The arbitrariness of market definition and an evolutionary concept of markets.
Market definition is highly relevant in European case practice in competition law. Yet the tools and also the concepts are far from being very sophisticated. The critique of market definition by Richard Markovits is far-reaching: not only is market definition arbitrary, but current approaches also have an in-built bias towards a static snapshot understanding of the economy. Yet it would be wrong to give up this important step in antitrust analysis, since otherwise antitrust loses its function as the fundamental set of governing rules for markets. Instead, it is necessary to develop a more evolutionary concept of markets.
market definition, SSNIP-test, dominance, evolutionary approach
I. Market Definition--A Base Without Superstructure
At an international competition law conference, I recently heard a puzzling statement that crossed my mind when I read Richard Markovits's comments on the arbitrariness of market definition. At this conference, I came to sit next to an esteemed lawyer. We found out that in former times we had been in the backseat of case teams in the same competition matter. At the time, he was an associate with an international law firm, and I was a junior case handler at the German Federal Cartel Office. Our case had been on abuse of dominance under Art. 102 of the Treaty on the Functioning of the European Union (TFEU) and dealt with the practices of a company called Soda Club: Germans love to drink tap water (and they luckily can since it is clean enough), but they love to have it with bubbles. Soda Club catered to this desire by producing and distributing soda-carbonating machines. The Soda Club kits allow you to pump carbon dioxide into bottles filled with tap water. The kits include an empty bottle, the pumping machine, and a gas cylinder filled with C[O.sub.2]. These cylinders need a refill from time to time or need to be exchanged. Such refills are easy to handle; basically, every retailer, gas station, or supermarket could be in that business. Soda Club, however, tried to monopolize the refills--at least that was the accusation made by others in the refill realm. The competition authority also thought that Soda Club was dominant on the market for carbonating kits and stifled competition on the secondary market for refills by abusing its dominant position. (1) One of the many litigious questions of this small but significant case was the market definition. Is there a market for the refilling of small gas cylinders for the use in carbonating machines? Or is Soda Club in the business for drinking water? Possible definitions ranged this far. If the market was defined in the latter way, Soda Club would have been a competitor of the Coca Cola Company and the likes, with an insignificant market share. In market definitions focusing on the carbonating kits, the market share was above 50% with few relevant competitors. Do customers switch to prepacked bottled sparkling water when the price for a refill is increased? Do they decide for a lock-in-system of carbonating water when buying the Soda Club kit? Or is there a distinct market for the refill of such cylinders? The advocate said: "We were so frustrated since the authority's case team never accepted modern methodology to delineate the markets." He thought we had ignored the SSNIP (small but significant non-transitory increase in price) test and other tools that were relatively new those days. Then we wondered whether it would have made a difference if different tools had been applied by the Federal Cartel Office. We were not so sure.
Ever since, I have wondered about market definition. On the one hand, the difference in result has enormous impact in practice. If Soda Club competes with prepacked bottled water, its market share is insignificant. If Soda Club acts on a market for these specific refills, it is a dominant company limited in its freedom to act by the provisions in Art. 102 TFEU. (2) On the other hand, this impact was not reflected by the state of methodology. There was no established approach to market definition and no sophisticated reflection in theory.
The German Supreme Court that had to rule on the Soda Club case decided in favor of the narrow market definition by the Office. Regarding the claim that Soda Club offered a whole, lock-in system, the Court said:
If through the choice of a system for long-term use a specific need for further supply is aroused, the definition of the product market primarily depends on the alternatives regarding the supply material for a customer who has decided in favor of that system. A different system usually does not constitute an alternative for the supply materials. (3)
And with a view to the claim that the refills are in competition with prepacked bottled sparkling water, the Court denounced the SSNIP test:
The SSNIP-test ... is a model that may be of help for market definition but cannot define the market as an exclusive criterion. The test is of little value when--as is often the case when the abuse of a dominant position is examined--it is not guaranteed that the initial price was determined under competitive circumstances. (4)
The Court, in few words, denounced the major tool for market definition and decided the system- or independent refill-question in a direct, yet barely argued way. The example may illustrate that market definition is the base of abuse cases (and other cases as well), yet lacks a theoretical "superstructure"--a conceptual framework that structures the process of defining markets in a theoretically well-founded way, thereby providing legal certainty. In one of the most important fields of antitrust law, there is a certain conceptual vacuum.
