market consists of products which are considered to be substitutes by consumers within a geographic area.
The standard approach to defining the relevant market Hypothetical Monopolist Test is the First officially recognized in the 1982 US horizontal merger guidelines issued jointly by the Department of Justice and Federal Trade Commission The test is also known as the Small but Significant Non-transitory Increase in Price (SSNIP)Test
The test first assumes a small (5-10%) rise in the price of the product under investigation (focal product) e.g.shoes Thereafter the question is whether the price increase would cause the consumers of the focal product (shoes) to shift to another product (eg. Sandals) or buy the focal product from another area, to such an extend that the priceriseisunprofitable.
If the consumers of shoes, start buying sandals for a 5-10% rise in the price of shoes, shoes and sandals form part of the same relevant market. Similarly, if the consumers start buying shoes from another geographic area for a 5-10% rise in the price of shoes in one geographic area, then both the geographic areas form part of the same relevant market
The SSNIP test represents only one possible approach to defining the relevant market. Differences in physical characteristics imply separate relevant. Differences in price levels imply separate relevant markets. Definition of the relevant market is independent of the particular competition concern.
Cellophane Fallacy- If the product in question is already priced supra-competitively, a 5-10% rise in the price of the product would cause consumers to shift to another product. However, it does not imply that the relevant product market would constitute both products.
Price Correlation Analysis: Works on the principle that if products are in the same market, their prices should move together. Shock Analysis:This analysis is based on looking at evidence relating to past events in the market that offer actual examples of substitution between two products. (Example: How the launch of a new product affected the demand for another product)
Essential to assess market power of an enterprise and thus the anti-competitive effects caused by a combination. Several techniques used to assess market power. The Herfindahl-Hirschmann Index (HHI)- Based on the total number and size of firms in an industry.-Computed as sum of all firms in industry. Unconcentrated- HHI < 1000 Moderately Concentrated- HHI between 1000 & 1800 Concentrated- HHI >1800
Post-merger the HHI is again calculated-and HHI is taken. HHI < 100 Unlikely to have adverse competitive effects HHI between 100 and points= More likely to raise competition concerns
Concentration Ratio (CR)-Combined Market share of a given number of large firms. Higher the CR-Greater the potential for market power.
In the Lombard Club judgement (T-259/02)- General Court noted- In Article 101 cases, relevant market definition serves to determine effect on competition while in Article 102 cases, it serves to determine dominant position. Definition of relevant market of essential significance to determine product substitutability - Europemballage corp and Continental Can Co Inc v. Commission [1973] ECR 215, Para. 32
The concept of the relevant market in fact implies that there can be effective competition between all the products forming part of the same market insofar as a specific use of such products is concerned- Hoffman-La Roche & Co AG v. EC Commission [1979] ECR 461, para 28
For the purposes of investigating the dominant position, it is essential that the product market should be defined comprising the totality of the products with respect to their characteristics.....-Nederlandsche Banden- Industrie Michelin v. Commission [1983] ECR 3461, para.37, Birtish Airways v. Commission [2003] ECR II-5917, para 91
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