The new EU Commission’s Notice on Relevant Market Definition and its Effect in Serbia, Montenegro, and Bosnia and Herzegovina

The European Commission (“Commission“) adopted the revised Market Definition Notice for competition cases (“revised Notice“). The revised Notice supersedes the 1997 Commission Notice on the definition of the relevant market for the purposes of Community competition law (“1997 Notice“), the longest-lasting soft law instrument of EU law which ultimately had to succumb to new market realities.

The revised Notice does not overhaul the rules of the 1997 Notice, but rather builds on the existing methodology and codifies the concepts and examples developed in practice over the past 25 years.

Local regulations on definition of relevant market in Serbia, Montenegro and Bosnia and Herzegovina are based on the 1997 Notice, although they contain much less guidance. However, they are general enough to be interpreted in line with the revised Notice. Since the national competition authorities have relied on the EU decisional practice and soft law as a matter of practice, it is expected that they will, where relevant, acknowledge the experience and common wisdom embodied in the revised Notice.

Non-price factors

One of the most important features of the revised Notice is the elaboration of non-price parameters of competition to be used when defining relevant market, such as the product’s degree of innovation, the products’s quality features (sustainability, resource efficiency, durability), the value and variety of product uses, the product’s integrability, the image the product projects or security and privacy protection afforded, as well as the product’s availability, including in terms of lead-time, resilience of supply chains, reliability of supply and transport costs.

Forward-looking assessment

The Commission may use a forward-looking assessment for defining relevant markets when changes, such as emergence of new types of products, impending technological changes or impending changes in the regulatory framework, which may affect the general dynamics of supply and demand on the market as a whole are expected to occur. The expectation of the change must be based on evidence and not a mere hypothesis.

Market definition in specific circumstances

The revised Notice sets out the following specific circumstances to be considered when defining the relevant market:

  • Significant product differentiation – Where there is a significant differentiation between products that in principle may serve as substitutes to each other, the Commission may treat such products to be part of separate relevant markets.
  • Discrimination between customers – When certain customers or customer groups are offered different prices or different quality for the same product, the conditions of competition are not homogenous, and this justifies defining separate relevant markets based on different customer groups.
  • Innovation-intensive industries – When defining the relevant market for products in early stage of research and development or in the pipeline. Even through pipeline products are not yet on the market, there may be sufficient information to establish with which other product(s) the pipeline product is likely to be substitutable (if the product is successfully brought to market). Based on its intended use, the Commission may conclude that such pipeline product belongs to an existing relevant product market or to a new product market, which is limited to the pipeline product and its substitutes.
  • Multi-sided platforms – The revised Notice recognizes the impact of indirect network effect on market definition in cases of multi-sided platforms such as payment card systems or advertising-sponsored platforms, where the activities of one user group influences the demand of other user groups within the same platform.
  • After-markets and digital ecosystems – By introducing the notion of digital ecosystems and after-markets into the rules on market definition, the revised Notice clarifies the conditions under which it may be appropriate to include primary and connected products within a single market (a system market), as opposed to defining the markets as dual or multiple.

Geographic market definition

The revised Notice confirms that geographic market may range from local to global. While the analysis starts by identifying the locations of undertakings concerned and their customers, it further includes the presence of the same or different suppliers across geographic areas, similarities or differences in their market shares, prices, but also in customer preferences and purchasing behaviour, barriers and costs related to supply in different areas, distance-related factors affecting costs, quantities available or reliability of supply, and trade flows and patterns of shipments.

The revised Notice clarifies that the mere existence of imports or the possibility of switching to imports in a given geographic area does not of itself lead to the widening of geographic market, but a case-by-case analysis is required. However, when geographic market is defined based on the customers’ location, all sales into the location, including imports, form the basis for calculation of the market shares. When the Commission uses a forward-looking assessment, the geographic dimension of a relevant market containing pipeline products may need to reflect the geographic dimension of the underlying R&D effort, and therefore it could be broader than the relevant geographic market of the relevant commercialised products.

Calculation of market shares

The Revised Notice provides a useful guidance on how the Commission should calculate market share when sales are not a suitable metrics. For example, in digital markets, the relevant metrics could be the number of active users, website visits or streams, time spent or audience numbers, the number of downloads and updates, the number of interactions, or volume or value of transactions concluded over a platform. For markets characterised by strategic importance of capacity, the suitable metrics include capacity and production, while for innovative markets the number of suppliers or awarded contracts should be considered. Regarding the transport markets, the relevant metrics include the size of the fleet, seating capacity, number of trips or access rights such as slots at specific airports, and for market characterised with significant R&D investments the level of R&D expenditure and even the number of patents or patent citations may count.

Relevance in Serbia/Montenegro/Bosnia and Herzegovina

As mentioned, NCAs on the Balkans have been largely accepting relevant market definitions developed in the decisional practice of the European Commission. Accordingly, it is expected that the authorities will continue to inform themselves from the new soft law as well. However, the problem, especially in the merger control practice of Serbian and Montenegrin NCAs, has been not so much in the market definitions but in the practice of treating as relevant for the assessment of the concentration’s impact on the competition the markets which are not apposite for such assessment. Due to low filing thresholds in Serbia and Montenegro, a large number of transactions are notifiable even if one of the concentration participants has no local sales whatsoever. In those cases, the NCAs often treat each market on which the acquirer and the target are separately present in the jurisdiction as the relevant market and request market data. This burdens the notifying party(ies) with the duty to supply information which ultimately does not contribute to the competition law analysis. It is to be hoped that the local authorities will reduce their information requests in those cases where there is no horizontal overlap and no vertical effects of the concentration.