II. The Current Approach to Market Definition
At present, European competition law is heavily based on the assessment of market power, and therefore market definition is a necessary prerequisite for the decision of many cases: abuse cases rest on finding a dominant position in the relevant market; in merger control, high market shares are still the leading indicator for the impediment of competition; and in cases of restrictive business agreements, market shares come into play in order to assess the appreciable effect of agreements and to find whether an exemption is possible. The market structure approach is still dominant in European competition law. (5)
I. The European Commission's Instrumental View
But what is the exact purpose of market definition? What do we really want to describe in words when defining a market--the concept of market being a construction of the mind, not a snapshot from reality. The European Commission gave the following idea:
Market definition is a tool to identify and define the boundaries of competition between firms. It serves to establish the framework within which competition policy is applied by the Commission. The main purpose of market definition is to identify in a systematic way the competitive constraints that the undertakings involved face. The objective of defining a market in both its product and geographic dimension is to identify those actual competitors of the undertakings involved that are capable of constraining those undertakings' behavior and of preventing them from behaving independently of effective competitive pressure. (6)
Three of the four sentences have exactly the same message: with a market definition, it is possible to survey the competitive situation of a company. The market, in this case, accordingly, is seen from the subjective perspective of the undertaking involved. The second sentence of this paragraph however indicates differently. Here, market definition establishes a "framework within which competition policy is applied by the Commission," something much more neutral and objective, seen from the perspective of the Commission. So, in the same paragraph, the Commission mingles a subjective approach (the market as felt by the company) with an objective one (the market as evaluated from a neutral, bird's eye perspective). (7)
In the process of concrete determination of the market, the Commission allegedly establishes the boundaries of the objective market, naming the product, the geographical area and the temporal dimension. Yet it applies a test of substitutability of products from a customer's perspective.
Consumers are asked what products or services they see as substitutes to the product or service in question. This concept of interchangeability was acknowledged by the European Court of Justice in United Brands, for instance, when the question was whether bananas are interchangeable with other fruits. The Court held that "for the banana to be regarded as forming a market which is sufficiently differentiated from other fruit markets it must be possible for it to be singled out by such special features distinguishing it from other fruits that it is only to a limited extent interchangeable with them and is only exposed to their competition in a way that is hardly perceptible." (8) So, interchangeability, substitutability from a customer's perspective, is the yardstick to find out whether bananas are like oranges. This has been held explicitly in the European Commission's Notice on the definition of relevant market: "A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products' characteristics, their prices and their intended use." (9) The methodology for determining interchangeability is embodied in the SSNIP test, testing customers' behavior in case of a small but significant, nontransitory increase in price. (10) This test favors neither the subjective view of the producers nor a more bird's eye approach of the neutral Commission: the SSNIP test elevates the consumer to being the umpire to decide upon the competitive restraints a company has to face.
All ideas of the European Commission regarding how to establish whether bananas compete with oranges are set into the context of the functions of market definition. The definition of markets is instrumental to the Commission only in order to establish market power; (11) it "is not an end in itself." (12) Massimo Motta, now the European Commission's chief economist in competition matters, put this in a very straightforward way: "Market definition is instrumental only to the assessment of market power." (13) Essentially, this means that the analytical step of identifying competitive constraints for a company does not have a value in itself but is undertaken only in order to find out whether the company meets the thresholds of market power that enable an intervention by the authorities. Put differently: market definition is dependent upon the structural approach in competition law, and it is a tool that may come out of fashion. (14) All criticism related to a structural approach to markets and market dominance concepts in particular can be directed against this concept of market definition as well--if it is just an instrument for this exercise.
2. Shortcomings of the Instrumental View of Market Definition
This instrumental view of market definition has several shortcomings. The most well-known challenge to the use of market definition is the cellophane fallacy: the price comparison exercise for controlling substitutability does not work properly if the price-sensitivity has already been corrupted by the presence of a dominant company in the market. The Supreme Court in the Soda Club decision based its denouncement of the SSNIP test on this problem. The European Commission acknowledges the problem in the Guidelines. (15) Yet if the major tool of market definition, the SSNIP test, does not work in cases with powerful companies, what then is left for this tool? And if this is the major methodological tool to define markets, what then is left for a systematic analysis of markets and for legal certainty so that companies may rely upon the methodology of the authorities?
