1. Concept and importance

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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. 

2. Market indirect definition

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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.

3. Determination of relevant product market: substitutability

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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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1. Functional interchangeability, defined if one product have has physical or technical similarities that cover the same functions of another product.
2. 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.
3. Barriers to substitution, assuming that the first two requirements are complied. Three , three barriers must be considered:

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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

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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”.

5. Leading cases and decisions on the EU:

Some EU cases shows the definition of relevant product market within the economic territory of the Union:

5.1. Physical characteristics of the product or service and intended end use:

• Case No. IV/M. 190 - Nestlé/Perrier (Official Journal L 356, 05/12/1992 P. 0001 - 0031).

• Case 27/76, United Brands Company and United Brands Continentaal BV v Commission of the European Communities. Chiquita Bananas case. (European Court Reports 1978 - 00207).

5.2. Product prices:

• Case No IV/M 057 - Digital-Kienzle.

• Case No. IV/M053 - Aerospatiale-Alenia/de Havilland.

• Case No COMP/M.2609 – Hewlett Packard / Compaq

• Case No IV/M.1524 – Airtours /First Choice.

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