The Competition Ordinance, 2007 ("Ordinance of 2007") has created a relatively new competition regime in Pakistan therefore, the true scope and purpose of most of the basic competition concepts such as relevant market doctrine, abuse of dominant position, prohibited agreements and etc is not as much clear, as is in other developed competition regimes.
The establishment of fair and free competition is an uphill task, which not only requires the proactive role of the Competition Commission of Pakistan (the Commission) but would also need the co-operation of other stakeholders, such as the Government, industry players etc.
One vital factor in the application and enforcement of the competition policy, such as in determining the dominant position of an undertaking, or judging the effectiveness of an agreement is the delineation and definition of the relevant markets in which the market players operate.
Market definition serves to illustrate the structure and sphere for the application of competition law and the competitive constraints being faced by the market participants. The determination of the market in its product and geographic dimension is the prerequisite where the share and position of any player is to be determined, or where the appreciable effects of any arrangement or agreement on competition are to be judged by the Commission.
Since the Commission has reiterated in its determinations and opinions that the law in Pakistan defines the relevant market in the same manner as it is understood in the developed world such as the UK, EU and USA, therefore, the focus of this article is to study the relevant market in the light of the Ordinance of 2007 and as is understood in other jurisdictions specially the EU.
i) RELEVANT MARKET Section 2(k) of the Ordinance of 2007 defines that, "The Relevant Market means the market which shall be determined by the Commission with reference to a product market and a geographic market."
ii) PRODUCT MARKET Section 2(k) of the Ordinance of 2007 defines that, "A product market comprises all those products or services which are regarded as interchangeable or substitutable by the consumer by reason of the products' characteristics, prices and intended uses.
iii) GEOGRAPHIC MARKET Section 2(k) of the Ordinance of 2007 defines that, "A geographic market comprises the area in which undertakings concerned are involved in the supply of products or services and in which conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring geographic areas because, in particular, conditions are appreciably different in those areas"
1. BASIC PRINCIPLES FOR MARKET DEFINITION The objective of defining a market, in both its product and geographic dimension, is to identify those competitive constraints which serves to restrain the undertaking's behaviour and of preventing those undertakings from behaving independently of effective competitive pressures.
Although, no standard criteria can be fixed to define the relevant market as it varies from case to case, but still there are certain essentials which are taken into consideration by the competition authorities around the world while defining the markets in their product and geographic dimension. There are three recognised sources of competitive constraints that are taken into consideration while defining the relevant market (EU Commission notice (97/C 372/03) on the definition of relevant market).
A. DEMAND SUBSTITUTION Demand substitution is the measure of willingness of consumers to switch from one product to another in response to price increases. In this case, a hypothetical is formulated to see that how many consumers switch to other products or supplier situated elsewhere if there is a permanent price increase of 5 to 10%.
If the substitution is enough to make the price increase unprofitable or loss of sales, additional products and areas are included and this would be done until a small but permanent increase would not prompt a significant number of buyers to leave or sellers to enter the relevant market. Finally, all those substitutable products would be considered to belong a single market.
A similar approach has been followed by US Department of Justice and Federal Trade Commission in Horizontal Merger Guidelines, 1992 while defining the relevant markets. This test is also known as "SSNIP test" or "Hypothetical Monopolist Test". This would be simplified by an application to, for instance, the ice cream market. The fact to be taken care of in this case would be how many consumers switch to flavour B ice cream if there is price increase of 5 to 10% in flavour A ice cream.
Other flavours would be added until a set of products is identified for which a price increase would not induce a sufficient substitution in demand. However, the EU Commission has interpreted and applied this principle in various ways keeping in view the product's characteristics and the consumer choices. A study of some of the following leading cases will illustrate how the Competition Commission of Pakistan and EU Commission has applied this principle and has taken other factors into consideration while determining relevant market.
