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Market definition
Market definition under product migration.

Jul 15, 2020

In many markets, consumers migrate from traditional to more advanced products as the latter can satisfy their needs better, or prices are lower. When such markets are under competitive or regulatory scrutiny, it is sometimes unclear whether old and new products exert a competitive pressure on each other and, if so, whether the pressure is sufficient to include both products in the same market. Given the important role played by the market definition in competition and regulation, a market definition that does not properly reflect the competitive pressures can lead to incorrect decisions, harming social welfare.

The Commission’s market definition notice (currently under revision) points to migration as possible evidence of substitution: “launches of new products in the past can also offer useful information, when it is possible to precisely analyse which products have lost sales to the new product.”1However, in a number of cases, competition or regulatory authorities stated that migration can be “autonomous”, reflecting changing consumer preferences and that it does not necessarily imply consumers would switch from the old to the new product in response to price or quality changes. For example:

  • The UK's CMA in its Ladbroke/Coral merger decision decided that, despite the evidence of migration from brick-and-mortar betting offices to online gambling, the two segments to do not belong to the same relevant market.2
  • In the Netherlands, ACM concluded in its market review of the postal market that the substitution from post to digital means of communication is largely "autonomous" and not influenced by price changes.3,4

Moreover, migration is sometimes as a sign of “one-way” or “asymmetric” substitution, leading to defining separate markets. For example, in an abuse of dominance case against France Telecom (Wanadoo Interactive) the Court of First Instance of the European Commission agreed with the Commission that as the substitution between high-speed and low-speed broadband was asymmetric as consumers who use high-speed internet would be unlikely to switch back to low speed in response to a small price increase.5 According to the Commission, “if the products were perfectly substitutable from the point of view of demand, the rates of migration should be identical or at least comparable.” More recently, in its 2018 Business Connectivity Market Analysis, Ofcom defined separate markets for services of 1 GB and 10 GB as consumers of 10 GB service would be unlikely to switch to 1 GB after a price increase. On this basis Ofcom concluded that the substitution between high and low speed services is weak and asymmetric.6 Similarly, the European Regulatory Framework for Electronic Communication states that substitution between narrowband and broadband is in one direction as “evidence shows that once customers have migrated from narrowband to broadband access, they are unlikely to switch back, even in response to a small but non-transitory increase in price.”7

However, migration does not always imply that the new product exerts more competitive pressure on the old product than the reverse. One of the claims brought in in favour of substitution asymmetry is that once consumers have switched to the new product, they will not switch back to the old product. But even in the absence of switching back, the presence of the old product makes increasing the price of the new product less profitable, because it slows down migration.

Moreover, in most cases, migration is not likely to be “autonomous” i.e. independent of price or quality. All migration is driven by the new product offering a lower price or higher quality. The reason why sales volumes change even if prices and quality remain constant is that there is a delay between the changes in prices or quality and the subsequent switching. This is the result of how the example in constructed, where the migration is explained by the difference in price and/or quality. However, the concept of migration implies replacement, and it is difficult to envisage that consumers would replace the old with the new product if the new product did not give them more value. Therefore, when analysing substitutability between the old and new products in the presence of migration, competition and regulatory authorities should either provide a convincing explanation for migration other than one based on higher value offered by the new product, or accept migration as evidence for some degree of substitutability.

Any opinions expressed in this communication are personal and are not attributable to Competition Economists Group (CEG)