European Commission updates rules for defining digital markets in its revised Market Definition Notice

Published Date
Feb 26, 2024
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Our antitrust experts, Kristina Nordlander and Agnieszka Kolasinska, analyse the impact of the revised Market Definition Notice on digital markets.

The European Commission (EC) launched a review in April 2020 of its market definition guidance to address new market realities, in particular the increased digitalisation and new ways of offering goods and services online. The review has now resulted in the publication of a significant revision to the Market Definition Notice (Notice). This marks the first revision since the Notice was adopted in 1997. 

The Notice will also provide guidance for other antitrust authorities in the EU and around the world, who often look to the EC as a global leader in this field. The Notice has already been welcomed by the French Competition Authority, who said that “it provides greater transparency and predictability for undertakings and takes better account of changes in the economy, at the forefront of which is the development of digital markets”.

Market definition – an intermediate step in the EC’s antitrust and merger analysis

Market definition is a tool to identify the boundaries of competition between undertakings and actual/potential competitors in relevant markets. Once a market is defined, the EC can calculate market shares, which may indicate a company’s market power. The market definition tool is applied in the substantive assessment of antitrust cases under Articles 101 and 102 TFEU, as well as in merger control proceedings. 

Note that the EC does not expect to carry out market definition assessments under the Digital Markets Act.

Updates in assessment of digital markets

The Notice contains new and expanded guidance relating to the competitive assessment of digital markets.

Defining markets for multi-sided platforms

The EC now specifically explains how it will evaluate markets that involve multi-sided platforms. These act as intermediaries between two or more interdependent customer groups (eg payment card systems or online advertising platforms). The EC may define a relevant product market for products offered by a platform, or it may define separate (although interrelated) relevant product markets for the products offered on each side of the platform. The guidance reflects the EC’s recent decision-making experience.

The EC explains that it may be more willing to define separate product markets on each side of the platform where there are significant differences in the substitution possibilities on different sides of the platform. To determine whether such differences exist, the EC will look, for example, at the degree of product differentiation on each side, behavioural factors such as the homing decisions of each user group or the nature of the platform (eg whether it is a transaction or a matching platform). Importantly, even if separate markets are defined for multi-sided platforms, the EC will consider “where relevant, the indirect network effects between the user groups on different sides of the platform”. It remains to be seen, however, to what extent the EC would be willing to accept efficiency arguments in cases involving multi-sided platforms.

New tools to assess demand substitution

When defining the relevant product market, the EC primarily considers the substitutability of products from the perspective of the customer, ie so-called “demand substitution”. To that end, the old Notice focused on whether customers would switch to readily available substitutes or to suppliers located elsewhere in response to a hypothetically small but permanent relative price increase (5%-10%) (the “SSNIP” test).

The Notice acknowledges that applying the SSNIP test can be challenging in innovative tech and digital markets where companies often do not compete on price but on quality or innovation. Where industries are highly innovative, products are free or indirect network effects exist, the EC may rely instead on non-price parameters, eg product functionalities, product quality or level of innovation, intended use, evidence of past or hypothetical substitution, barriers, or costs of switching, such as interoperability with other products, data portability and licensing features.

The Notice also offers an alternative to SSNIP: an “SSNDQ” test for a small but significant non-transitory decrease in quality. The SSNDQ test may be particularly relevant in zero-price markets (eg in a multi-sided platform context). However, applying the SSNDQ test brings some challenges, and it is not clear how such a test could be applied in practice. For example, it is not clear what level of degradation in quality would be equivalent to a 5%-10% price increase applied in the SSNIP test.

Digital ecosystems

The EC provides guidance on how to define markets in digital ecosystems where the consumption of several secondary digital products is connected to the core product by, for instance, technological links or interoperability, eg a mobile operating system, including hardware, app stores and software applications.

The Notice explains that in the case of digital ecosystems, the EC may apply a similar scheme to the one applied when defining relevant product markets in after-markets. In such cases, there are three possible ways to define relevant markets: (i) a system market comprising both the primary and the secondary product; (ii) multiple markets, namely a market for the primary product and separate markets for the secondary products associated with each brand of the primary product; and (iii) dual markets, namely the market for the primary product on the one hand and the market for the secondary product on the other.

The EC further explains that when secondary (digital) products are offered as a bundle, it may also assess the possibility of that bundle constituting a relevant market on its own. The EC acknowledges, however, that after-markets and bundle schemes may not be appropriate for all types of digital ecosystems, in which case the EC will define the relevant market by considering factors such as network effects, switching costs (including factors capable of leading to customer lock-in) and (single- or multi-) homing decisions.

Calculation of market shares

When calculating market shares, the EC usually relies on the value and volume of sales or purchases. The Notice provides alternative metrics for digital markets, including the number of active users, the number of website visits or streams, time spent or audience numbers, the number of downloads and updates, the number of interactions or the volume or value of transactions concluded on a platform.

What’s next?

The Notice gives valuable and timely clarification of how the EC looks at digital markets in view of its decisional practice. However, the EC retains significant discretion in conducting market definition analysis and it remains to be seen how it will apply certain concepts, such as the SSNDQ test, in its analysis.

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