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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.
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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.
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The relevant product market is an important element of the indirect definition of market power. Since a direct assessment the same implies several condition conditions that are difficult to fulfill on modern economies (e.g. very stable situations for estimate estimating the elasticity of the residual demand function), an indirect approach to market definition is necessary to an 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 are has to be applied for determine determining whether it have 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 its relations the interrelations within the market.
The indirect assessment of market power usually is made in three consequents 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.
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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).
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- Functional interchangeability, defined if one product have has physical or technical similarities that cover the same functions of another product.
- Reactive interchangeability, that apply 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.
- Barriers to substitution, assuming that the first two requirements are complied. Three , three barriers must be considered:
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