Competitive analysis is an essential pillar of competition law. To establish the existence of an abuse of a dominant position, two steps are essential: defining the relevant market and establishing a dominant position on that market. These concepts, which seem abstract at first glance, nevertheless determine the fate of many disputes involving companies of all sizes. This article takes a look at these fundamental concepts and the methods used to analyse them.
Why is defining the relevant market essential in competition law?
Competition law, particularly as regards abuse of a dominant position, first requires a precise identification of the economic territory in which the company operates. This delimitation is an essential prerequisite.
The functionality of market determination
The Autorité de la concurrence (French competition authority) points out that "defining the relevant market is essential in competition law" because it makes it possible to identify the area in which companies compete. This stage is used to assess a company's market power - its ability to raise prices without the fall in sales cancelling out the rise in profits - and to evaluate the potential effects of anti-competitive practices.
Case law confirms this approach. For example, the Paris Court of Appeal emphasised that "the application of Article L. 420-2 of the French Commercial Code presupposes defining the relevant market in order to determine whether the undertaking in question holds a dominant position on it" (Paris, 12 May 2016). This methodological requirement has been reaffirmed by the Cour de cassation.
Contrary to certain economists who put this stage into perspective, the competition authorities consider this approach to be objective and a guarantee of impartiality. It represents the primary framework for assessing an abuse of a dominant position.
The two dimensions: product/service market and geographic market
The relevant market has two complementary dimensions.
On the one hand, the product or service market, which corresponds to goods or services considered by buyers to be substitutable. The Autorité defines the relevant market as "the place where supply and demand for specific products or services considered by buyers or users as substitutable for each other, but not substitutable for other goods or services offered, meet" (Decision 17-D-25, 20 December 2017).
Secondly, the geographic market, which delimits the territorial area where conditions of competition are sufficiently homogeneous. This spatial dimension varies considerably depending on the product: it may be local for heavy products such as concrete, national for services subject to specific regulations, or international for easily transportable products.
These two dimensions, analysed together, help to define the relevant economic area in which the company operates.
How do you determine the product or service market?
Determining the product or service market is based on identifying the goods or services considered interchangeable by customers.
The central criterion: substitutability from the point of view of applicants
For the Autorité de la concurrence, "substitutability between different goods or services from the point of view of demand is the decisive criterion for defining the relevant market" (2014 Report). This criterion answers a simple but fundamental question: in the event of a sustained increase in the price of a product, would consumers switch to another product?
The "hypothetical monopolist" or "SSNIP" test (Small but Significant Non-transitory Increase in Price) aims to measure this reaction. It assesses whether a small (5 to 10%) but lasting price increase would lead to a significant shift in demand towards other products. If customers opt en masse for a substitute, then the price increase will not be profitable and the two products belong to the same market.
The Autorité sometimes illustrates this test with "natural experiments". For example, in the rolled zinc sector, the surge in world prices (multiplied by 2.3 in 2006) made it possible to observe the real reactions of the market to a significant increase in prices (Decision 16-D-14, 23 June 2016).
Qualitative indicators (nature, function, use, price, preferences, etc.)
In practice, precise quantitative data on cross-price elasticity is rarely available. The Autorité therefore uses a range of qualitative indicators to assess substitutability:
- The nature and physical characteristics of the product: mannequin dolls constitute a distinct market because of their typical appearance (Decision 99-D-45).
- The function and use of the product: competition pétanque boules form a specific market distinct from leisure boules because they alone can be used in competition (Decision 17-D-02).
- Technical conditions of use: different television broadcasting techniques (satellite, cable, terrestrial) are not substitutable (Decision 99-D-14).
- Applicant behaviour: medicines prescribed by doctors constitute a distinct market depending on their therapeutic indications (Decision 09-D-28).
- Price levels and trends: a substantial and lasting difference between the prices of different products may indicate that they are not substitutable.
These indices are assessed globally. The Autorité notes that "perfect substitutability between products or services is rarely observed" and considers as substitutable those products "for which it can reasonably be assumed that customers regard them as alternative means between which they can choose" (Decision 10-D-19).
The complementary role of supply-side substitutability
The analysis is also based, to a lesser extent, on the substitutability of supply. This assesses the ability of suppliers to redirect their production towards the products or services in question, in the short term and without prohibitive costs.
For example, in the case of travel agency services, the Autorité considered that online and traditional agencies operate on the same market, in particular because the technological supports and Internet access are accessible to all potential entrants. This lack of barriers to entry is illustrated by the tendency of agencies to adopt a "multi-channel" strategy (Decision 09-D-06).
Conversely, in the case of two-wheeler spark plugs, the Conseil de la concurrence ruled out the possibility of the analysis of supply substitutability modifying the initial analysis, because even if the equipment made it possible to produce several types of spark plugs indiscriminately, the distribution channels remained distinct (Decision 06-D-22).
