18 February 2016

European Commission publishes report on geographic market definition in merger control

On 16 February 2016, the European Commission (Commission) published a report by the Centre for Competition Policy at the University of East Anglia (Centre for Competition Policy) which assesses its recent practice of geographic market definition in merger cases. The study reviews ten cases between 2008-2014, including the Western Digital/Hitachi (2011) and Glencore/Xstrata (2012) mergers.

For each case, the report was asked to evaluate: (i) the Commission’s geographic market analysis in terms of the methodology used and conclusions reached from the available evidence; (ii) how the Commission incorporated constraints from outside the geographic market in its competitive assessment; and (iii) whether a more flexible approach to supply-side substitution could have been considered, and whether such an approach might have changed the outcome of the case.

The Centre for Competition Policy found that there is “no evidence that the Commission’s approach to geographical market definition is leading to poor merger decisions” and made the following main observations:

  • the Commission’s general approach to geographic market definition set sufficient parameters for competition analysis, being well-evidenced and broadly drawing on the Commission's Notice on the definition of relevant market (OJ 1997 C372/5);
  • appropriate consideration is generally given to competitive constraints external to the market;
  • the Commission typically draws on a wide range of evidence, rarely relying on one decisive item of evidence for its decisions. Where a more narrow approach is taken, this can be explained by the lack of data available and the decision taken by the parties concerned to focus resources and attention on what is available; and
  • the Commission does not need to adopt a more flexible approach to supply-side substitution. Market shares within the geographic market as defined in the Commission's Notice on the definition of relevant market are more appropriate than any wider definition.

Nevertheless, the study does find that the Commission’s approach has room for improvement. Importantly, it recommends that the Commission provides greater clarification that market definition is only an “intermediate and non-decisive” consideration in merger control assessment. In the cases considered, the parties placed unnecessary emphasis on arguing for a wider geographic market definition where this would lead to the undertakings concerned having a lower market share, under the impression that this would raise fewer competition concerns. The report suggests that the Commission should underline the fact that it takes a more substantive approach than this and readily considers factors such as barriers to product switching and ease of market entry. In our view, such clarification would be welcome for two reasons. First, this is in line with the holistic approach taken by other competition authorities, as observed in the UK Competition and Markets Authority's recent Whittan/Apex merger decision, which involved two undertakings with high market share. Second, it is not only the parties which sometimes need reminding that market definition and market shares are not the "be all and end all” of competition analysis, but also the Commission’s own case team.

As to its observations on supply substitution, the Centre for Competition Policy concluded that under the Commission’s Notice on market definition, supply substitution should only be used to expand markets where “most suppliers are active across a number of geographic areas and able to switch production across them in the short term without incurring significant additional costs or risks in response to small and permanent changes in relative price.” The current approach of adopting a narrow geographic market definition should continue to be the standard approach, with appropriate weighting given to imports from outside the geographic market as a competitive constraint.

Other recommendations from the report include: (i) the use of isochronic analysis of geographic markets where the relevant market is a geographic area spread across the borders of different Member States but may not include an entire Member State; and (ii) a greater analysis of the concept of time so as to give appropriate consideration to factors such as price and exchange rate fluctuations. Commentators will look on with interest to see the extent to which the Commission takes account of such recommendations from the report in the coming months.

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