The Relevant Market

Nothing in competition law can be decided until the market is defined. Market share, barriers to entry, dominance and foreclosure are all relative to a market, and the same conduct may be harmless in a wide market and decisive in a narrow one. Market definition is therefore not a preliminary formality but the step on which most cases actually turn, and a party's first argument is almost always that the market is wider than the informant says. The Act deals with it in Sections 2(r), 2(s) and 2(t), which define the concept, and in Sections 19(5) to 19(7), which supply the factors.

1. The Concept and Its Importance

A relevant market is the set of products and the area within which a firm's conduct is constrained by rivalry. It is defined by substitution: the market consists of those products to which buyers would turn, and those areas from which supply could come, if the firm raised its price. The purpose is not descriptive but analytical. One defines a market in order to measure something, and what is being measured is the degree to which the firm is free from constraint.

Section 2(r) provides that relevant market means the market which may be determined by the Commission with reference to the relevant product market or the relevant geographic market or with reference to both. Two points follow from the word or. The Commission may define a market by reference to one dimension alone where the other is not in issue, and it is not obliged to arrive at a single definitive market where the conduct would be objectionable on any of several plausible definitions.

2. The Relevant Product Market

Section 2(t) provides that the relevant product market means a market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use. The amendment of 2023 added the supplier's perspective, so that products or services whose production or supply are regarded as interchangeable or substitutable by the supplier are also included.

Section 19(7) lists the factors to which the Commission must have due regard in determining the product market.

• Physical characteristics or end use of goods. The starting point. Products that do the same job for the buyer are candidates for the same market; products that look alike but serve different uses are not.
• Price of goods or service. A large and stable price difference between two products usually indicates that buyers do not regard them as substitutes, since arbitrage would otherwise close the gap.
• Consumer preferences. What buyers actually do, evidenced by switching behaviour, surveys, and the reaction to past price changes.
• Exclusion of in-house production. Production that a firm consumes itself is not available to the market and is generally excluded from the measurement of market size.
• Existence of specialised producers. Producers who supply only a particular class of customer or product indicate a market boundary at that class.
• Classification of industrial products. Standard industrial classifications are a starting point but not conclusive, since they are compiled for statistical rather than competition purposes.

2.1 Demand-side and supply-side substitution

Demand-side substitution asks whether buyers would switch. It is the primary test and does most of the work. Supply-side substitution asks whether a producer not currently in the market could switch its facilities to making the product quickly and without significant additional cost or risk; such a producer constrains the firm even though it sells nothing in the market today. The amendment of 2023 brought supply-side substitution expressly into Section 2(t), and the practical consequence is to widen markets, which in turn lowers market shares and makes dominance harder to establish.

2.2 The hypothetical monopolist test

The technique used internationally, also called the SSNIP test, asks whether a hypothetical monopolist of a candidate group of products in a candidate area could profitably impose a small but significant non-transitory increase in price, conventionally five to ten per cent for a year. If too many buyers would switch away for the increase to be profitable, the candidate market is too narrow and the closest substitute is added; the exercise is repeated until the increase would be profitable. The Commission rarely performs the calculation, because the data are seldom available, and it proceeds instead through the qualitative factors in Sections 19(6) and 19(7); the test nevertheless supplies the logic of what those factors are being used to establish.

3. The Relevant Geographic Market

Section 2(s) provides that the relevant geographic market means a market comprising the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogeneous and can be distinguished from the conditions prevailing in the neighbouring areas. The question is where a buyer can practically turn, and the factors are in Section 19(6).