UNITED BRANDS V. COMMISSION This is an interesting case in which EU Commission defined a sub-market within the broader fruit market. In this case, the European Court of Justice "ECJ" held that the bananas do not belong to the broad fruit market and has its different and distinct market from other fruits. The ECJ reasoned that for some banana consumers, all fruits are perfectly substitutable while for some such as old and very young consumers, bananas are the only fruit because they cannot consume hard fruits.
In the words of the Commission, "Such special features distinguishing (banana) 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".
HILTI AG V. COMMISSION The Commission has narrowly defined markets in this case. Hilti manufactured a range of products used for fastening materials such as nails guns, cartridge strips, cartridges and nails. In this case, it was held that Hilti nails guns and Hilti nails belong in separate product markets because of different competitive conditions faced by guns and nails and non-substitutability with each other.
However, the markets can also be determined by reference to their usage therefore, it is possible although in rare case that the separate markets may exist for same products according to their different usage.
ILJIN ELECTRIC COMPANY LIMITED V. SIEMENS PAKISTAN In this case, the Competition Commission of Pakistan has followed the principle laid down in Brown Shoe Co v. US. In that case, the US Supreme Court cautioned against drawing product markets too narrowly. The US Supreme Court observed while discussing the criteria that may define a "submarket" that: "The boundaries of such a submarket may be determined by examining such practical indicia as industry or public recognition of submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes and specialised vendors."
B. SUPPLY SUBSTITUTION The analysis in supply substitution gets shifted from the demand side (buyer's perspective) to supply side (producer's perspective). Supply substitution, as described in the Para 20 of the EU Commission Notice on the definition of relevant market is the readiness of supplier, in response to small and permanent changes in relative prices, to switch production to relevant products and market them in the short-term without having to incur significant additional costs or risks. Where there are substantial investments required and longer time to switch production, the relevant market is not generally found to exist.
MICHELIN V. COMMISSION In this case, the Commission defined the market keeping in view the supply-substitution factor and held that the tyres for heavy commercial vehicles and cars belonged in different product markets on the basis of different production techniques, plant and tooling needed.
HUGIN V. COMMISSION In this case, it was held that cash registers and spare parts for cash registers belong to different product markets because manufacturers of cash registers are not in a position to adapt production techniques in order to manufacture spare parts for equipment made by other manufacturers. There is competition as far as the supply of the cash registers is concerned but the manufacturers cannot compete for the supply of each other's spare parts.
ILJIN ELECTRIC COMPANY LIMITED V. SIEMENS PAKISTAN The Competition Commission of Pakistan has described the factors that can be taken into consideration while defining the relevant product market generally and in special circumstances such as in case of Horizontal mergers. The Commission has put its reliance on the Robert Pitofsky book, "New Definitions of relevant Market and the Assault on Antitrust".
IN THE WORDS OF THE COMMISSION, "A relevant product market is, generally, defined by taking into account "all those products or services which are regarded as interchangeable or substitutes by the consumer by reason of the products' characteristics, prices and intended uses.
However, in the case of a horizontal merger where merging parties have production facilities, which can readily be used to produce other products as well, all such products are counted while defining the relevant product market. Moreover, in a case where products are not good substitutes but are complementary to each other, as is the case of instant complaint, then the range of products may be grouped to measure market power."
C. POTENTIAL COMPETITION Potential competition is a factor that is taken into consideration only if the analysis of the product substitution and supply-side substitution raises competition concerns. The potential competition factor is normally taken into consideration to judge the competitiveness of the market and ease of entry into the market. This is also used to determine the share of competitors in the market.
The definition of relevant market is an important tool to define the boundaries of competition between the competitors in any relevant product and geographical market. The clearly defined markets in their product and geographic dimensions serve as a foundation stone on which entire empire of competition can be built and run in a successful manner.
The Competition Commission of Pakistan is expected to come up with clear cut guidelines regarding the Relevant Market Doctrine like EU Commission so that transparency to a maximum extent can be maintained in the application and enforcement of the Competition Laws in Pakistan. (The writer is LLM from Queen Mary University of London and currently working as head of Competition Law Desk at a law firm).
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