1. Concept and importance

The definition of the relevant product market is one of the main analysis that is necessary to delineate the scope of the market on which is going to be assessed the level of dominance of certain firm or undertaking. In the same line, this assessment will show what is going to be considered as a product in a set or portion of offer and demand relation.

Accordingly, a very close relation with the definition of the relevant geographical market that will complete the dimension where the market power of an undertaking will be assessed.

The assessment of the relevant product market is of utmost importance for the analysis of market power and accordingly for the promotion of effective competition, detection of distortions of the market, regulation of mergers and controlling and preventing abuses of dominant position.

2. Market indirect definition

The relevant product market is an important element of the indirect definition of market power. Since a direct assessment implies several conditions that are difficult to fulfill on modern economies (e.g. very stable situations for estimating the elasticity of the residual demand function), an indirect approach to market definition is necessary to estimate the market power on the basis of the respective market share of an undertaking.

Once the market share of an undertaking is defined, different analysis has to be applied for determining whether it has current market power (retrospective analysis) or whether that power will appear or be enhanced afterwards (prospective analysis). Hence, the results of that analysis will report the existence or not of power market i.e. it is not defined directly, but through the consequences of the interrelations within the market.

The indirect assessment of market power usually is made in three consequent steps: “First, the relevant market has to be defined. Then, the firms’ market shares have to be determined. Finally, the market shares have to be interpreted, taking into account the competitive conditions prevailing in the market in order to establish whether a dominant position exists, or if it is strengthened or being abused”.Since the delineation of the relevant product market is one of the most important points to determine the market by itself, it is considered also as the starting point of the market power assessment. Hence the importance of a conscientious definition of the product since a mistake in this element would imply an error on further analysis.

3. Determination of relevant product market: substitutability

The main criterion used for defining the relevant product market is its substitutability with other products with similar or the same characteristics. As a general rule, a bigger similarity between products implies bigger substitutability (e.g. mineral water can be easily substituted with natural water), and products with a considerable differentiation are unlikely to be substitutable between them (e.g. technological markets leaded by innovators).

According with some authors the following factual criteria can be applied to determine the substitutability of a product:

1. Functional interchangeability, defined if one product has physical or technical similarities that cover the same functions of another product.
2. Reactive interchangeability, that applies in the case of products that fulfill the functional first aspect defined above. In that case, it is necessary to define how costumer would react to small but significant changes in prices i.e. if the will switch to products with similar functionality.
3. Barriers to substitution, assuming that the first two requirements are complied, three barriers must be considered:

• • Differences in the capacity of distribution between the products;
  • Whether any of the products are generally sold with complementary products that imply extra transactions for the costumer switch the product; and,
  • Whether any of the products require additional investment for the switch.

Another imperative criterion that must be taken into account is the price differentiation between the products that will determine the principal motivation for switching between substitutable products.

Applying the lines explained above, the analysis will appreciate how the demand will react before a Small but Significant Non-Transitory Increase in Price (SSNIP test). If costumers switch to another products with a price increase it means that the market is broader. The relevant product market will be define when the costumers stop of switching to other similar commercial options.

4. Interrelation with the relevant geographical market

Traditionally the definition of the relevant product market was before defining the geographical element in order to complement the study in two steps. Nevertheless, the analysis carried in this way usually presents some limitations for defining accurately the market since product switching is studied regardless the geographical factor tending to overrate the latter.

For solving this problem, currently both, product and geographical relevant market are considered simultaneously, considering the options of the costumers as a whole. Thus, “the geography cannot be ignored completely in delineating the product dimensions of markets. One can consider product substitution apart from geographic substitution, but product substitution must be evaluated in the context of the economic environment of the relevant region [...] The product and geographic dimensions of markets are closely related and cannot be considered in isolation”.