Relevant market
Encyclopedia
In competition law
the Relevant market defines the market in which one or more goods compete. Therefore, the Relevant market defines whether two or more products can be considered substitute good
s and whether they constitute a particular and separate market
for competition analysis.
The relevant market combines the product market and the geographic market, defined as follows:
would be not possible without referring to the market where competition takes place. The extent to which firms are able to increase their prices above normal competition levels depends on the possibility for consumer
s to buy substitute good
s and the ability for other firms to supply
those products. The fewer the substitute products and/or the more difficult it is for other firms to begin to supply those products, the less elastic the demand curve is and the more probable is to find higher price
s. For all these reasons it is necessary to define the relevant markets for the different cases which fall under the Law.
The Relevant market contains all those substitute products and regions which provide a significant competitive constraint on the products and regions of interest. An interesting guiding principle provided by Bishop and Darcey (1995) states that a relevant market is something worth monopolising, in the sense that the relevant market includes all the substitute products and therefore control of that market would allow the monopoliser to profitably increase the prices of the products to the monopoly level. This can only be possible if the products in this "market" are not subject to significant competitive constraints by products outside that market.
A relevant market comprises a product or group of products and the geographic area in which these products are produced and/or traded. Therefore, the relevant market has two components: the product market and the geographic market.
When examining the likely responses of consumers, it is the response of the marginal consumer, not the average consumer which is important. Therefore, a small but significant number of consumers (generally 5 to 10 percent) switching to another product when there is a price increase is considered a sufficient condition for both goods to be defined as forming part of the same relevant market. Therefore, the existence of a group of consumers who would never switch in response to a relative price increase is not by itself sufficient to conclude that the relevant market should be defined narrowly.
Determining both the likely extent of demand-side substitution, and the level of substitution which would imply that monopolisation was not worthwhile, requires an assessment of the price-elasticity of demand. This is generally done using the SSNIP-test.
The elements to be taken into consideration when defining the relevant geographic market include the nature and characteristics of the concerned products, the existence of entry barriers
, consumer preferences, differences among the market shares of undertakings in the neighboring geographic areas, as well as significant differences between suppliers’ prices and transport costs level.
An interesting aspect to which competition authorities look at are transport costs, given that high transport costs may explain why trade between two regions is economically infeasible.
Competition law
Competition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies....
the Relevant market defines the market in which one or more goods compete. Therefore, the Relevant market defines whether two or more products can be considered substitute good
Substitute good
In economics, one way we classify goods is by examining the relationship of the demand schedules when the price of one good changes. This relationship between demand schedules leads economists to classify goods as either substitutes or complements. Substitute goods are goods which, as a result...
s and whether they constitute a particular and separate market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
for competition analysis.
The relevant market combines the product market and the geographic market, defined as follows:
- 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;
- A relevant geographic market comprises the area in which the firms concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homogeneous.
Definition and use
The notion of relevant market is used in order to identify the products and undertakings which are directly competing in a business. Therefore, the relevant market is the market where the competition takes place. The enforcement of the provisions of Competition lawCompetition law
Competition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies....
would be not possible without referring to the market where competition takes place. The extent to which firms are able to increase their prices above normal competition levels depends on the possibility for consumer
Consumer
Consumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...
s to buy substitute good
Substitute good
In economics, one way we classify goods is by examining the relationship of the demand schedules when the price of one good changes. This relationship between demand schedules leads economists to classify goods as either substitutes or complements. Substitute goods are goods which, as a result...
s and the ability for other firms to supply
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
those products. The fewer the substitute products and/or the more difficult it is for other firms to begin to supply those products, the less elastic the demand curve is and the more probable is to find higher price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
s. For all these reasons it is necessary to define the relevant markets for the different cases which fall under the Law.
The Relevant market contains all those substitute products and regions which provide a significant competitive constraint on the products and regions of interest. An interesting guiding principle provided by Bishop and Darcey (1995) states that a relevant market is something worth monopolising, in the sense that the relevant market includes all the substitute products and therefore control of that market would allow the monopoliser to profitably increase the prices of the products to the monopoly level. This can only be possible if the products in this "market" are not subject to significant competitive constraints by products outside that market.
A relevant market comprises a product or group of products and the geographic area in which these products are produced and/or traded. Therefore, the relevant market has two components: the product market and the geographic market.
Product market
The relevant product market is determined according to three criteria:- Demand-side substitution.
- Supply-side substitution.
- Potential competition.
Demand-side substitution
Demand-side substitution takes place when consumers switch from one product to another in response to a change in the relative prices of the products. If consumers are in a position to switch to available substitute products or to begin sourcing their requirements from suppliers located in other areas, then it is unlikely that price increases will be profitable. Therefore, it is necessary to progressively include in the Relevant market the products to which consumers would most likely switch in response to a relative price rise, repeating the exercise at each stage until a collection of products is reached that is worth monopolising.When examining the likely responses of consumers, it is the response of the marginal consumer, not the average consumer which is important. Therefore, a small but significant number of consumers (generally 5 to 10 percent) switching to another product when there is a price increase is considered a sufficient condition for both goods to be defined as forming part of the same relevant market. Therefore, the existence of a group of consumers who would never switch in response to a relative price increase is not by itself sufficient to conclude that the relevant market should be defined narrowly.
Determining both the likely extent of demand-side substitution, and the level of substitution which would imply that monopolisation was not worthwhile, requires an assessment of the price-elasticity of demand. This is generally done using the SSNIP-test.
Supply-side substitution
Sometimes consumers may be unable to react to a price increase, nevertheless, producers may be able to do so by for example, increasing their supply to satisfy the demand of these consumers. If other producers respond to an increase in the relative price of the products supplied by the single supplier by switching production facilities to producing the monopolized collection of products, the increased level of supply may render any attempted price increase unprofitable. In this case, those producers with the ability for supply-side substitution should be included in the Relevant market.Geographic market
The geographic market is an area in which the conditions of competition applying to the product concerned are the same for all traders. The same factors used in delineating relevant product markets should be used to define the relevant geographic market.The elements to be taken into consideration when defining the relevant geographic market include the nature and characteristics of the concerned products, the existence of entry barriers
Barriers to entry
In theories of competition in economics, barriers to entry are obstacles that make it difficult to enter a given market. The term can refer to hindrances a firm faces in trying to enter a market or industry - such as government regulation, or a large, established firm taking advantage of economies...
, consumer preferences, differences among the market shares of undertakings in the neighboring geographic areas, as well as significant differences between suppliers’ prices and transport costs level.
An interesting aspect to which competition authorities look at are transport costs, given that high transport costs may explain why trade between two regions is economically infeasible.
See also
- Competition lawCompetition lawCompetition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies....
- Federal Trade CommissionFederal Trade CommissionThe Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...
- Anti-trust law
- European CommissionEuropean CommissionThe European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
- United States Department of Justice Antitrust DivisionUnited States Department of Justice Antitrust DivisionThe United States Department of Justice Antitrust Division is responsible for enforcing the antitrust laws of the United States. It shares jurisdiction over civil antitrust cases with the Federal Trade Commission and often works jointly with the FTC to provide regulatory guidance to businesses...
- Industrial organizationIndustrial organizationIndustrial organization is the field of economics that builds on the theory of the firm in examining the structure of, and boundaries between, firms and markets....
- SSNIP