Concept and significance of market definition
Die Market Definition is a central term in competition and antitrust law. It describes the determination of the relevant market in which companies operate or compete with each other, based on legal and economic principles. Precise market definition is necessary to assess the effects of anti-competitive conduct, mergers, as well as the extent of market power and competition intensity.
Function and significance in competition law
Market definition is an essential prerequisite for the application of key antitrust law provisions, especially in connection with merger control and the oversight of abuse by dominant companies (§§ 18 ff. GWB, Art. 102 TFEU). It establishes the framework within which market shares are calculated and market power is determined.
Purpose of market definition
- Assessment of market position: Assessing whether a company holds a dominant position requires the prior definition of the relevant market in terms of product, geography, and, if necessary, time.
- Examination of mergers: In the context of merger control, market definition is needed to forecast potential competitive effects.
- Analysis of competition restrictions: Determining antitrust infringements or the abuse of a dominant position requires the definition of the affected market.
Components of market definition
Market definition takes place in three stages, considering the product, geographic and, if applicable, temporal relevant market.
Product Market Definition
Product market definition determines which goods or services are considered interchangeable or substitutable. The starting point is customer demand, supplemented by functional, technical, and price similarities. Substitutability is often checked using the SSNIP test (Small but Significant Non-transitory Increase in Price): Are there enough customers who would switch to a comparable competitor if the price of the product were raised by a small percentage?Criteria for product market definition:
- Needs- or demand-oriented approach: Substitutability from the perspective of consumers.
- Supply-oriented approach: Taking into account the ability to quickly switch the supply.
- Product characteristics: Technical, physical or functional properties.
Geographic Market Definition
Geographic market definition describes the geographic area in which companies are in competition. The crucial question is to what extent buyers and sellers meet in a particular area and whether competition takes place nationally, regionally, or internationally. This can vary depending on market structure, logistics costs, regulations, or customer preferences.Relevant aspects:
- Transport and delivery costs
- Linguistic or legal barriers to market entry
- Regulations and customs barriers
Temporal Market Definition
In special cases, temporal market definition may also be required, such as for seasonal markets (e.g., Christmas trees, harvest products) or markets with specific supply and demand situations.
Legal basis for market definition
European law
In European law, market definition is of particular importance for the application of Art. 101 and Art. 102 TFEU as well as the Merger Regulation (Regulation (EC) No 139/2004). The European Commission has issued its own notice on the definition of the relevant market in the sense of competition law (Commission Notice on the definition of the relevant market for the purposes of Community competition law, 1997/C 372/03).
German law
In German law, market definition is regulated in §§ 18, 19 GWB (Act against Restraints of Competition). It distinguishes between relevant product, geographic, and, if necessary, temporal markets to enable appropriate interventions such as merger control (§§ 35 ff. GWB) or abuse control (§ 19 para. 4 GWB). The case law of the Federal Court of Justice and the practice of the Federal Cartel Office regularly refer to these definitions.
Methods and procedures of market definition
Demand-side substitutability
The SSNIP test is the main methodical tool to examine demand-side substitutability. It simulates whether customers would switch to substitute goods in response to a price increase.
Supply-side substitutability
In addition to the demand side, the supply side, that is, the ability and willingness of companies to switch to a market and offer products in the short term, can also be considered for market definition.
Market analyses and empirical procedures
Market studies and empirical data, such as price trends, demand volumes, or customer surveys, are regularly used as evidence for market definition.
Significance in merger control and abuse supervision
Merger control
In the context of company mergers, market definition serves to assess the impact of the merger on the market structure, especially regarding the creation or strengthening of a dominant position (§ 36 GWB, Art. 2 para. 3 ECMR).
Abuse control
Abuse control examines market-related conduct of a dominant company for consistency with antitrust law. Here, too, market definition is a prerequisite for determining market power.
Case law and practice
Market definition is carried out by authorities such as the Federal Cartel Office, the European Commission, and the courts using the above-mentioned methods. It is often the subject of extensive economic analyses and is adapted to market conditions on a case-by-case basis.Important judgments and decisions:
- ECJ, Case 27/76 – United Brands/Commission: Landmark decision on the criteria for product market definition in the European Union.
- Federal Court of Justice, Decision dated 6 November 2001, KVR 25/00 – Gasversorgung Süddeutschland: Definition and application of geographic market definition.