Price-based tests also fail with gratuitous services. What is the relevant market if customers do not have to pay in a directly financial manner and are thus not susceptible to a price-based test? In an early case involving Google, the Court held that there was no relevant market for antitrust. (16) The "economics of free" is an important element in an economy with companies like Google and other multisided platforms. Looking only at the revenue-earning side of the enterprise seems implausible: it would ignore the main economic features of the platform economy. Yet the practical challenges to defining markets in such cases "are likely to be overwhelming in practice." (17) The European Commission's high-profile case on Google may serve as an example.
More generally, the SSNIP test and thus substitutability mechanisms in the classic sense do not reach meaningful results when price is not a key parameter in markets. As soon as other factors play a more vital role, such as quality, any price-based test will not reflect the decisions of market participants. This is a bias in favor of a static efficiency tendency in competition law: an end-consumer-oriented interpretation of competition rules places low prices into the center of concern for competition since the maximization of consumer welfare is the ultimate goal of competition law. A tool like market definition that is seen as "instrumental" to serve the goals of competition law (not being an end in itself) is liable to paving the way in the direction of an one-dimensional application of competition law: Using SSNIP makes you focus on price competition. Competition enforcers that aim at lowering prices consequently start the case analysis with a price-based test.
One other conceptual shortcoming of this approach to market definition lies in the decision to choose a consumer-perspective for defining markets and competitive constraints. The customer of a product or service has a limited view of what is available in the market. The customer is biased through experiences, sometimes kept in the dark as to what products could cost or perform or what progress may be made in the near future. The question put forward in the SSNIP test favors a short-sighted snapshot analysis, a static comparison of prices in scenarios that are not altered regarding other circumstances. This approach lacks any dynamic or evolutionary safeguards.
III. Markovits on Market Definition
A modern critique of market delineation in its current form is presented by Richard Markovits in his study of the economics of antitrust law. Markovits focusses on the 1992 U.S. Horizontal Merger Guidelines and reviews case law and theoretical approaches alike. While he mentions the 2010 U.S. Horizontal Merger Guidelines only from time to time, much of his criticism is still valid even though the Department of Justice and the Federal Trade Commission in the 2010 version accommodated many concerns: (18) concrete evidence plays a higher role, market-based concepts have less room, the variety of tools is expanded (if at the cost of legal certainty). The arbitrariness of market definition, a key factor for Markovits to criticize the whole analytical step, remains in place.
I. Arbitrary and Ineffective
His starting point is to set the yardstick for what market delineation should achieve. This is a fundamental insight of his: for critically assessing the tools employed in antitrust law, it needs yardsticks. This may sound trivial to some; yet in most instances, legal literature omits to reveal these yardsticks-if there are any that go beyond a mere practicality test. At least in Europe, tests or standards for the quality of decisions or tools are rarely discussed.
Markovits measures the value of market definition concepts with two fundamental standards: First, he asks whether market definition leads to non-arbitrary results in a classical ideal-type test:
Does ... [the market definition] fit or produce conclusions that fit ideal-type assumptions about the competitiveness of products that are placed in the same market and the difference between the competitiveness of products that are placed in the same market and their respective competitiveness with products that are placed in other markets? (19)
Secondly, from a functional perspective, market definition needs to be cost-effective. Economic tools need to stand the test of economics themselves, and thus Markovits asks whether the methods applied "play a useful role in a cost-effective approach to resolving some antitrust issue under U.S. or E.C./E.U. competition law." (20)
Measuring current antitrust approaches to market definition according to these criteria leads Markovits to negative results. Regarding the first criterion, he makes it utterly clear that assumptions made for market definition models need to be arbitrary. Here, Markovits goes into the nitty-gritty details beyond the more general stage of conceptualization: What is the minimum amount of sales to constitute a "market"? What is the necessary degree of competitiveness of products? It will be impossible to answer these and his other questions without some degree of arbitrariness. Accordingly, there may always be other market definitions that also fit the test of pairing competitive products in one market with a certain degree of insider-insider-competitiveness as opposed to other products in a different market.
