Achilles uncovered: revisiting the European Commission's 1997 market definition notice.

I. Introduction

Often, in competition law disputes it is the delineation of the relevant product and geographic market that signals their final outcome. (1) This is particularly true when antitrust, alike under European law, focuses heavily on market shares. (2) As the number of products (or services) included in the assessment expands, and the geographic area considered widens, chances dwindle for finding market shares large enough to warrant regulatory intervention. A market defined too narrowly will result in unnecessary meddling on behalf of the antitrust authorities, while a market defined too broadly will cloak real competitive problems. Ultimately, identifying markets is part of a decisionmaking structure. This implies that market boundaries are drawn subject to the underlying issues as related to the market position of the actors participating in that activity. To avoid negative outcomes, European competition policy cannot afford to neglect the topic of market definition.

For a long time, however, scant attention was paid to producing useful, predictable, and economically sustainable methods and techniques to that end, which could then also be applied in antitrust practice. Rather, it appears that the European regulators had resolved the markets of relevance in a pragmatic manner, leading to allegations that the outcome of the market definition exercise had been predetermined by a desire to prohibit (or, alternatively, allow) business behavior rated as potentially distortive (or supportive) of the competitive process. (3) This line of argument as adopted in the decisional apparatus was repeatedly considered defective by economic commentary; while legal commentators could convincingly argue that the economics profession had effectively disregarded the task of identifying market boundaries. (4)

Recently, incipient changes to this unsatisfactory situation may be discerned, as the European Commission (the Commission) issued its notice on the definition of the relevant market in late 1997. (5) The notice refers to theoretical insights gained in industrial economics and mentions a range of econometric techniques helpful in delineating the relevant market. Integrating the legal and economic disciplines into a coherent approach remains a difficult task, however, even in domains like competition law, where the presence of economic analysis is most pronounced. As a consequence, this article will show that the Commission's notice (while still failing to deliver the desired clarity and suffering from a range of inconsistencies) constitutes a real leap forward.

First, the article provides a brief overview of how economic thinking on market definition has evolved. It also considers the impact of a growing body of criticism of the core market share approach, which challenges its ability to indicate the market actors' relative power. The article aims to be instrumental in outlining the current discussion surrounding the Commission's notice, the evaluation of which is incorporated into the second section. Highlighted is the notice's combination of established legal standards and modern industrial economic perceptions, along with the Commission's dealings with quantitative techniques to enumerate the necessary assessment criteria. The findings thus derived are then illustrated in the final section, in discussing some of European law's more high-profile cases. In referring to the U.S. experience, it is shown how sensibly handling economic arguments and econometrics can alter and improve a competitive dispute's outcome.

II. Perceiving relevance in market definition

Market definition is discussed as a tool designed for use in identifying market power. The standard economic concern, therefore, interprets an increase in market power as an increase in the Lerner index. (6) A monopolist sets its price at that point on his demand curve, where marginal cost equals marginal revenue. The Lerner index formalizes this concept of market power as the setting of price in excess of marginal cost, by measuring the proportional deviation of price at the firm's profit-maximizing output from the firm's marginal cost at that output. As a result of the traditionally limited applicability of the marginal cost concept, antitrust economics has primarily focused on the elasticities of demand as a detour leading to determining market power. (7) The initial starting point is to distinguish between the elasticity of demand for a product (8) and the elasticity of demand a firm faces, the former referring to the impact of the change in price on the market's demand, the latter also including any changes in demand for the product following a price rise that is due to induced changes in the price of competing products.