• Regulatory trade barriers. Restrictions on movement between States or countries, licensing requirements, and taxes that differ by area.
• Local specification requirements. Standards or approvals that differ from place to place and prevent a product qualified in one area from being sold in another.
• National procurement policies. Where the buyer is government and its rules confine supply to domestic or local sources, the market is correspondingly confined.
• Adequate distribution facilities. Whether a distant supplier has any practical means of reaching the buyer.
• Transport costs. The classic determinant. Where transport is a large proportion of delivered cost, as with cement or bulk materials, markets are regional even though the product is identical everywhere.
• Language. Decisive in media, publishing and broadcasting, where a product in one language is no substitute for the same product in another.
• Consumer preferences. Local tastes and habits that make a distant product unacceptable.
• Need for secure or regular supplies or rapid after-sales services. Where the buyer needs quick service or reliable delivery, a distant supplier is not a substitute.

4. How the Commission Approaches the Exercise

5. Markets in Digital and Platform Settings

1. Two-sided platforms. A platform serves two or more groups whose demands are interdependent, and the sides cannot be analysed in isolation. Whether to define one market covering the platform as a whole, or separate markets for each side, depends on whether the platform is a transaction platform where the sides deal with each other through it, in which case a single market is usually appropriate, or a non-transaction platform such as advertising-funded media, where separate markets on each side are usual.
2. Zero-price services. A service supplied without charge is not outside the Act. The definition of price in Section 2(o) covers every valuable consideration whether direct or indirect, and the Commission has proceeded on the footing that attention and data are supplied in return. The consequence for market definition is that a price-based test cannot be run on that side; the substitution question is asked in terms of quality, of the degree of data collection or of advertising load, which is sometimes described as a test of a small but significant non-transitory decrease in quality.
3. Functionality and switching. In digital markets the boundary is often drawn by functionality rather than by physical characteristics, and the decisive question is whether users multi-home, that is use several services at once, or single-home. Where users single-home because of switching costs or network effects, the market is narrow and the incumbent's position correspondingly strong.
4. Ecosystems. Where a group of connected services is offered together, the question is whether each service is a separate market in which competition takes place, or whether the ecosystem as a whole is the unit of competition. Indian practice has generally defined separate markets for each layer, such as the licensable operating system, the application store and the individual applications, which is what permits an inquiry into leveraging between them under Section 4(2)(e).

6. Primary Markets and Aftermarkets

An aftermarket is the market for products or services required by buyers who have already purchased a durable primary product: spare parts, consumables, servicing and software support. Whether the aftermarket is a separate relevant market, or whether it must be analysed together with the primary market, is one of the recurring questions in this subject.

• The argument for a single market. If buyers make a whole-life calculation at the time of the original purchase, taking account of the likely cost of parts and servicing, then competition in the primary market disciplines conduct in the aftermarket, and a manufacturer who overcharges for parts will lose sales of the product itself.
• The argument for separate markets. Buyers frequently do not make that calculation; information about aftermarket costs is not available at the time of purchase, the costs are incurred years later, and once the product is bought the buyer is locked in and cannot switch without abandoning the investment. On that view each manufacturer's parts and service constitute a market in which that manufacturer is necessarily dominant.
• The Indian position. In Shri Shamsher Kataria v. Honda Siel Cars India Ltd. the Commission defined separate relevant markets for each manufacturer's genuine spare parts and for after-sales repair services, on the footing that a buyer of one make cannot use the parts of another and does not compare aftermarket costs at the time of purchase. The finding of dominance in those markets followed necessarily from the definition, which illustrates how decisive the exercise is.

7. Writing the Market Definition

1. State the candidate market and say why it is the right unit: what function the product performs for the buyer, and what the buyer would do if the price rose.
2. Test it against demand-side substitution using the Section 19(7) factors, dealing expressly with the closest substitutes rather than ignoring them.
3. Consider supply-side substitution, which the amendment of 2023 made explicit, and say whether any producer could switch quickly and without significant cost.
4. Define the geographic dimension using the Section 19(6) factors, and identify which of them actually operates on the facts rather than reciting the list.
5. State the consequence: the market share of the parties within the market as defined, and what follows for dominance or for foreclosure.
6. Where more than one definition is arguable, deal with the alternative and show that the conclusion holds on either, which is how the Commission itself often proceeds.

8. Related Topics and Provisions