The concerns regarding the second criterion may be even stronger: for a cost-effectiveness approach, the first step would be to identify the goals to be achieved. While this may be easy regarding the proximate goals (market definition as part of a procedure to avoid monopolization or a substantial lessening of competition), the ultimate goals are much harder to define: Is antitrust law about efficiency, consumer welfare, redistribution, freedom, economic integration? Even if it was possible, how would different goals be weighed, and how would errors be evaluated? What weight would be assigned to the problem that one way of defining markets may lead to errors? And so on--working with cost-effectiveness in the law leads to difficulties that render any functional or instrumental justification of a test absurd. As Markovits states himself: "[T]he process of defining such markets and calculating market-aggregated figures generates high costs and negative benefits--i.e. reduces the value of the non-aggregated data that is used to define the markets. Hence, market-oriented approaches to antitrust issues can never be justified functionally." (21)
The rigorous questions by Markovits do not only shatter the classic approach to market definition. Practically en passant he also lays bare the vulnerability of some of the concepts that are regularly applied in market definition--for instance, the integration of potential competition (22) or supply-side substitutability (23) in the market definition exercise or, more generally, the need to add more and more assumptions once the path of modelling concrete results has been entered. (24)
2. Alternative Approaches
This article is not meant to explain in detail Markovits's own approach. He proposes to solve cases by predicting the competitive impact without taking recourse to market definition and he therefore welcomes any movement into the direction of non-market-oriented approaches. (25) This is radical since many cases and instruments rest on market definition, starting with the concept of market power as a driving source of European competition law to Herfindahl-Hirschmann Index (HHI) calculations in merger control. A radical shift away from this may work if it is possible to operationalize models that simulate price competition theories or competition on quality and variety investment (QV investment competition).
As a "half-way move" to his idea of non-market-oriented competition law tools, Markovits urges to take a buyer-oriented view of markets instead of starting from the seller. (26) In fact, cases carry a seller bias since they get off with the accusation of a specific undertaking: when Soda Club or Google are in the focus of a competition investigation in a monopolizing case, market definition will rather automatically start from the product or service distributed by the undertakings in question. The problem identified above as the problem of too little dynamics and too little attention paid to potential different solutions finds its basis here, as rightly identified by Markovits: in the starting point with a concrete product in a concrete case. This is the trick with tools that are only used in an instrumental way in a nonnative setting: these tools usually produce the desired results, yet once the results are on the table it is forgotten that they are fabricated through the use of debatable tools. Applying a certain test does already involve a nonnative decision--a fact that should be taken into account at a later stage when the results of the test are taken for granted.
Other economists and the courts have not come up with superior concepts, according to Markovits. He discusses several ideas put forward by writers or in cases, and it turns out that most of these are a bit dated already--market definition has not been in the spotlight a lot. He concedes, however, that the courts do a fairly decent job, although they seem to lack the ability to express themselves clearly. It is intriguing to read how many different concepts and ideas Markovits found in court cases over the years. (27) At least in the U.S., judges do not seem to stick to one specific concept but vary methodologically.
To sum it up, Markovits's chapters on market definition present a comprehensive critique of a concept that lies at the heart of European competition law and is widely used in U.S. antitrust law. The analysis of markets is flawed conceptually; the basis for deciding cases is necessarily arbitrary. While Markovits acknowledges that courts often get it right in the end as far as the ultimate result of cases is concerned, (28) he also asserts that his criticism amounts to much more than a "researcher asking for footnotes at a cocktail party." (29)
IV. Towards an Evolutionary Concept of Market Definition
The fundamental critique of market definition prompts the question whether market definition should be taken out of the toolbox of antitrust law. I suggest that the tool has its values that go beyond the instrumental role assigned to it. This prompts the follow-up question how to deal with the inherent arbitrariness of market definition and its shortcomings. The answer lies in a more open concept of market definition that integrates evolutionary ideas.
I. Why Define Markets?
A growing number of scholars in the footsteps of Richard Markovits (30) and later Louis Kaplow (31) have questioned the need to define markets. Gregory Werden has answered the question on a technical level as well as on a conceptual one. (32) Yet the debate in U.S. antitrust law is more open than in Europe since the term "market" is not used in the U.S. statutory texts but is in the European treaties. In the Sherman Act, Section 2 speaks of the monopolization of "any part of the trade or commerce. " The Clayton Act, in Section 7, refers to a substantial lessening of competition "in any line of commerce or in any activity affecting commerce in any section of the country." The wording is not directly referring to markets or market definition, even though this has been the reading. The situation is different in the European Union. The European rules on competition law refer to markets or market shares explicitly in several instances:
* Art 102 TFEU, prohibiting the abuse of a dominant position, requires "a dominant position within the internal market or in a substantial part of it."
* Art 2 para 3 of the Merger Control Regulation sets as a criterion that a concentration "would significantly impede effective competition, in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position." And in Art 2 para 1 the Commission is asked to take into account "the need to maintain and develop effective competition within the common market in view of, among other things, the structure of all the markets concerned" and "the market position of the undertakings."
