A relevant market is typically defined in terms of both a product and geographic dimension. The geographic dimension concerns the geographic or territorial boundaries of the market. Its purpose is to identify the geographic boundaries of competition, in other words to identify the suppliers of a given product or service that are capable of constraining the market behaviour of a given company and to whom customers of that product or service can turn.
The European Courts of Justice have long held that a relevant market has a geographic dimension, the definition of which must be based on appropriate evidence. From the early case Europemballage Corporation and Continental Can Company v Commission (1973), the Court of Justice considered it necessary to take account of the geographic dimension of the relevant market. The case concerned an attempt by the Commission to prohibit a concentration under what is today Art 102 TFEU at a time when no specific merger control regulation existed in Community competition law. The Court annulled the Commission’s decision for lack of reasoning. The Court explained that the Commission was under an obligation to state legally sufficient reasons or, at least, to prove that the remaining competitors could no longer constrain the merged entity (Continental Can, paragraph 29). In this context, and while the Court approached the question of relevant market primarily from the product market perspective, it explained that ‘[t]he argument … that the plants of certain manufacturers … were located too far away from most … consumers to enable the latter to decide to use them as a permanent source of supply, has not been substantiated’, thus acknowledging that the relevant market had a geographic dimension (Continental Can, paragraph 35). A few years later, in United Brands v Commission (1978, paragraph 10), the Court of Justice stated this explicitly.
Since Continental Can and United Brands, the European Courts of Justice have discussed geographic market definition many times. The long history of case law is enshrined in the EU Market Definition Notice (1997), which describes the European Commission’s approach to market definition, including to relevant geographic market. The Notice explains that a relevant market includes a geographic dimension, and that such relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas (EU Market Definition Notice, paragraph 8). A similar definition is found in Article 9(7) of the EU Merger Regulation, called the ‘geographic reference market’.
The idea of a systematically defined geographic market is widely recognised outside the EU. For example, in the US, Section 7 of the Clayton Act prohibits mergers that substantially lessen competition or tend to create a monopoly in any line of commerce ‘in any section of the country’. Ruling on a case under the Clayton Act, the US Supreme Court explained in Brown Shoe Co., Inc. v. United States (1962) that the area of effective competition must be determined by reference to ‘a geographic market (the “section of the country”)’ (Brown Shoe, paragraph 324). The Court further instructed that the definition of such market required ‘a pragmatic, factual approach’ and that the market must ‘correspond to the commercial realities’ of the industry (Brown Shoe, paragraph 336). It follows that the US Horizontal Merger Guidelines (2010) note that the ‘arena of competition affected by the merger may be geographically bounded if geography limits some customers’ willingness or ability to substitute to some products, or some suppliers’ willingness or ability to serve some customers’ (US Horizontal Merger Guidelines, section 4.2).
The analytical approach to defining a geographic market is largely similar to defining the product market. In the context of a geographic market, demand substitution refers to the possibility of customers in a given area turning to suppliers outside that area. At the same time, supply substitution refers to the possibility of suppliers located outside a given area starting to supply customers inside that area. In this context, it is interesting to observe that different jurisdictions take different approaches to these competitive constraints. In particular, while demand substitution is generally accepted as the main competitive constraint, approach to supply substitution shows some variation. Overall, supply substitution is considered less often than demand substitution and, for example, the US Horizontal Merger Guidelines explicitly state that market definition focuses solely on demand substitution, leaving supply substitution to be considered in the competitive assessment (US Horizontal Merger Guidelines, section 4). In contrast, while demand substitution is typically considered the most effective and immediate constraint under the EU competition law (easyJet, paragraph 99), the EU Market Definition Notice accepts that supply substitution ‘may’ be taken into account, including for the definition of a geographic market, if its effects are equivalent to those of demand substitution in terms of effectiveness and immediacy (EU Market Definition Notice, paragraphs 20 and 21).
The factors considered in the definition of a geographic market may be different from those for a product market. The OECD has observed (OECD 2016, paragraph 44) that, with regard to geographic markets, transport costs are one of the most frequently cited, and potentially determinative, factors. They increase the relative price of imports (or lower their quality) and, if sufficiently high, effectively close a market to foreign producers and support a narrower market definition. Transport costs are nonetheless not the only factor, and the OECD has further observed that product characteristics, regulatory and trade barriers, consumer preferences and characteristics as well as market dynamics and commercial relationships are commonly considered (OECD 2016, sections 3.3.2 – 3.3.5). It could be noted that at least some of these factors appear capable of having an impact on both demand and – where considered – supply substitution: For example transport costs, trade barriers or the perishable nature of a product may have an impact on both demand and supply substitution. In the definition of a geographic market, the practical impact on market definition of demand and supply substitution may thus be close to each other in some respects and cases, or at least closer than in product market definition.
