The first steps toward economic analysis of the Anti-monopoly Law

Lack of detailed guidelines for the demarcation of the relevant market is a primary criticism of the PRC Anti-monopoly Law (AML) and its enforcement. Relating to the definition of the relevant market, there has been a tremendous difference in opinion among Chinese experts, including legal consultants and economists. The gap between such opinions is far too wide for consolidation. Thus, the State Council has intentionally ignored the demarcation of the relevant market in regulations following the AML concerning notification of concentrations.

From a theoretical and practical stance, inattentiveness is not an adequate response: the relevant market is the basis of competition. Therefore it is hard to treat a specific behaviour as anti-competitive or pro-competitive if such behaviour is not within the relevant market. Without the boundary of the relevant market, it is impossible to evaluate a concentration, monopoly agreement and/or administrative monopoly. It is also impossible to regulate any abuse of dominance due to the inability to describe the relevant market, as such action would take place within the relevant market.

This situation has resulted in confusion. When a business operator makes a concentration notification, the operator is required to evaluate the competitive impact on the relevant market. Without a definite way to describe the relevant market, the evaluation is inherently flawed. The draft guidelines may provide some clarity, however.

First, the draft clearly stipulates the related factors to demarcate the relevant market. In accordance to the provision of the AML, the draft states that the product market and geographic market are essential factors of the relevant market. Furthermore, the draft acknowledges that the temporal market is also an important factor influencing the relevant market. This is an important point as it brings the production cycle, usage period and current trends into consideration. Finally, during the course of investigation of concentration relating to IP issues, the invention market and technology market should also be considered.

Regarding the definition of the relevant market, the draft breaks through the provisions of the AML, transplanting the latest research from the USA and EU, resulting in a practical approach towards enforcement.

Secondly, the draft provides a theoretical basis for the demarcation of the relevant market. For the first time, substitutability analysis is regarded as a means to demarcate the relevant market in the official documents in China.

In the draft, supply substitutability and demand substitutability are mentioned and are complemented with a detailed way in which to proceed with the required analysis. On the downside, the lack of potential competition will be regretful.

Third, it is worth mentioning that the draft provides a detailed list of elements influencing the geographical and product market. For instance, from the perspective of demand, the elements which could potentially influence the product market include the product character, use, price, sale channel, consumer loyalty, and cost and risk of shift to substitutability. From the view of supply to demarcate the product market, the relevant elements include process flow and product workmanship, difficulty, time, sunk costs and risks associated with transferring into a different product market.

These stipulations do not appear perfect. However, if promulgated they will add dramatic practical value to the enforcement of the Anti-monopoly Law. As far as the AML is concerned, it is too abstract to be enforced without additional guidelines and regulations. From this point of view, the draft improves the certainty of enforcement in the field of demarcation of the relevant market.

Lastly, the draft also uses SSNIP (small but significant non-transitory increase in price) to demarcate the relevant market. In the explanation of SSNIP, the draft uses certain terminology, such as “competitive prices”. In the future the draft will likely be criticised as it does not provide adequate definitions for terminology such as this; it also lacks specific methods, such as the specific ranges concerning price increases in SSNIP. These problems do not appear to be faults of this draft, but rather have originated from the characteristics of the AML.

The future promulgation of the guidelines for the demarcation of the relevant market will be a fundamentally important step in the economic analysis provided by the AML. The exact date of promulgation of these guidelines remains uncertain, so, for now, we must wait.