A key change in the recently published Market Definition Notice is the greater emphasis on non-price elements as relevant parameters of competition.
How can we define markets in settings where firms compete on innovation and quality? How can we adapt existing economic tools for this purpose? This note illustrates this with a simple example from mobile gaming.
On 8 February 2024, the European Commission (the “Commission”) published its new Market Definition Notice (the “Notice”).(i)
This first revision since the adoption of the notice in 1997 is substantial: the new notice is much longer and reflects 27 years of Commission practice. The Notice in particular updates the old notice to account for new trends in digital and more global markets. One such key update is the greater emphasis on non-price elements(ii) as relevant parameters that need to be assessed in the market definition stage. For example, in multi-sided (digital) markets, consumers may not pay a monetary price for the services they use (hereafter, we refer to such services as “zero-priced products”). This makes conventional tools (which rely on a price increase) not fit for purpose.
In the case of quality competition, the Commission departs from the traditional Small but Significant and Non-transitory Increase in Price (SSNIP) framework(iii) and introduces the new Small but Significant Non-transitory Decrease of Quality (SSNDQ) test.
The SSNIP test is a conceptual test designed to identify relevant markets. In simple terms, a relevant market is identified as a group of products where market power can be exercised. This is the smallest set of products for which a small but significant (typically 5% or 10%) price rise would be profitable.
The SSNDQ applies the same logic to zero-priced products,[1] where quality is the most important parameter of competition. In this case, market power is manifested by a profitable decrease in quality, rather than a price increase. A relevant market is therefore defined as the smallest set of products where a hypothetical monopolist could profitably decrease quality in a small but significant way.
While providing a useful conceptual framework, this test raises practical challenges that authorities and firms will have to consider when using it. It is important to consider the objective of the SSNDQ test when using economic analysis to overcome these challenges.
The first challenge is to determine a relevant measure of quality. Unlike price, there is no universal measure of quality:
The second challenge is to determine what constitutes a small but significant deterioration in quality. While it is generally accepted that a price increase in the range of 5% to 10% is considered significant, [3] a 5% reduction in some quality measures may not be significant or noticeable for most users. For example, an increase in the proportion of the screen dedicated to ads by 5% may not be sufficient to make users switch simply because they do not notice this.
The Notice refers to the General Court’s Decision in Android stating that ‘defining a precise quantitative standard of degradation of quality of the target product cannot be a prerequisite for the application of the SSNDQ test. […] All that matters is that the quality degradation remains small, albeit significant and non-transitory.’[4] The question that remains, however, is determining what constitutes a “small, albeit significant and non-transitory” quality decrease.
Just like the SSNIP test, the SSNDQ test provides only a conceptual framework for the assessment of market definition. Often, the level of switching that a hypothetical monopolist would face cannot be determined. Competition authorities often rely on evidence of price-driven substitution to define markets. Similar analysis may be used for quality substitution.
For example, just like price co-movements (e.g., price correlation analysis), co-movements of quality improvements (e.g., assessing whether quality improvements are clustered) inform demand substitution. Likewise, event analysis can exploit significant variations of relative quality (e.g., when one firm launches a new product) to infer substitution.
Finally, the SSNDQ implicitly assumes that all the firms offer equally zero-priced products. This may not always be the case, though: Firms may compete in the same market using different business models or different choices regarding whether to charge end-users (e.g., YouTube vs Netflix, free-to-air vs pay-per-view TV, or free content vs paid content websites).
In such a case, it may be necessary to compare products with a price and those that are zero-priced. In this case, an alternative approach would be to determine an implicit price of the free product to compare with the prices of the paid products.[5] A “small but significant quality decrease” would then be translated into a “small but significant (implicit) price increase” and the original SSNIP test applied.
Alternatively, the closeness of competition between different sets of products could be assessed using estimates of the impact of forced diversion. This method consists of assessing what consumers would do when an alternative is unavailable (e.g., a game is no longer offered on an app marketplace). The impact of forced diversion could be estimated via a survey of consumers or events where one product was no longer available in a particular setting (e.g., because of exclusion from the marketplace of a mobile operating system). This approach would already capture by design all price and non-price factors that affect customers’ decisions.
Considering how digital markets operate, the Commission has found it necessary to look beyond price to understand relevant markets. This requires adjustments to qualitative and quantitative tools to define relevant markets and assess competition. The new Notice offers long-awaited guidance in this direction. With an increasing body of practice, the tools and methods will become increasingly clear.
Endnotes
[1] In many instances, the product in question may be a multi-sided platform that offers its services for free to one side of the platform.
[2] For instance, the expanded like button, introduced by Facebook in 2016 and updated in 2020, received varied feedback. Some commentators highlighted that some users appreciated the broader and more nuanced set of reactions; others pointed out that users might have “quibbled with the implementation”; yet others argued that users might find the intended messages of these reactions unclear and ambiguous. See The Verge, 2016. Facebook rolls out expanded Like button reactions around the world. 24 February 2016. Available online at: https://www.theverge.com/2016/2/24/11094374/facebook-reactions-like-button. Wired, 2016. Facebook Reactions, the Totally Redesigned Like Button, Is Here. 24 February 2016. Available online at: https://www.wired.com/2016/02/facebook-reactions-totally-redesigned-like-button/. Paolillo, J. C., 2023. The awkward semantics of Facebook reactions. First Monday, 28(8). 7 August 2023. Available online at: https://firstmonday.org/ojs/index.php/fm/article/download/13157/11293 doi: https://dx.doi.org/10.5210/fm.v28i8.13157.
[3] The Notice, footnote 53.
[4] “The SSNIP considered is normally a price increase in the range of 5% to 10% implemented on one or more products in the candidate market, including at least one product of the undertaking(s) involved”. The Notice, footnote 54.
[5] Implicit price refers to the price of a good or service that is not directly observed in a market transaction but can be inferred from other information. For example, if we assume that consumers prefer fewer ads, an implicit price could be calculated for the ads that the user sees to use the free product. This could be done by reference to the price of the ad, revealed preferences on users’ willingness to pay for ad-free versions or other measures.
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