Guidelines on the Definition of Relevant Market

Defining the relevant market in a scientific and reasonable manner plays an important function in identifying competitors and potential competitors, ascertaining business operators' market share and the degree of market concentration, determining the market position of business operators, analysing the effect of business operators' acts on market competition, judging whether a business operator's act violates the law and determining, where a violation of the law has taken place, the legal liability that ought to be borne, as well as other such key issues. Accordingly, defining the relevant market is often the starting point in analysing competitive behaviour and is an important step in anti-monopoly law enforcement work.

Article 3: Meaning of relevant market

The term “relevant market” means the product dimension and geographic dimension within which business operators compete in respect of specific products or services (hereinafter collectively referred to as Products) during a certain period of time. In anti-monopoly law enforcement practice, it is commonly necessary to define the relevant Product market and the relevant geographic market.

A relevant Product market is a market consisting of a group or type of Products that consumers view as being relatively highly substitutable by reason of factors such as their characteristics, purpose and prices. These Products exhibit a relatively strong competitive relationship and, in the course of anti-monopoly law enforcement, may be taken as the Product dimension within which business operators compete.

A relevant geographic market means the geographic area within which consumers obtain relatively highly substitutable Products. These areas exhibit a relatively strong competitive relationship and, in the course of anti-monopoly law enforcement, may be taken as the geographic dimension within which business operators compete.

Where production lead times, use by dates, seasonality, trendiness or term of protection of intellectual property have become a characteristic of a Product that cannot be ignored, the time factor should be considered when defining the relevant market.

In anti-monopoly law enforcement work done in respect of technology trading, licence agreements, etc. that involve intellectual property, the relevant technology market may additionally need to be defined and the effect of factors such as intellectual property and innovation taken into consideration.

Part Two: Fundamental basis for defining the relevant market

Article 4: Analysis of substitutability

In anti-monopoly law enforcement practice, the size of the relevant market is mainly dependent on the degree of substitutability of the Product (area).

The circumstance that constitutes a direct and effective competitive constraint to the behaviour of a business operator in market competition is when there is a Product in the market that consumers deem to have a relatively high degree of substitutability or when there is another area that can provide such Product. Accordingly, the relevant market is mainly defined by analysing demand substitutability from the perspective of the consumers. Where the competition constraint imposed on the behaviour of business operators by supply substitutability is similar to demand substitutability, supply substitutability should also be considered.

Article 5: Demand substitutability

Demand substitutability is the degree of substitutability of different Products determined from the perspective of consumers based on factors such as consumers' demands with respect to the function and purpose of a Product, quality recognition, price acceptance and degree of difficulty in obtaining a Product.

In principle, from the perspective of consumers, the greater the degree of substitutability between Products, the more intense is the competition and the more likely it is that they belong to the same relevant market.

Article 6: Supply substitutability

Supply substitutability is the degree of substitutability of different Products determined from the perspective of the business operator based on factors such as other business operators' investments in improving production facilities, risks borne and time of entry into the target market.

In principle, the less investment in improving production facilities, the smaller the extra risks borne; and the more quickly highly substitutable Products are provided by other business operators, the higher is the degree of supply substitutability. When defining the relevant market, particularly when identifying the relevant market participants, it is then necessary to consider supply substitutability.

Part Three: General methods of defining the relevant market

Article 7: Overview of the methodology for defining the relevant market

More than one method can be used to define the relevant market. In anti-monopoly law enforcement practice, it is possible to use different methods depending on the actual circumstances. When defining the relevant market, an analysis of demand substitutability may be carried out based on factors such as the characteristics, purpose and price of the Products; when necessary, an analysis of supply substitutability may be carried out. When the market dimension within which business operators compete is not sufficiently clear or is difficult to determine, the analytical approach of the “hypothetical monopolist test” may be used to define the relevant market (for the specifics, see Article 10).

The anti-monopoly law enforcement authority encourages business operators to define the relevant market based on the specific circumstances of the case by using objective and true data and employing economic analysis methods.

Regardless of the method used to define the relevant market, the basic nature of a Product, that it satisfy consumer demand, needs to be grasped, and this is to be used as the basis for correcting marked deviations that arise in defining the relevant market.

Article 8: Main factors to consider when defining the relevant product market

When defining the relevant Product market from the perspective of demand substitutability, the factors that may be considered include but are not limited to the following:

(1) evidence showing that due to a change in Product price or other competition factor, consumers would switch or would consider switching to another Product;

(2) the overall characteristics of the Product, such as its appearance, performance, quality and technical features, and its purpose: with respect to characteristics a Product may show certain differences, but consumers may still deem it a close substitute based on its identical or similar purpose;

(3) price differential between Products: under normal circumstances, the prices of relatively highly substitutable Products are relatively close, and when prices change, they trend in the same direction; when analysing price, price changes arising due to factors unrelated to competition should be ignored;

(4) Product sales channels: it is possible that the consumers for Products sold through different channels are different, making the occurrence of a competitive relationship between them difficult, and thus minimising the possibility that they can become relevant Products; and

(5) other important factors: e.g. consumer preferences or degree of consumers' reliance on the Product; barriers, risks and costs that could impede a large number of consumers from switching to a certain close substitute Product; whether differential pricing exists, etc.