* The block exemption regulation on vertical restraints (Reg. 330/2010) is not applicable, according to Art 3, if the companies involved have market shares above a certain threshold.
These examples may suffice to prove that, at least from a pure legalistic European perspective, it is impossible at present to avoid market definition. Market power is still key to understanding the European approach to market.
Furthermore, legal steps of analysis usually have some intrinsic value, and that is the case with market definition as well. The step to delineate markets is a hurdle on the path to intervention. All the hurdles together form the pattern of a legal test for constituting an abuse of dominance or a significant impediment of effective competition and thereby raise the bar for enforcement and provide a minimum of legal certainty to parties. Those scholars claiming that market definition is just a means to an end do not only produce the criticism that market definition only delivers the results we put into the concept in the beginning. They also overlook that the law lives upon the carefully balanced arrangement of analytical steps.
Yet apart from the explicit wording and the more abstract argument on how norms are constructed, it is also justified to define markets from a more fundamental point of view. Markovits and others contend that competitive effects of the actions of companies can be better measured with other tools. Even if this is correct, market definition has a value that goes beyond its instrumental function for enabling authorities to intervene. Market definition is the step in antitrust analysis that informs parties, litigators, enforcers, and the public how in an official proceeding the economic reality is translated into the realm of normative value judgments. Werden speaks of "adding power to the antitrust narrative" (33) in cases, and I would even go one step further. It is not only of relevance to litigators in the concrete case who need an antitrust narrative. The narrative of antitrust law as a whole is the constitutionalization of economic behavior--asserting that on a very fundamental level there are some rules that need to be respected. In order to live up to this promise of antitrust law, it is necessary to translate business into law. This is what market definition is all about: it translates an economic reality (and maybe also a social and political reality) into the realm of the law. It puts the behavior of people into legal terminology so that lawyers in law firms, authorities, or courts can discuss this reality. As in all other litigious cases, antitrust law needs to establish a common reality for the parties in the courtroom. The facts of a case are essentially framed in a common language of the parties, giving the basis of the assessment. Most work in courtrooms and law offices is about producing a plausible reality that can be agreed upon by the parties involved in order to find a solution. If there is no agreement as to the facts as established in legal terminology as relevant for the decision of the case, the judge's version of reality or truth counts. Market definition is a translation tool in this sense: "Market" in the normative sense is a word of translation that brings a very complex reality into legal language, making it palpable for lawyers. Omitting market definition or fabricating it in an instrumental way so as to serve as a market-power-tool only rips it off the information it holds for economic and competition policy as a whole.
In essence, the difference between modern U.S. critics of market-oriented approaches and a more traditional European approach may have its very roots in the perspectives on antitrust law. The notion of "market" lies at the core of understanding the, well, market economy. Scholars favoring a market-oriented approach stick to the concept of antitrust law as the set of fundamental rules for governance of markets. They want to understand how markets work and how they may work better--an official claim of the European Commission's Directorate General for Competition: "making markets work better." (34) If, on the other side, antitrust is mainly seen as a tool to enhance consumer welfare, it may be more cost-effective to directly remedy situations of negative impact (as far as these can be identified) according to an effects-based analysis.
2. How to Define Markets
A modern approach to defining markets would nonetheless need to address the criticism put forward by Markovits and the shortcomings identified above. This requires a new understanding of what market definition is. I propose not to reduce market definition to being an instrument to establish market power but to see it as information about the facts of the case, as a normative selection of those facts that for lawyers make the economy palpable. Accordingly, the definition of what a market is needs to be adapted. On a most fundamental level, markets are all the aspects constituting the economic environment for a certain point of reference. Economic environment means the influences on offering goods and services in a nonprivate, nonpublic capacity. Attaching this to a point of reference makes clear that "market" cannot be an objective, all-encompassing concept but is subjective and relative to the persons or practices involved. I propose to work with this definition that makes it clear that the concept of markets goes beyond the preparation of the dominance test:
Market in the sense of competition law is the environment in which the behavior under investigation takes place, encompassing all factors that are relevant for shaping the decisions of the actors. (35)
Above all, this definition is open to gathering all facts that finally determine competition, including barriers to entry, upstream and downstream relations, or nonprice factors. It is pointed out with this definition that market is an encompassing term that translates the economic environment into a legal concept. The charm of this definition is that it puts at the center of competition law analysis the driving force of a free economy: autonomous decisions of individuals. Markets are constituted not by supply and demand but by the decisions to supply or to ask, to invest, or to spend. This highlights that markets are not forces that pressure companies into certain practices but that every independent entity has the power to decide for itself.
