The Concept of Market Definition

The role played by market definition in Competition law must be fully

understood. Market definition is one of the most important analytical tools for
competition authorities to examine and evaluate competition problems.
Liability in competition law often depends on how markets are defined. In
many cases the liability of companies may depend on whether they are in or
out of a market. Competition law remedies are also adopted with the principal
aim to restore competition in the particular market.

Traditionally, the first steps in every competition analysis are the definition of
the relevant market, the identification of relevant competitors, the computation
and assignment of market shares. By defining a relevant market, then
calculating and assigning market shares, competition authorities seek to
assess the market power of firms, which is of central importance to understand
competition effects.

The main purpose of market definition is to identify in a systematic way the

competitive constraints that an enterprise involved face. Thus market definition
sets a framework for competition analysis. Markets must be defined to assist in
determining whether the firms whose conduct is being examined have market
power, as in sufficient power individually or collectively to have adverse price
and output effects. Market definition then comes into play when market power
is relevant. Market share is the benchmark for proof of market power. Market
share, however, can be calculated only after the market has been defined. For
the market shares to be reliable the market has to be defined in such a way
that the market shares are as meaningful as possible. If the market is defined
too narrowly, important competitive constraints will not be taken into account
and the market power will be overstated. If on the other hand markets are
defined too broadly, products will be considered as competitive constraints that
in fact do not substantially constrain the behavior of enterprises and could
thus understate market power. Market definition is therefore crucial in
assigning the market power of an enterprise in an industry and establishing
whether or not particular agreements or conduct fall within the scope of the
competition rules.

Economic principles of market definition

Markets in which there is no effective competition will in general lead to

inefficiencies inter alia in the form of higher prices and/or lower quality of
products, reduced R&D investments and/or retarded innovations as compared
to markets where the competitive process works effectively. These inefficiencies
will arise if the behaviour of firms is not constrained by (potential) other
products or services. In these cases, firms are considered to have market
power. This concept thus refers to the competitive constraints a firm faces, for
example by products and services supplied (or potentially supplied) by rivals
and competitors (or potential rivals and competitors). A reduction in
competitive constraints usually leads to an increase in market power which in
turn could induce welfare decreasing effects. The role of competition law is to
ensure that effective competition prevails by preventing the creation or the
strengthening of market power or to prohibit the abuse of a position of
substantial market power. Competition authorities have to assess the
competitive effects of decisions concerning mergers or potential anticompetitive
conduct. In economics, market power is usually defined as the ability of a firm
to keep the price of its product (or products) profitably above the competitive
price for an extended period of time.

Relevant Market

Competition takes place on markets. For this reason, competition is always

closely related to one or several particular markets. When calculating and
assigning market shares, the status of an enterprise should be analyzed within
particular markets, i.e. ‘the relevant markets’. The definition of the relevant
market helps to identify the market participants, to delineate the boundaries of
the market and to determine the area of effective competition. The competitive
constraints are exerted by the products and services of other enterprises or in
other regions. Thus the relevant market is defined with respect to the product
and the geographical dimensions.

Product Market
The Act provides that the Minister may, on the advice of the Commission,
prescribe the procedure for determining the relevant product market.
Generally, a relevant product market comprises all those products and/or
services which are regarded as interchangeable or substitutable by the
consumer. In product market definition the issue is whether the market should
include products, other than that produced by those whose conduct is at issue,
which may serve as substitutes to which at least some consumers would turn
in the event of a significant price increase. When considering substitutability of
a product, it’s important to differentiate between demand side substitutability
and supply side substitutability.

a) Demand side substitutability

Following the price rise, customers may switch some of their purchases from
their preferred product to other substitute products. This is referred to as
demand side substitution. It is not necessary for all customers, or even the
majority, to switch. The important factor is whether the volume of purchases
likely to be switched is large enough to prevent an enterprise from sustaining
prices sufficiently above competitive levels. Substitute products do not have to
be identical to be included in the same market. For example, matches and
disposable lighters may be considered to be in the same market if customers
view them as close substitutes. Similarly, the products' prices do not have to be
identical. For example, if two products perform the same purpose, but one is of
a higher price and quality, they might be included in the same market. The
question is whether the price of one sufficiently constrains the price of the
other. Although one is of a lower quality, customers might still switch to this
product if the price of the more expensive product rose such that they no
longer felt that the higher quality justified the price differential.

b) Supply side substitutability

If prices rise, enterprises that do not currently supply a product might be able
to supply it at short notice and without incurring substantial sunk costs. This
may prevent an enterprise profitably sustaining prices above competitive levels.
This form of substitution is carried out by suppliers and hence is known as
supply side substitution.

