Understanding market definition is the essential first step in almost every EU competition law analysis. Whether the issue is an alleged cartel, an abuse of dominance, or a merger, the European Commission and the courts begin by a asking a deceptively simple question:
What is the relevant market?
This post breaks down the concept with clarity, case law, and practical insight – giving students and early career practitioners a solid foundation for deeper study.
Why Market Definition Matters
Market definition is not an abstract exercise. It directly shapes the outcome of a competition case.
It determines:
- Market power – does the firm face competitive constraints?
- Dominance – is the firm able to behave independently of competitors and consumers?
- Competitive effects – Will an agreement, practice or merger harm competition?
A narrow market can make a firm appear dominant; a broad market can make the same firm look competitively constrained. Getting this step right is therefore crucial.
The Legal Framework
The Commission’s approach is set out in the Market Definition Notice, https://eur-lex.europa.eu/eli/C/2024/1645/oj/eng which emphasises substitutability – the idea that products belong in the same market if consumers (or suppliers) can switch between them easily.
Two dimensions are assessed:
(a) The Relevant Product Market
This captures all products or services that are interchangeable or substitutable from the consumer’s perspective.
Key factors:
- Product characteristics
- Intended use
- Price levels
- Consumer preferences
(b) The Relevant Geographical Market
This covers the area where competitive conditions are sufficiently homogeneous.
Key considerations:
- Transport costs
- Regulatory barriers
- Trade flows
- Localised consumer preferences
The SSNIP Test: A Conceptual Tool
The SNNIP test (Small but Significant Non-transitory Increase in Price) asks:
Would a hypothetical monopolist profitably raise prices by 5-10%?
If consumers would switch to alternatives, the market must be broadened.
If they would not, the market is correctly defined.
Although rarely applied mechanically, the SNNIP test provides a structured, economics-based framework for thinking about substitutability.
Demand Substitution: The Primary Constraint
Demand substitution is the most important factor in market definition.
Questions the Commission asks:
- Would consumers switch to another product if prices rose?
- How quickly and at what cost?
- Are products perceived as close substitutes?
Case examples: United Brands https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:61976CJ0027
The Court held that bananas formed a separate market from other fresh fruit because of their unique characteristics (softness, convenience, year-round availability) and consumer perception.
This remains the classic illustration of how consumer behaviour shapes market boundaries.
Supply Substitution: A Secondary Constraint
Supply substitution considers whether producers could quickly and easily switch production to compete with the firm in question.
This is only relevant when:
- Switching is feasible within a short period
- Costs are low
- No significant regulatory or technical barriers exist
If these conditions are met, additional suppliers may be included in the market.
Market Power and Dominance
Once the market is defined, the next step is assessing market power:
Indicators of market power:
- Market share (40%+ often suggests dominance, but context matters)
- Barriers to entry (legal, economic, technological)
- Countervailing buyer power
- Network effects (especially in digital markets)
Case example: AKZO https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:62007CJ0550
A market share above 50% was considered strong evidence of dominance unless exceptional circumstances applied.
Challenges in Digital Markets
Traditional tools like the SNNIP test can struggle in digital markets where:
- Prices are zero
- Products are multi-sided (e.g., platforms)
- Data is a key competitive asset
- Network effects create “winner-takes-most” dynamics
The Commission increaslingy relies on:
- User attention metrics
- Data access and control
- Ecosystem lock-in
- Switching costs
This reflects a shift from priced-based analysis to functionality, interoperability, and user behaviour.
Case Law Highlights
United Brands (1978)
Defined a narrow product market based on consumer perception
Hilti (1994) https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A61992CJ0053
Found separate markets for nail guns, cartridges, and nails – showing that complementary products may form distinct markets.
Microsoft (2007) https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:62004TJ0201
Recognised the importance of interoperability and network effects in defining markets for software products.
These cases illustrate how market definition evolves with economic realities.
Practical Tips for Students and Practitioners
- Always start with consumer behaviour – what do users actually switch to?
- Avoid assuming markets based on industry labels; look at functional substitutability.
- Remember that market shares only matter after the market is defined.
- In digital markets, think beyond price: consider data, ecosystems, and user lock-in.
- Use case law to anchor your analysis – courts value structured reasoning.
Conclusion
Market definition is the analytical foundation of EU competition law. It shapes the assessment of market power, dominance, and competitive effects across Article 101 and 102 TFEU, merger control, and even state aid.
By understanding how markets are defined – and why – you gain the tools to analyse any competition law problem with clarity and confidence.
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