Geographic market definition
The geographic market complements the product dimension in defining the scope of the competitive analysis.
Definition and criteria (transport costs, legal constraints, habits, etc.)
According to the Autorité de la concurrence, using the European Commission's definition, "the geographic market comprises the territory in which the undertakings are involved in the supply and demand in question and in which the conditions of competition are homogeneous" (Decision 22-D-06).
Several criteria influence this delimitation:
- The cost of transport: a determining factor for heavy products or products of low intrinsic value. As confirmed by the Court of Cassation (29 June 1993), tiles and bricks manufactured in Alsace were not substitutable for other products because of "the constraining impact of transport costs".
- The physical characteristics of products: some products, such as ready-mix concrete, cannot be transported over long distances without losing their essential properties.
- Regulatory constraints: in the case of electricity distribution by a local authority, the Conseil considered that the legal framework necessarily imposed a local dimension on the market (Decision 99-D-59).
- Consumer preferences and habits: attachment to regional or national brands can limit the substitutability of similar products from different origins.
The different possible scales (local, national, European, etc.)
The geographical dimension of the relevant market varies considerably:
At local level, some services are naturally limited to a restricted area due to practical constraints. In the case of roadworthiness tests for HGVs, the AMF noted that "the customers of the test centres are almost exclusively local, consisting of HGVs based within a radius of around twenty kilometres from the centre" (Decision 12-D-13).
In supermarkets, the geographic market corresponds to the catchment area, determined by customer travel time, transport links and the attractiveness of sales outlets. These local markets are somewhat porous, but not totally watertight.
At national level, markets are delimited by cultural or regulatory factors. For example, pay-TV markets are national in scope because of "linguistic and cultural factors and the negotiating framework" (Decision 10-D-32). Similarly, the existence of a statutory national monopoly, such as that historically held by the SNCF, naturally confers a national dimension on the market.
At the supranational level, some markets transcend national borders. The Autorité has taken the view that the market for top-of-the-range servers for businesses is "at the very least European, although this does not rule out the possibility that it may be global" (Decision 12-D-01).
How do you identify a dominant position?
Once the relevant market has been defined, it is necessary to determine whether the company occupies a dominant position on it - an essential prerequisite for classifying an abuse.
Legal definition: power to abstain from competition
The Autorité defines a dominant position as "a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and, ultimately, of consumers" (Decision 22-D-06).
This definition, inspired by European case law (ECJ, Hoffmann-La Roche, 1979), emphasises the independence of the dominant undertaking. Its decisions are largely insensitive to the actions and reactions of other market players.
It is important to note that a dominant position is not condemned per se - only its abuse is. A company can hold a dominant position because of its superior performance without this being reprehensible.
Structural criteria: monopoly and market share
The assessment of dominance is based on a number of structural indicators.
The most obvious is the possession of a legal or de facto monopoly. As the Autorité reminds us, "the possession of a monopoly, whether de jure or de facto, is sufficient to establish the dominant position of its holder" (Decision 13-D-11). A legal monopoly generally results from a legislative provision, as in the case of EDF concerning the French electricity transmission network (Decision 18-D-11). A de facto monopoly exists when a company makes all or almost all of the sales on a market.
In the absence of a monopoly, market share analysis is an "essential parameter" (2010 Report). According to European case law, adopted by the Autorité, "extremely large market shares are in themselves, and save in exceptional circumstances, proof of the existence of a dominant position" (Decision 22-D-06).
A market share in excess of 50% creates a presumption of a dominant position. The Autorité has thus recognised Google's dominant position on the online advertising market with very high and stable market shares (Decision 19-D-26), or EDF's 88% share of French electricity production (Decision 11-D-09).
However, this presumption may be rebutted by other factors. The Autorité examines "whether or not there are in fact circumstances that would be such as to rebut the presumption of dominance" (Decision 14-D-08).
Competitive advantages (power, technology, reputation, etc.)
In addition to market share, a number of other factors can confirm or strengthen a dominant position.
The size and economic power of the company play an important role. The Council pointed out that the Decaux group was present "in almost all towns with more than 10,000 inhabitants and in more than 85% in towns with more than 30,000 inhabitants" (Decision 98-D-52).
Technological advance or specific know-how are also decisive advantages. The Autorité noted that Cegedim's OneKey database was distinguished by "its exhaustiveness" and "the specificity of its daily updating" (Decision 14-D-06).
Brand awareness plays a decisive role. For Obut, its "reputation as a quality product among the general public and petanque licence holders gives it a considerable lead" (Decision 17-D-02). Similarly, TDF enjoys a "strong reputation stemming from its special position as a former incumbent operator" (Decision 16-D-11).
Price control is another indicator. A company that is able to maintain higher prices than its competitors while retaining a high market share demonstrates its independence (Decision 16-D-14 concerning Umicore).