An example is the supply of paper for use in publishing. Paper is produced in

various different grades dependent on the coating used. From a customer's
point of view, the different types of paper may not be viewed as substitutes, but
because they are produced using the same plant and raw materials, it may be
relatively easy for manufacturers to switch production between different
grades. A company specialized in one grade of paper might not profitably
sustain supra competitive prices because manufacturers currently producing
other grades would rapidly start supplying that grade.

i) The Geographic market

Geographic markets are defined using the same process as that used to define
product markets. The geographic market may be national, smaller than that
(e.g. local or provincial), wider than that (e.g. part of East Africa Bloc), or even
worldwide. Geographic market definition involves the identification of those
firms, selling the products within the relevant product market, to which
customers in the area will turn in the event of a significant price increase, and
may also include firms that would enter the geographic area in response to
such an increase. Generally, the value of a product in relation to costs of
search and transport is often an important factor in defining geographic
markets. The higher the relative value, the more likely customers are to travel
further in search of cheaper supplies. For consumer products, geographic
markets may often be quite narrow, e.g. where sufficient numbers of
consumers are unlikely to switch to products sold in neighboring towns or
regions, let alone countries. For wholesaling or manufacturing products,
customers may be in a better position to switch between suppliers in different
regions, providing transport costs are not too high.

I. Application of Market definition under the CCPA

The notion of ‘relevant market’ is commonly used in virtually all countries

where competition laws exist. It is important to note that while the need for
market definition may arise under many areas of competition law, market
definition has historically been of a much higher importance in merger and
abuse of dominance cases. Although the Act specifies only two provisions 1
where market definition is important, the need for market definition and
evaluation of market structure under the Act may arise in many circumstances
including the following:

i) Market Definition under section 8 CCPA

Section 8 of CCPA apply to only agreements which have as their object or

effect the prevention, restriction or distortion of competition to an appreciable
extent. The reason for defining the market under section 8 is twofold: Firstly,
as part of the broader "objects/effects" inquiry. Secondly to determine whether
the agreement has an appreciable impact on competition. On the overall, the
test for appreciability requires a definition of the relevant market and a clear
demonstration that the agreement would have an appreciable effect on
competition within that market.2

ii) Market definition under section 14 CCPA

1
See section 17 CCPA
2
However, for certain types of agreements, market definition or proof of market power or actual competitive
effects may not be a necessary because their "object" is the restriction of competition. For example Cartel
agreements have generally been condemned without an evaluation of their actual effects
Market definition is also required under section 14 of the Act in order to
determine share of supply threshold for authorization of restrictive
agreements.3 Section 14 of the Act requires parties to a restrictive agreement
to apply to the Commission for authorization if they have a combined share
output of thirty percent or more in the case of horizontal agreements and
fifteen percent or more for vertical agreements. Parties to an agreement have to
decide themselves whether their agreement violates competition law. This
requires that they examine the economic context of the agreement, which
involves, among others, the definition of the relevant product and geographic
market. Further, as assessment of the supply share under section 14 CCPA
requires the definition of the relevant market.

iii) Market definition under section 16 CCPA.

Under section 16 market shares provide the starting point in determining

whether a firm holds a dominant position. Market definition is necessary under
section 16 because “before an abuse of a dominant position is ascertained, it is
necessary to establish the existence of a dominant position in a given market,
which presupposes that such a market has already been defined.” 4 According
to section 15 CCPA a dominant position is presumed to exist when an
enterprise has a market share of 30 per cent or greater and 60 per cent or
more in the case of collective dominance. Measuring market shares requires a
definition of the relevant market.

iv) Market definition in Merger Control

In merger transactions market definition comes into play when determining

whether market power is created or strengthened by a merger. Under the CCPA
merger control invariably begin with market assessment. Section 29 of the Act
requires that the Commission to conduct a market assessment of the proposed

3
“when specific provisions either explicitly or implicitly rely on a certain market share threshold, only the
calculation of the shares, which in turn requires definition of the relevant market, can trigger the application of
such provisions” OECD Policy Roundtables, Market Definition (2012) at p. 85.
4
The ECJ in Volkswagen (2000)
merger to determine the likely effects of the proposed merger in the relevant
market, on trade and the economy in general. Therefore a market assessment
requires in, all cases, that a relevant market must be ascertained.