Antitrust/ Competition Law: Relevant Product Market and the Hypothetical Monopolist Test

Antitrust/ Competition Law: Relevant Product Market and the Hypothetical Monopolist Test*

Market definition is usually the first step in competition analysis because the concepts that will be used in the analysis occur in the market (i.e. market power, competition, statutory restrictions, etc.).  Furthermore, defining the market is relevant in calculating and determining variables such as barriers to entry, import and market shares. Thus, in competition law analysis, the determination of the relevant product and geographic market is necessary in assessing the market power of a firm or undertaking.

In most abuse of dominant position cases, the definition of the relevant market is likely to be based on functional characteristics of the product and on consumer behavior.[i] In the Philippines, Section 24 of Republic Act No. 10667, otherwise known as the Philippine Competition Act, states that for purposes of determining the relevant market, the following factors, among others, affecting the substitutability among goods or services constituting such market and the geographic area delineating the boundaries of the market shall be considered:

(a) The possibilities of substituting the goods or services in question, with others of domestic or foreign origin, considering the technological possibilities, extent to which substitutes are available to consumers and time required for such substitution;

(b) The cost of distribution of the good or service, its raw materials, its supplements and substitutes from other areas and abroad, considering freight, insurance, import duties and non-tariff restrictions; the restrictions imposed by economic agents or by their associations; and the time required to supply the market from those areas;

(c) The cost and probability of users or consumers seeking other markets; and

(d) National, local or international restrictions which limit access by users or consumers to alternate sources of supply or the access of suppliers to alternate consumers.

In United States v. E. I. du Pont de Nemours & Co.[ii], the US Court defined a relevant product market as “composed of products that have reasonable interchangeability for the purposes for which they are produced, price, use and qualities considered. Hence, the operative word is substitutability of products. Thus, in Europemballage Corporation and Continental Can Company v. Commission, Case 6/72 para. 14, the European Court of Justice defined the relevant market as follows:

“The definition of the relevant market is of essential significance, for the possibilities of competition can only be judged in relation to those characteristics of the products in question by virtue of which those products are particularly apt to satisfy an inelastic need and are only to a limited extent interchangeable with other products. In order to be regarded as constituting a distinct market, the products in question must be individualized not only by the mere fact that they are used for packing certain products, but by particular characteristics of production which make them specifically suitable for this purpose.”

The process of defining a market typically begins by establishing the closest substitutes to the product (or group of products) that is the focus of the investigation[iii]. In determining the interchangeability of products, the hypothetical monopolist test is employed.  Specifically, the test requires that a hypothetical profit-maximizing firm, not subject to price regulation, that was the only present and future seller of those products (“hypothetical monopolist”) likely would impose at least a small but significant and non-transitory increase in price (“SSNIP”) on the product in the market[iv] This test seeks to establish the smallest product group (and geographic area) such that a hypothetical monopolist controlling the product group (in that area) could profitably sustain ‘supra competitive’ prices, i.e. prices that are at least a small but significant amount above competitive levels. That product group (and area) is usually the relevant market.[v] Usually, a price of 5 to 10% above competitive levels is held to be small but significant.[vi] For example, if a Hypothetical Monopolist of dolls were to subject his price of dolls to a SSNIP of around 5 to 10% and this would result to consumers switching to teddy bears, it would not be profitable for the Hypothetical Monopolist to do so.  Hence, the relevant product dimension will be dolls and teddy bears.

In addition to the relevant product market, the relevant geographic market must likewise be identified. Thus, in United Brands Company v. Commission of the European Communities[vii], it was ruled by the European Union that reference must be made to “a clearly defined geographic area in which the product is marketed and where the conditions of competition are sufficiently homogenous for the effect of economic power of the undertaking concerned.”

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* This is part of the papers submitted by NDV Law’s Atty. Norieva “Nikki” de Vega to the University of Melbourne, in partial fulfillment for the completion of a Master of Laws Degree (Global Competition and Consumer Law).