The definition is an open one since it does not instrumentalize the notion of "market" for a certain purpose. It gives enough room for putting forward all relevant aspects as a basis for further analysis. The market can be described in full terms. There is also no narrowing down to one specific actor, but the interplay of actors (which is typical for decision-making and contracting) is noted. It is also an advantage that there is not a single right approach for all markets. Instead, this definition offers the opportunity to have different factors that are of importance in different markets. Decisions on refilling gas cylinders may be different from decisions on programming search algorithms.
The definition is also an evolutionary one: (36) focusing on the decisions of the actors in the market necessarily entails a perspective of developments over time. Decisions express expectations that are formed through a mixture of past experiences, regulatory framework, risk affinity, rational choice, and constant change. Decisions do not take immediate effect but are rather the documentation of a process at a specific point of time. They also anticipate certain developments, are an expression of creativity, and trigger feedback effects. This leads to an evolutionary conception of markets that reflects the reality that actual markets evolve over time. The static-snapshot bias in market definition is overcome if such evolutionary perspectives (and patterns of decision-making processes) are taken into account. The dynamics of fast-moving markets may be better integrated into the analysis than in other models. The famous quote by Friedrich von Hayek that competition is a "discovery procedure" (37) is given credit with an evolutionary model: trust the autonomous decisions of the market players and not the expectations of those modeling reality.
Actually, such an encompassing, dynamic approach is not too far from the tool of sector inquiry in Art. 17 Reg. 1/2003, a specific instrument in European competition law that enables competition authorities to investigate the practices in sectors without the specific suspicion of wrongdoing by one company. In practice, the European enforcement agencies use this tool to understand markets and to see all the influences at play.
The facts selected for further analysis in such a market-definition process will probably not answer all deficits of current market definition. In particular, the arbitrariness argument of Markovits remains a forceful one. Yet whenever discussing economic transactions in courtrooms, and in particular whenever a government or court tries to remedy a situation perceived as problematic, this comes with a gross reduction of complexities. Claiming that it does not accurately reflect the complex economic reality is a truism. And still it seems necessary to me that this reduction of complexities takes place in order to enable lawyers to discuss economic cases. Only considering competitive impacts without a common understanding of the parties of the economic environment reduces complexities even further instead of taking up the challenge that the economy is a complex structure composed of autonomous decisions of individuals. Leon Walras had argued that the economy has to be seen as one market in its totality due to the many interdependencies that occur. (38) Chamberlin and Robinson, who introduced partial market analysis, reduced this complexity in order to analyze price-setting decisions. (39) Yet this did not mirror the economy as a "phenomenon of organized complexity." (40) Yet whoever agrees that lawyers need to play a role in the economy (actually, a case difficult to argue, once in a while) needs to agree that facts are selected, that normative decisions are taken, that the injustice of this selection process is mitigated by procedural arrangements, and that some arbitrariness remains.
Putting this market definition into practice means to take a closer look at institutional constraints (as pointed out by Douglass North (41)), including an eye on Markovits's criterion of cost-effectiveness. Cases should start with an encompassing description of the economic environment at hand and the factors for taking decisions. Maybe this could even open the path for a stronger emphasis on behavioral studies. (42) The guiding question for the first fact-finding would not be the hypothetical-monopolist-test question but the question to identify the decision parameters of the actors in the market, identifying the actors whose interests are closest to that of protecting the mechanism as such, and finding out what the drivers of decisions and transactions in this sector are and where possible restrictions to the freedom to decide come from. The factors and decisions most important in the context of the practice under investigation would be defined as the "market" in this case. This definition would list all relevant aspects for making business in the field. It would not, however, give a sharply delineated market-something inexistent anyway.
Market dominance could be assessed nonetheless, without the illusion of exact market shares--for instance, according to the factors mentioned in Art. 2 (1) (b) Merger Control Regulation:
the market position of the undertakings concerned and their economic and financial power, the alternatives available to suppliers and users, their access to supplies or markets, any legal or other barriers to entry, supply and demand trends for the relevant goods and services, the interests of the intermediate and ultimate consumers, and the development of technical and economic progress.
This assessment would no longer be a mainly quantitative one but it would be more qualitative in nature. (43) The role of econometric tools would be to inform the normative decision but not to replace it. This would entail the possibility to place the SSNDQ test (small but significant, non-transitory decrease in quality) next to the SSNIP test. (44) It would also be much easier to take account of multisided markets and the expectations of customers in technology-driven markets that are characterized by dynamic developments.
