Market Definition in the Digital Age: An Analysis of the EU Commission's Draft Revised Notice

A. Market definition for multi-sided platforms

Multi-sided platforms, such as advertising-sponsored online intermediaries, are prominent in the digital sector. Defining markets in which multi-sided intermediaries operate is challenging for various reasons, including the fact that the services offered on different sides of the intermediary are generally offered to different users and are often offered to one set of customers without monetary payment.

The 1997 Notice does not address platforms, but the Draft Notice does, noting that multi-sided intermediaries support interactions between different groups of users on each side, such that demand from one group of users influences demand from other groups.  The Draft Notice acknowledges the difficulties created by these indirect network effects.

The Draft Notice states that the Commission may define a relevant market for all products/services offered by an intermediary, or it may define separate relevant markets for products/services offered on each side. Defining separate markets on each side may be more appropriate where there are significant differences in substitutability on the different sides.  Relevant factors to consider in identifying the appropriate approach include whether the companies offering products/services to each user group are the same or different; the degree of differentiation on the different sides; user behaviour, including multi-homing; and the intermediary’s business model, such as whether it is transaction-based or matching. 

The Draft Notice’s discussion of market definition in the context of intermediaries reflects practice over the last 25 years, starting with advertising-funded broadcasting.,  For example, the Commission defined online recruiting services, encompassing both job seekers and recruiters, as a single market. In the context of payment card systems, however, the Commission defined the issuing and acquiring side of the market as distinct relevant product markets.

B. Economic tools used in digital markets

Traditional antitrust market definition relies heavily on well-established economic tools, including the SSNIP (small but significant non-transitory increase in price) test, which attempts to identify the smallest relevant market within which a hypothetical monopolist could profitably impose a price increase of 5 to 10%.  

The Draft Notice acknowledges the difficulties in applying the SSNIP test in a multi-sided context, in view of the importance of indirect network effects and the fact that products may be offered at a zero (monetary) price to one user group (to attract users to, and generate revenue on, other sides).  The Draft Notice suggests a "SSNDQ" (small but significant non-transitory decrease of quality) test.  However, the challenges in quantifying quality and the EU General Court’s criticism raise questions about how the SSNDQ test will be used in practice.  

The Draft Notice further notes that non-price characteristics such as functionalities, intended use, evidence of hypothetical substitution and competitive constraints based on industry views, and barriers to or costs of switching, are relevant to determining whether relevant markets are single- or multi-sided.  The Draft Notice again cites examples from its decisions, but does not provide guidance regarding which non-price element is most relevant in a given situation or how different factors can be quantified and weighed against one another.  

C. Bundles and aftermarkets

The Draft Notice addresses the relevance of digital aftermarkets and bundles in market definition.  Primary products and secondary, or “aftermarket”, products can form a single “system” market, depending on whether customers take whole-life costs into account when purchasing the primary product, the relative cost of the primary and aftermarket products, and ease of switching between primary products.  Similarly, groups of products that are not dependent on one another may fall into a single market if they are consumed together as a bundle.  

The Draft Notice observes that digital markets can consist of a primary core product and several secondary products whose consumption is connected to the core product, for instance, by technological links or interoperability. Accordingly, the Commission will take account of elements such as network effects, switching costs and single and/or multi-homing decisions when defining relevant product markets.  

D. Market shares

Another key tool in traditional market definition is market shares, which are normally based on the value of sales and/or the number of units sold.  The Draft Notice discusses alternative metrics for digital markets, including metrics such as the number of users, the number of visits, time spent or audience numbers, the number of downloads and updates, the number of interactions or the volume or value of transactions concluded.

E. Takeaways

The Draft Notice lays out various approaches to defining markets both where different users are present on different sides of multi-sided intermediaries and where services are offered as a secondary (or aftermarket) services and/or as part of a bundle of services.  

That said, the Draft Notice provides little concrete guidance regarding the factors on which the Commission is likely to rely in a given situation.  Instead, the Draft Notice stresses case-by-case analysis, perhaps understandably in view of the complexity and variety of such intermediaries.