Finally, simultaneous presence on several markets can strengthen a dominant position. The Autorité has pointed out that fixed-mobile convergence gives Orange a significant competitive advantage (Decision 15-D-20).
The countervailing power of buyers as a limit
Strong bargaining power on the part of buyers can limit, or even counterbalance, a seller's dominant position. The Autorité reminds us that when assessing a dominant position, "the countervailing power of buyers should be taken into account" (2010 Report).
This countervailing power exists when customers have so much influence that they can force the company to adapt its strategy. For example, the Autorité found that the Drouot group's dominant position on the market for event rentals of Parisian halls had not been established because its customers had "particularly extensive power" (Decision 17-D-19).
However, the authorities rarely acknowledge the existence of such countervailing power. In the rolled zinc sector, even the three main customers representing 72% of sales did not have countervailing buying power, because the reputation of the supplier among architects limited the ability of distributors to change supplier (Decision 16-D-14).
Individual versus collective dominance
A dominant position may be held by a single company or collectively by several entities.
Individual dominance: the economic unit
A dominant position is said to be individual when it is held by a single "undertaking" within the meaning of competition law. This concept must be understood as designating an "economic unit", even if, legally, it comprises several natural or legal persons (Decision 17-D-25).
In the case of a group of companies, the parent company and its subsidiaries form an economic unit when the subsidiaries do not autonomously determine their behaviour on the market and essentially follow the instructions of the parent company.
When a parent company holds all or almost all of the capital of its subsidiary, there is a presumption that it exercises decisive influence over its subsidiary. In this case, the competition authority simply has to prove this capital holding in order to attribute the subsidiary's behaviour to the parent company. This presumption can be rebutted if the parent company demonstrates that its subsidiary autonomously determines its conduct on the market.
Collective dominance: criteria and complexity
Article L. 420-2 of the French Commercial Code also prohibits the abusive exploitation of a dominant position by "a group of undertakings". Drawing on European case law, the French authorities define collective dominance as a situation in which several undertakings "have, together, in particular because of factors correlating with each other, the power to adopt the same course of action on the market and to act to an appreciable extent independently of other competitors" (Decision 20-D-11).
This position can be established in two ways:
- Either by examining the structural links between the companies (cross-shareholdings, formal agreements) combined with the adoption of a common line of action on the market.
- Or, in the absence of such links, by analysing the structure of the market according to three cumulative criteria: 1) the oligopolistic structure and transparency of the market, 2) the possibility of retaliating against undertakings that deviate from the common line, and 3) the non-contestability of the market by potential competitors.
Collective dominance is distinct from a cartel, although the two terms can sometimes be applied to similar practices. As the Court of Cassation has stated, "in order to uphold the concurrence of the two offences prosecuted simultaneously", the authority cannot "invoke the same acts or facts several times" (Cass. 7 July 2009).
The importance of a case-by-case analysis
The analysis of the relevant market and of the dominant position is not an exact science but a methodology adapted to each situation.
The courts favour a pragmatic approach that takes account of the specific features of each economic sector. In digital markets, for example, the Autorité considered that "in recent, rapidly expanding sectors characterised by short innovation cycles and a dynamic context, high market shares are not necessarily indicative of market power" (Decision 19-D-26).
The assessment criteria have also evolved over time. Jurisprudence has progressively attached more importance to the concrete effects of practices on the market than to their abstract qualification. This "new approach", influenced by economic doctrine, has led to a more detailed analysis of the real market power of companies.
The assessment of the temporal context is essential. Dominance is assessed "at the time of the practices, without prejudice to subsequent market developments" (Decision 15-D-01). A dominant position may be contested and challenged by competition, and its non-permanent nature does not render the provisions on abuse inapplicable.
Finally, the role of sector authorities should not be overlooked. The AMF may rely on the analyses carried out by other bodies such as ARCEP or ARCOM, but is not bound by them. The definition of a market adopted by a sector authority "is not binding on the Authority, when the matter is referred to it" (Paris, 27 January 2011).
If your company is faced with questions of dominance or if you believe that you are the victim of an abuse on a market, our firm can help.lawyer in abuse of dominant position can help you. For a overview of abuse of a dominant position and prohibited practicesor to understand abuse of exclusion and exploitation abusesFor more information, please consult our other resources or contact us for a personalised analysis of your situation.
Sources
- French Commercial Code, in particular Article L. 420-2
- Treaty on the Functioning of the European Union, Article 102
- European Commission notice on the definition of the relevant market (OJ C 372, 9 December 1997)
- European Commission guidelines on the market analysis of electronic communications services (OJEU C 159, 7 May 2018)
- Étude thématique de l'Autorité de la concurrence, "Les remises fidélisantes", Annual Report 2018
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