European Commission adopts revised Market Definition Notice: Evolution fit for new challenges?

A. Market definition for multi-sided intermediaries, after-markets, bundles and ecosystems

For the first time, the Commission provides market definition guidance for “multi-sided platforms”³ (e.g., advertising-sponsored online intermediaries), noting that such intermediaries support interactions between different groups of users, creating a situation where demand from one group of users likely has an influence on demand from one or more other groups, creating indirect network effects. Against that background, the Commission:

• Acknowledges that a relevant product markets may include all products offered by a platform as a whole or there may be separate (interrelated) markets for the products offered on each side of the platform;
• Confirms that, whether or not separate product market are being defined, it will take into account (1) whether the undertakings offering substitutable products for each user group differ, (2) the degree of product differentiation on each side of the intermediary, (3) behavioural factors (e.g., (single- or multi- homing decisions by each user group and nature of the intermediary [transaction- vs. matching-based]), and (4) the indirect network effects between user groups on different sides.

The Commission also provides guidance in relation to after-markets, bundles and (digital) ecosystems,⁴ noting that:

• Primary and secondary, or “after-market”, products can form (1) a single “system” market, (2) multiple markets, or (3) dual markets.
• Where customers prefer to consume several products together as a bundle, the Commission looks at whether the bundle falls within a single relevant product market, based on a substitutability assessment between the bundle and individual products.
• In the context of (digital) ecosystems, which the Commission defines as consisting of a primary core product and several secondary (digital) products whose consumption is connected to the core product, the Commission would apply principles similar to those applied to after-markets and, if secondary (digital) products are offered as a bundle, it will take into account factors including network effects, switching costs and (single- or multi-) homing. It is interesting that in recent cases, the Commission appears to have applied the ecosystem concept more broadly, taking into account potential bundling/exclusion of physical products by intermediaries.

B. Economic tools used in defining 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%. However, the SSNIP test is not particularly useful in the context of digital services, particularly “free” (to the end-user), digital services. The Commission addresses the use of alternative tools in Section 4.4 of the revised Notice:

• Given that the SSNIP test be difficult to apply in a multi-sided context with indirect network effects and the likelihood that services are offered at a zero (monetary) price to one user group (to attract users to, and generate revenue on, other sides),⁵ the Notice suggests an "SSNDQ" (small but significant non-transitory decrease of quality) test.⁶ However, the challenges in quantifying quality and the EU General Court’s criticism of the approach raise questions about using the SSNDQ test in practice.
• Factors including 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, can be used in determining whether relevant markets are single- or multi-sided. However, while the Notice again cites decisional practice using these factors, it does not provide guidance regarding the most relevant factors in specific circumstances, or regarding the weighting of different factors.⁷

C. Market shares

The Commission has revisited its guidance on the use and importance of market shares,⁸ noting that, while it is an important tool in traditional markets (e.g., in homogeneous product markets with limited dynamics), there are other factors that might be useful, both in traditional and digital markets (e.g., barriers to entry or expansion, access to specific assets and inputs, product differentiation and degree of substitutability). Further, while market shares are based on the value of sales and/or the number of units sold in traditional markets, the Commission addresses in detail additional metrics that it may rely on in the context of digital markets, e.g., number of users, number of visits, time spent, audience numbers, number of downloads and updates, number of interactions and number (or value) of transactions concluded.

D. Competing globally – how does the Commission define global markets?

Apart from relevant product markets, the Commission also expands its guidance regarding the identification of global geographic markets (in the context of increasingly globalizing business), addressing in particular:

• Circumstances where “customers around the world have access to the same suppliers on similar terms regardless of the customer’s location, for instance if they purchase from undertakings located anywhere in the world on similar terms, the relevant geographic market is likely to be global”;⁹
• The importance of regulatory frameworks in assessing barriers created by state action that may affect suppliers from other states or, on the other hand, regulatory harmonisation reducing barriers in defining geographic markets.¹⁰

E. Takeaways

The revision essentially updates the Notice to reflect approaches that the Commission has already been applying in the context of digital and global markets. While it effectively summarizes the Commission’s enforcement practice in antitrust and mergers, including the tools the Commission is likely to deploy, it does not enhance clarity as to how the Commission is likely to deploy these tools in any given situation. However, it was always unlikely that the Commission would tie its hands in this way.