CLIP of the month: The new EC Notice on Market Definition addresses approaches to two-sided platforms, digital ecosystems and pharma


On 8 November, the European Commission (EC) issued a draft revised Market Definition Notice for consultation.  The revised Notice incorporates new specific guidance on defining markets for innovation markets, pharmaceuticals, two-sided platforms, after markets and digital ecosystems.  If adopted it will replace the existing Market Definition Notice, which is almost 25 years old. The consultation runs until 13 January 2023.  

General Principles 

To a large extent, the general principles set out in the revised Notice are unchanged.  Market definition is a “tool” for defining the boundaries of competition between undertakings and its main purpose is to identify “immediate competitive constraints” in a systematic way.  Identifying the extent to which customers can switch easily to readily available substitute products (demand substitution) remains at the core of that process.  

However, there are interesting differences of emphasis.  The revised Notice downplays the importance of both market definition and the calculation of market shares.  Market definition is “not a mandatory step in all assessments” and “market shares may be less relevant” where products are differentiated. 

It also downplays the centrality of competition on price and, consequently, the SSNIP (small but significant non-transitory increase in price) test as the sole or main measure of competitive constraints.  The EC is “not obliged” to rely on a SSNIP test and while market definition “usually” focuses on reactions to price increases the EC can also consider changes in other competitive parameters.  Where products are supply at a zero monetary price, the EC may apply an alternative significant non-transitory decrease of quality (SSNDQ) test.  Sustainability, security and privacy are all mentioned as potential parameters of quality competition, reflecting some of the Commission’s wider goals and changes to ways of doing business since the existing Notice.   

Innovation and Pharma Markets 

Market definition in relation to innovation and tech is a significant theme in the revised Notice, with references throughout the document and a separate section on industries involving significant investments in R&D.   

The need to take account of the “specific factors” in industries characterised by frequent and significant investments in R&D is recognized.  Among others, where technological progress leads to “structural market transitions” that affect the general dynamics of demand and supply, the EC may adopt a “forward-looking assessment” if that is relevant to its assessment.  In a pharma context, this may lead to widening the market to include pipeline products or narrowing the market to a single molecule where the entry of a generic alternative is imminent.   

The revised Notice emphasises that while innovation is a “key parameter of competition” the results are inherently “largely uncertain”.  As a result, it seems that the EC will cast its net widely to factor in all potential outcomes “in particular those scenarios where competition would be significantly affected”.   

Two- and Multi-sided Platforms  

Two-sided (or multi-sided) platforms are businesses  that support interactions between different groups of users, creating a situation where the demand from one group of users has an influence on the demand from the other groups.  Many digital platforms – Google, Amazon, etc – operate in this way.  

The revised Notice identifies two basic approaches to market definition for such platforms.  First, defining a single market for all the products offered by the platform that encompasses all user groups.  (Interestingly, this approach was rejected in the recent CAT judgment upholding the appeal against the CMA’s Compare The Market decision.) Second, defining separate relevant markets for the products offered on each side of the platform.  Where there are different substitute products on the different sides of the platform, the revised Notice suggests that the second option is likely to be appropriate.  

After Markets and Digital Ecosystems 

So-called ‘after market’ situations arise where the purchase of a primary product (such as a printer) leads to the consumption of secondary products (compatible printer cartridges).  Digital ecosystems can, according to the revised Notice, be thought of as similarly consisting of a primary core product and several secondary (digital) products.   

Three possible approaches to market definition in such situations are identified:  

  1. a system market – covering both the primary and secondary products;  
  2. dual markets – a primary market plus a single, separate secondary market; or  
  3. multiple markets – a primary market plus multiple secondary markets, one for each brand of primary product.   

Following much of the established case law, the revised Notice suggests identifying multiple markets may be appropriate where customers are locked-in to using only a restricted set of secondary products.  However, it takes what appears to be a relatively liberal approach to the circumstances in which defining a systems market may be more appropriate.  In addition to established cases (where customers take account of whole-life costs or the cost of secondary products is high compared to the primary product), the revised Notice suggests situations where switching costs are lowered by a high degree of substitutability between primary products, or there are no (or few) independent suppliers of secondary products.  However, as we discussed in our earlier piece here, the recent judgment of the Court of Justice in Google Android may make life difficult for parties seeking to argue for a systems market approach, at least as regards digital ecosystems.