Obviously, the suggestion made here is just a first sketch of how the deficiencies in market definition could be overcome without abolishing this tool altogether. The general idea of this approach is to give a relatively full picture of the economic environment in a case instead of narrowing the case down in the very beginning to an overly price-dependent and far too "exact" formula. So this is meant as a further step in the "discovery procedure" of antitrust law concepts that was started with the more radical writings by Richard Markovits and others. An important role is played by the courts, which in the past often refrained from giving legal guidance in market definition questions, at least in the EU. (45) Since they viewed market definition as a matter of fact not a matter of law, the highest courts were barred from speaking out on this matter, while the lower courts lacked the insight and skill to deal with the economic details. This would have to change once it is accepted that framing the economic environment of a monopolization, abuse, or merger case is already a normative selection process. The encompassing and more evolutionary approach presented here would force courts to disclose their selection of facts: What do they see as the formative aspects for the actors? And why? Revealing how the facts of a case are established is much more sincere (and more open to debate) than presenting a glossy but opaque version of reality. The more rulings the courts give on questions of methodology, the more certain and sophisticated the approach will become.
Obviously, and who knows this better than an author like Markovits, who has been writing on antitrust for decades, progress moves at a snail's pace. In this regard, it is comforting, looking back to the Soda Club case and looking forward to litigation in the Google case, to learn another lesson from Markovits: "In my experience, in the United States, judicial resolutions of cases are often far superior to the justification the judges offer for their conclusions." (46)
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
The author(s) received no financial support for the research, authorship, and/or publication of this article.
(1.) Actually, Soda Club used several techniques to monopolize the secondary market--inter alia, claiming property and trademark rights and flooding the market with their own cylinders while taking competitive exchange cylinders from the market. For a review of the case, see Rupprecht Podszun, A Sparkling Decision: Property Rights and Competition Law in a German Abuse Case, Eur. Comp. L. Rev. 695 (2007). The original decision of the Bundeskartellamt, the Gemian Federal Cartel Office, is available in German only. See BKartA, 9 February 2006, Case B3-39/03, www.bundeskartellamt.de; reported in Eur. Comp. L. Rev. NI40 (2006). The highest court affirmed the decision, Soda Club II, Bundesgerichtshof, 4 March 2008, Case KVR 21/07, BGHZ 176, I.
(2.) The problem may be partly remedied with a diversion ratio analysis if applicable.
(3.) Soda Club II, Bundesgerichtshof, 4.3.2008, KVR 21/07, headnote I.
(4.) Id. at headnote 2.
(5.) See Giorgio Monti, EC Competition Law 4 (2007).
(6.) European Commission, Notice on the Definition of Relevant Market for the Purposes of Community Competition Law (971C 372/03), OJ C 372/5, 9.12.1997, [paragraph] 2.
(7.) Cf. Wolfgang Fikentscher, Philipp Hacker, & Rupprecht Podszun, Fair Economy--Crises, Culture, Competition and the Role of Law 26 ff. (2013); Wolfgang Fikentscher, A Transnational Antitrust Convention and the Recent European Antitrust Proposals: Exercises in Economic Anthropology, in Competition Policy in the Global Trading System 341,342 ff (Clifford Jones & Mitsuho Matsushita, eds., 2002).
(8.) United Brands, European Court of Justice, 14.2.1978, Case 24/76, ECLI:EU:C: 1978:22, [paragraph] 22.
(9.) European Commission, Notice on the Definition of Relevant Market, supra note 6, at [paragraph] 7.
(10.) Id. at [paragraph] 17.
(11.) Id. at [paragraph] 2.
(12.) Richard Whish, Competition Law 26 (6th ed., 2009).
(13.) Massimo Motta, Competition Policy 102 (2004).
(14.) In European law there are signs for moving from a market dominance approach to a contestability approach in some cases. See Geert Goeteyn, Patrick Smith, & Sara Ashall, Away from Market Shares? The Increasing Importance of Contestability in EU Competition Law Cases, 6 J. European Comp. L. & Prac. 197 (2015).
(15.) European Commission, Notice on the Definition of Relevant Market, supra note 6, at [paragraph] 19.
(16.) KinderStart.com v. Google, 2007 WL 831806 (N. D. Cal.).
(17.) David S. Evans, Antitrust Economics of Free, 7 Comp. Pol'y Int'l 70 (2011).