Relevance and current developments
The importance of market definition has increased with digitalization and the emergence of new markets, especially in the platform sector and data economy. New business models partly challenge traditional market definition logic and require an adaptation of established methods to digital markets, network and platform effects.
Literature and further information
- Federal Ministry for Economic Affairs and Energy (ed.): Act against Restraints of Competition, Commentary.
- European Commission: Notice on the definition of the relevant market for the purposes of Community competition law (97/C 372/03).
- Federal Cartel Office: Guidelines on market definition.
This article provides a comprehensive overview of market definition in a legal context and discusses its fundamentals, legal basis, methods, and practical significance, including current developments.
Frequently Asked Questions
Which legal methods for market definition are applied in practice?
The legal market definition is primarily guided by competition law requirements, especially under German and European antitrust law (esp. § 18 GWB and Art. 102 TFEU). Common approaches include the needs market method, the functional substitution test, and the so-called SSNIP test (“Small but Significant and Non-transitory Increase in Price” test). Legally, this defines which products, services, or regions are considered interchangeable by checking whether sufficient competitive pressure exists. Courts and competition authorities use economic analyses, demand and supply elasticities, as well as empirical data on buyer behavior. It is crucial that the definition enables competitive and abuse analyses and serves as a basis for antitrust investigations and decisions.
What is the role of market definition in merger control proceedings?
Market definition is a central element in the legal examination of company mergers. It determines in which market the effects of the merger need to be assessed. According to § 36 GWB and Art. 2 ECMR (Merger Regulation), it is examined whether the merger results in the creation or strengthening of a dominant position. Accurate determination of the relevant product and geographic market is therefore a prerequisite for assessing the market power of the companies involved and evaluating competitive effects such as price increases or restrictions on competition. Incorrect market definitions can lead to incorrect assessments and thus to unlawful approvals or prohibitions. The reviewing authorities are obliged to define the market methodically and comprehensibly.
How are digital markets legally defined?
Digital markets present special challenges for market definition due to strong network effects, multi-sidedness, and complex platform behavior. Legally, the focus is on the interchangeability of platforms, services, or digital technologies. Important aspects include user switching costs, interdependencies between user groups, and the significance of data as a competition factor. German and European case law as well as authorities (e.g., Federal Cartel Office, European Commission) follow specific guidelines to adapt market definitions to the particularities of digital platform markets. Parameters such as access restrictions, interoperability, and innovation dynamics are considered.
What is the significance of geographic market definition in antitrust law?
Within the framework of geographic market definition, it is legally examined on which geographically defined markets companies are actually competing. This is essential because competitive conditions can vary regionally. Authorities usually define a local, national, or international relevant market, referring to factors such as transport costs, government regulation, consumer preferences, and market structure. For example, the sales market for fresh milk may be limited locally, while the market for electronic components is defined globally. Geographic market definition determines the scope for competition law interventions and is particularly important for mergers, abuse proceedings, and sector inquiries.
Can companies legally challenge market definition?
Companies can challenge market definition in antitrust proceedings, both in investigations before competition authorities and in main judicial proceedings. This is often done by submitting economic expert opinions arguing for alternative or different market definitions. Authorities are legally obliged to provide a comprehensible and factual reasoning for their market definition. Companies can challenge methodological errors, data basis, or assessment standards. Courts review the authorities’ decisions from a legal perspective, recognizing an assessment margin but not allowing errors of discretion, procedural errors, or significant factual errors.
What binding effect does market definition have in subsequent proceedings?
The market definition undertaken in the context of an investigation, merger, or abuse proceeding generally does not have an absolute binding effect for other proceedings. Instead, each proceeding requires a case-specific market definition, as relevant circumstances, legal frameworks, or market dynamics may have changed. However, there is a de facto precedent, especially where the facts and market structures remain identical. In practice, authorities and courts may refer to earlier market definitions if they are still appropriate for the current case and no relevant changes have occurred.
What evidence and data are relevant in the context of legal market definition?
Various types of evidence and data should be considered in the context of legal market definition. Key materials include market research studies, empirical demand data, company revenues by product group and region, price developments, supply and demand substitution tests, and internal company documents (e.g., marketing materials, sales statistics). In addition, statements from market participants (e.g., customer surveys, comments from competitors) play a significant role. Authorities comprehensively evaluate this evidence and also use econometric models to make well-founded and robust decisions regarding market definition.