When defining the relevant Product market from a supply-side perspective, the factors generally considered include: evidence of the reaction of other business operators to a change in Product price or other such competition factor; the production procedures and processes of other business operators, the degree of difficulty involved in switching production, the time required to switch production, the additional costs and risks involved in switching production, market competitiveness of the Products supplied after the switch in production, marketing channels, etc.

No function of any factor in defining the relevant Product market is absolute and a certain emphasis may be placed on one or another depending on the circumstances of a case.

Article 9: Main factors to consider when defining the relevant geographic market

When defining the relevant geographic market from the perspective of demand substitutability, the factors that may be considered include but are not limited to the following:

(1) evidence showing that due to a change in Product price or other competition factor, consumers would switch or would consider switching to another area to buy the Product;

(2) transport costs and transport characteristics of the Product: relative to Product price, the higher the transport costs, the smaller the dimension of the relevant geographic market, e.g. Products such as concrete; the transport characteristics of a Product also determine the sale territory of a Product, e.g. Products such as industrial gas that requires conveyance by pipeline;

(3) the actual Product territory selected by a majority of consumers and the sales distribution of the Products of the main business operators;

(4) inter-regional trade barriers, including customs duties, local regulations, environmental protection factors, technical factors, etc.; if customs duties, relative to the price of the Product, are relatively high, the relevant geographic market is likely to be a regional market; and

(5) other important factors: e.g. the preferences of consumers in a specific area and the quantity of Products transported into and out of the area.

When defining the relevant geographic market from a supply-side perspective, the factors generally considered include: evidence of the reaction of business operators in other areas to a change in Product price or other such competition factor; the timeliness and feasibility of business operators in other areas supplying or selling the relevant Products, e.g. the changeover costs for placing orders with business operators in other areas, etc.

Part Four: Explanation of the hypothetical monopolist test analytical approach

Article 10: Basic approach behind the hypothetical monopolist test

The hypothetical monopolist test is an analytical approach used to define the relevant market that may aid in resolving uncertainties that can arise in defining the relevant market and is now widely used by countries and regions when formulating anti-monopoly guidelines. Based on this approach, people can employ economic tools to analyse relevant data that they have obtained to determine the smallest Product group and geographic dimension within which the hypothetical monopolist can maintain prices at a level higher than the competitive price, and, thereby, define the relevant market.

In general the hypothetical monopolist test first defines the relevant Product market. Consideration commences first from the Product provided by the business operator that is the focus of the anti-monopoly review (Target Product). Assuming that the business operator is a monopolist that has the maximisation of profits as its business objective (Hypothetical Monopolist), the issue that is to be analysed is whether, the sales conditions of other Products remaining unchanged, a small (in general between 5% and 10%) increase in the price of the Target Product can be imposed by the Hypothetical Monopolist in a non-transitory manner (in general one year). The increase in price will cause consumers to switch to other highly substitutable Products, thereby causing the Hypothetical Monopolist's sales to drop. If, after the increase in the price of the Target Product, and despite the drop in its sales, the Hypothetical Monopolist is still able to make a profit, then the Target Product constitutes the relevant Product market.

If the price increase causes consumers to switch to other highly substitutable Products, making the Hypothetical Monopolist's price increase unprofitable, then those substitute Products need to be included in the relevant Product market and those substitute products and the Target Product form a Product group. Then, the analysis turns to whether an increase in the price of the Product group would still be profitable to the Hypothetical Monopolist. If the answer is “yes”, then the Product group constitutes the relevant Product market, otherwise it is necessary to continue with the foregoing analytical process.

As the Product group is expanded, the substitutability of the Products in the group with those outside the group becomes ever smaller until, in the end, a certain Product group is arrived at and the Hypothetical Monopolist can derive a profit from a price increase; from this the relevant Product market can be defined.

The approach for defining the relevant geographic market is identical to that for defining the relevant Product market. Commencing first from the area in which the business operator that is the focus of the anti-monopoly review carries out its business activities (Target Area), the issue to be analysed is whether, the sales conditions of other areas remaining the same, a small (generally between 5% and 10%) non-transitory (in general one year) increase in the price of the relevant Product in the Target Area by the Hypothetical Monopolist would be profitable. If the answer is “yes”, the Target Area constitutes the relevant geographic market. If the high substitutability of other geographic markets causes the price increase to be unprofitable, the geographic dimension needs to be expanded until the point where price increase is profitable, and such area then constitutes the relevant geographic market.

Article 11: Certain actual problems in the hypothetical monopolist test

In principle, when using the hypothetical monopolist test to define the relevant market, the selected benchmark price should be the fully competitive current market price. However, in a case of abuse of dominant market position, collusion or a concentration of business operators where collusive behaviour exists, where the current price deviates markedly from the competitive price, choosing the current price as the benchmark price would cause the result of the definition of the relevant market to be unreasonable. In such a circumstance, the current price needs to be adjusted and a more competitive price used.

Furthermore, in general, a price increase should be in the range of 5% to 10%, but, in law enforcement practice, the range of the small increase in price may be determined through analysis depending on the circumstances of the sector involved in the case.

When a business operator makes a small price increase, not all substitution reactions of consumers (or areas) will be the same. Where substitution reactions are different, tests using different ranges can be carried out on different groups of consumers (or areas). In such a case, when defining the relevant market, it will be necessary to consider the circumstances of the consumer groups and specific areas.