(18.) See Carl Shapiro, The 2010 Horizontal Merger Guidelines: From Hedgehog to Fox in Fourty Years, 11 Antitrust L. J. 701 (2010); Herbert Hovenkamp, Harm to Competition Under the 2010 Horizontal Merger Guidelines (April 20, 2011), http:// ssm.com/abstract= 1702843.
(19.) Richard Markovits, Economics and the Interpretation and Application of U.S. and E.U. Antitrust Law, Vol. I 166 ff. (2014).
(20.) Id. at 171.
(21.) Id. at 180.
(22.) Id. at 208.
(23.) Id. at 232.
(24.) See, e.g., id. at 176.
(25.) Id. at 247.
(26.) Id. at 173.
(27.) Id. at 226.
(28.) Id. at 235.
(29.) Id. at 198 ff.
(30.) For an early critique, see Richard Markovits, Predicting the Competitive Impact of Horizontal Mergers in a Monopolistically Competitive World, 56 Tex. L. Rev. 587 (1978).
(31.) Louis Kaplow, Why (Ever) Define Markets?, 124 Harv. L. Rev. 437 (2010) and Louis Kaplow, Market Definition: Impossible and Counterproductive, 79 Antitrust L. J. 361 (2013). For another critique of market definition, see Dennis Carlton, Market Definition: Use and Abuse, 3 Comp. Pol'y Int. 3 (2007) and Daniel Rubinfeld, Current Issues in Antitrust Analysis, in Competition Policy and the Economic Approach: Foundations and Limitations 81 ff. (Josef Drexl, Wolfgang Kerber, & Rupprecht Podszun, eds., 2011).
(32.) Gregory Werden, Why (Ever) Define Markets? An Answer to Professor Kaplow (February 13, 2012), http://ssm.com/ abstract=2004655.
(33.) Id. at 14.
(34.) European Commission, Marino Markets Work Better (2014).
(35.) This definition deviates from the one I developed with Benjamin Franz in our paper Was ist ein Markt?--Unentgeltliche Leistungsbeziehungen im Kartellrecht, NZKart 121, 127 (2015). There, our definition was more static: "Market is a social network of distributing scarce resources, formed through the transactions of the actors on the one hand and the ever-evolving framework on the other hand."
(36.) For a thorough evolutionary idea of markets, see Carsten Herrmann-Pillath, Foundations of Economic Evolution 504 ff. (2013).
(37.) Friedrich A. von Hayek, Wettbewerb als Entdeckungsverfahren (1968).
(38.) Leon Walras, Elements of Pure Economics 70 ff. (1988).
(39.) See Stephen Martin, Remembrance of Things Past, in The Political Economy of Antitrust 25, 44 (Vivek Ghosal & Johan Stennek, eds., 2007).
(40.) Erich Hoppmann, Wettbewerb und Wachstum in marktwirtschaftlichen Ordnungen, in Erich Streissler/Christian Watrin (eds.), Zur Theorie marktwirtschaftlicher Ordnungen 240, 241 ff. (Mohr Siebeck, 1980).
(41.) Douglass North, Institutions, Institutional Change and Economic Performance (1990).
(42.) See Gintare Surblyte, Competition Law at the Crossroads in the Digital Economy: Is It All About Google?, 4 EuCML 170, 178 (2015).
(43.) See Robert O'Donoghue & Jorge Padilla, The Law and Economics of Article 102 TFEU 95 ff. (2nd ed., 2013).
(44.) See Raymond Hartman, David Teece, Will Mitchell, & Thomas Jorde, Assessing Market Power in Regimes of Rapid Technological Change, 2 Industrial and Corporate Change 317 (1993).
(45.) Miguel Sousa Ferro, Judicial Review: Do European Courts Care about Market Definition?, 6 J. European Comp. L. & Prac. 400 (2015).
(46.) Richard Markovits, Economics and the Interpretation and Application of U.S. and E.U. Antitrust Law, Vol. I 235 (2014).
Rupprecht Podszun, Chair for Civil Law, Intellectual Property and Economic Law, University of Bayreuth; and Affiliated Research Fellow, Max Planck Institute for Innovation and Competition
Corresponding Author: Rupprecht Podszun, University of Bayreuth, Bayreuth, 95440, Germany. Email: LS-Podszun@uni-bayreuth.de
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|Title Annotation:||Symposium: Economics and the Interpretation and Application of U.S. and E.U. Antitrust Law|
|Date:||Mar 1, 2016|
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