Market Definition

Market definition is a widely applied analytical framework to examine and to evaluate competitive concerns. The relevant market should be defined in a way such that the competitive constraints a firm faces, i.e. demand and supply side substitution, are captured as accurately as possible. The relevant market is usually defined by applying the hypothetical monopolist test (also known as the SSNIP test), according to which a ‘market’ comprises all the products and regions for which a hypothetical profit maximising monopolist would impose a Small but Significant Non-transitory Increase in Price. Market definition serves several purposes in identifying the scope of competition in a market. The main goal of market definition is to assess the existence, creation or strengthening of market power, which is defined as the ability of the firm to keep the price above the long-run competitive level. The market shares of the respective firms provide an indication of market power. Market definition also facilitates the identification of relevant competitors and is useful in evaluating the risk of potential co-ordinated effects in mergers. In addition, identifying the area of competition allows other relevant competition issues to be examined, such as potential barriers to entry. Even when the necessary data to perform the hypothetical monopolist test are not available, this test provides a coherent conceptual framework to define the relevant market. The importance of market definition also extends beyond its role in analysing competition concerns: the concept is used as a basis for calculating fines, for estimating the effects on trade between EU member states and has served as a procedural model for other areas of law.