In or Out?
By Atty. Macario De Claro, Jr.
October 9, 2019
You may have heard in the news that the Philippine Competition Commission is looking into big mergers and the behavior of dominant market players. The PCC investigates alleged abuses of dominant position and reviews proposed mergers, acquisitions and joint ventures that exceed set thresholds to determine their effects on competition in the relevant markets. What, then, is a relevant market?
Based upon the implementing rules and regulations (IRR) of the Philippine Competition Act (PCA) under Rule 2 (l), relevant market refers to the market in which a particular good or service is sold and which is a combination of the relevant product market and the relevant geographic market, defined, as follows: (a) a relevant product market comprises all those goods and/or services which are regarded as interchangeable or substitutable by the consumer or the customer, by reason of the goods and/or services’ characteristics, their prices, and their intended use; and (b) the relevant geographic market comprises the areas in which the entity concerned is involved in the supply and demand of goods and services, in which conditions of competition are sufficiently homogenous and which can be distinguished from neighboring areas because the conditions of competition are different in those areas.
Market definition is often the starting point of competition assessment. It primarily depends on consumer response to the exercise of market power by firms. Imagine there is a monopolist in the market for a certain product—say soda. If this monopolist will increase prices (by just 5 percent to 10 percent but permanently), decrease quality, or limit product availability, do customers have alternative products to which they can and are willing to switch? Are there suppliers in other places from whom they can buy?
Consumer insight on purchase and usage patterns is crucial for market definition. What usually determines the relevant product market is demand-side substitution as a response to price or non-price changes. But sometimes, supply-side substitution also factors into market definition when competing suppliers can switch production to the relevant product without incurring significant additional costs or risks. This can happen when the companies segment their product line into several grades or variants, like in the case of baby formula, cement or paper. In these markets, customers with different needs may be unwilling to substitute between variants, but suppliers are usually able to shift supply and offer a competitive constraint on any undue exercise of market power by a firm just as quickly and effectively.
Talking about the relevant geographic market, does this include a barangay, city, province or the whole country? It depends on transportation costs. Other factors may be also considered such as regulations, culture, and other trade barriers that limit the willingness or ability of customers to substitute products or prevent suppliers from serving customers. Seller locations may also shape the geographic market when customers go to these locations to obtain goods and services. Alternatively, if suppliers bring their products to their customers, then the relevant geographic market will be based on the locations of suppliers’ target market.
So, why is market definition important? It is important because it allows competition authorities to limit the scope of products and services, geographic areas, and market participants that are relevant to their assessment or investigation. Sound market definition lends credence to the calculation of market shares and concentration in later stages of the assessment. For example, evidence on the extent of market share and the ability and incentive of a single player to exercise market power within a certain relevant market would allow competition authorities to determine a dominant position of a certain entity and potentially the entity’s abusive conduct.
For more information on market definition and its applications in competition policy enforcement, you may check the PCC’s web site https://www.phcc.gov.ph.
Commissioner de Claro Jr. is a CPA lawyer who has worked in companies in the fields of manufacturing, mining, telecommunications, real estate and banking and finance prior to his appointment to the Philippine Competition Commission. A litigation and corporate lawyer, he once served as legal consultant to the Department of Environment and Natural Resources. He graduated from the De La Salle College with a BS in Commerce, Major in Accounting and earned a Bachelor of Laws degree from the Ateneo de Davao Law School.
(Originally published on Business Mirror’s Competition Matters column on October 9, 2019 here.)