Competition Law's Innovation Factor

The Relevant Market in Dynamic Contexts in the EU and the US

Viktoria H S E Robertson

• Publisher: Hart Publishing
• Year: 2020
• ISBN:
  9781509931903
• Edition: 1
• Topic: Droit
• Subtopic: Antitrust

In recent years, market definition has come under attack as an analytical tool of competition law. Scholars have increasingly questioned its usefulness and feasibility. That criticism comes into sharper relief in dynamic, innovation-driven markets, which do not correspond to the static markets on which the concept of the relevant market was modelled. This book explores that controversy from a comparative legal perspective, taking into account both EU competition and US antitrust law. It examines the manifold ways in which courts and competition authorities in the EU and US have factored innovation-related considerations into market delineation, covering: innovative product markets, product differentiation, future markets, issues going beyond market definition proper – such as innovation competition, innovation markets and potential competition –, intellectual property rights, innovative aftermarkets and multi-sided platforms. This book finds that going forward, the role of market definition in dynamic contexts needs to focus on its function of market characterisation rather than on the assessment of market power.

PART I

Market Definition and Innovation

1

Introduction

There is no subject in antitrust law more confusing than market definition.¹

The importance of market delineation for antitrust can easily be likened to the importance of the tennis court in tennis: for competition law purposes, the relevant market stakes out the playing field upon which competition law provides the rules of the game, and competition law judges act as referees. The competitive constraints that the market players face are used as the playing field’s demarcation lines. If market behaviour affects issues that lie outside of the playing field, the line umpire signals an ‘out’ and competition law does not apply.

In order to decide whether a ball was inside or outside the court, tennis provides for certain procedures. The same is true of competition law, where the judge must determine whether behaviour occurred on a relevant market or not. On clay courts, the chair umpire may carry out ball mark inspections.² Similarly, some competition law judges directly delineate the market by relying on the evidence brought before them. On a hard court, chair umpires may rely on hawk-eye or other line calling assistance. In competition law, judges may rely on economic experts to illuminate questions of fact pertaining to market definition. What unites tennis and competition law is that in tennis, ‘[t]he referee is the final authority on all questions of tennis law’,³ including on deciding whether the ball was in or out. In competition law, it is the judge who is the final authority on all questions of competition law, including on deciding whether market behaviour took place on the relevant market or outside of it.

Different types of courts – be they clay, carpet, grass or hard courts – require different skills for line calls, just like different market environments in competition law do. In antitrust, this is particularly true of highly dynamic markets in which innovation plays a decisive role. When the playing field is innovative, it is frequently uncertain where the demarcation lines should be. The line umpires are at a loss. This is the question addressed in the present volume. While tennis has achieved unification on line calls through the International Tennis Federation’s Rules, transnational competition law lacks harmonisation and thus encounters the added complexity of different jurisdictions relying on (sometimes only slightly) different rules for market delineation, even where they relate to the same innovative market – one and the same game, so to speak.

The present study turns to two antitrust jurisdictions that are globally significant, namely the US and the EU. It compares their market definition frameworks as applied in dynamic contexts, thereby encountering a multitude of legal and economic approaches. After disassembling and comparatively re-organising both frameworks, consideration is given to the question of whether and how convergence of all or some parts of these frameworks could increase legal certainty and more accurately depict innovation to the benefit of consumers across the globe.

I.Innovation and the Relevant Market: The Issues at Stake

The relevant market is one of the most complex and contentious legal concepts in competition law, particularly in innovative market environments. While market definition merely serves as an analytical tool for antitrust purposes,⁴ the analytical tools we employ may well determine the outcome. Drawing on economic insights, market definition attempts to determine substitutability amongst products, both from a demand and from a supply perspective.⁵ It positions the legally relevant market within actual economic activity, while at the same time setting out which area of economic life is legally relevant for the antitrust assessment. As such, it provides the analytical framework for any antitrust analysis,⁶ perhaps even representing antitrust’s ‘analytical core’.⁷

Courts, antitrust authorities and scholars alike have repeatedly emphasised the unparalleled importance of market definition for antitrust cases.⁸ The reason for this importance is, quite simply put, that a company’s market behaviour cannot properly be legally assessed in the abstract, but only with reference to the market(s) in which the company is active:⁹ the relevant market(s). The soundness of antitrust market definition has a direct impact on the quality of antitrust law as such.¹⁰ While some regard market definition and the ensuing market power analysis as necessarily conflated,¹¹ the present research focuses on market definition as a separate analytical step, thus essentially ascribing a standalone value to market definition. This focus can again be understood against the metaphor of line calls in tennis: where competition law is not even sure what the relevant market is, it cannot properly judge whether the game that is being played by market participants is pro- or anti-competitive. In order to do so, it must first set out to delineate and thoroughly understand that playing field.

Market definition is the foundation that subsequent antitrust analysis builds upon. Relying on market analysis presupposes two steps: the identification of the companies that are catering to a particular customer demand, and based thereupon the analysis of competition on that market.¹² Depending on the competition conditions prevailing in the relevant market, antitrust authorities may or may not have competition concerns. The position of a company in the relevant market can have a plethora of consequences under antitrust law, including the application of stricter antitrust rules if a company is found to enjoy significant market power. Therefore, it is of crucial importance to define the relevant antitrust market in a predictable, coherent way. However, market definition as such is ‘hardly an exact science’,¹³ facing companies with legal uncertainty in antitrust matters. This problem is exacerbated in highly dynamic market environments, as market definition gives but a snapshot of economic reality.

In economics, it is believed that, in the long run, dynamic competition – or innovation – can generate greater consumer welfare than static competition.¹⁴ This insight has become widely accepted in antitrust,¹⁵ even if its consequences for antitrust law are not yet fully understood. As a first step, however, it is clear that the proper use of market definition in innovative environments is a necessary precondition for applying antitrust law to the long-term benefit of consumers.¹⁶ There is widespread concern that traditional antitrust tools may focus too much on static market conditions, price and homogeneous products, thus leading to a competition analysis that cannot properly take into account product diversification, future products and innovation competition.¹⁷ In dynamic market environments, innovation regularly overthrows the current market order and pushes the limits of the relevant market. This aspect of innovative markets needs to be analysed with legal certainty in mind.

Innovation as understood in the present context refers to new or significantly improved products or processes.¹⁸ This includes the digital markets that are currently at the forefront of many policy discussions both in the EU and in the US,¹⁹ but is much broader than that. Any industry that exhibits significant dynamic characteristics is included in this definition, covering innovation in production, in service provision and extending to self-driving cars and the pharmaceutical industry. The dynamic characteristics of innovative industries face market definition with a number of important challenges,²⁰ as the analytical framework for market definition was developed in static rather than in dynamic environments. These challenges revolve around the fast-moving nature of dynamic industries, the importance of potential competition and intellectual property rights in innovative markets, innovation rather than price as the most important parameter of competition in these markets, multi-sided platforms, innovative and proprietary aftermarkets, and network effects that are at play in dynamic environments. A rich body of literature cautions that the dynamic characteristics of innovative markets must be taken into account in antitrust law.²¹ Such an innovation-conscious approach necessarily needs to begin with market definition.

I...