WRITTEN QUESTION E-2092/00

by Reino Paasilinna (PSE) and Ulpu Iivari (PSE) to the Commission

(28 June 2000)

Subject: Definition of a geographical market

The Commission has taken a hard line in defining the concept of relevant markets when intervening in the purchase of undertakings, mergers and certain types of agreement. The Commission has prohibited the above-mentioned activities and has imposed conditions on them if they have had an influence on a relevant product market or geographical market in such a way that a commanding market position is created or strengthened. However, the Commission's interpretation of a relevant geographical market diverges from the concept of a market as seen by business. Businesses understand a market area to mean the sales area or area of industry in which they operate. On what exactly is the Commission's interpretation of a commanding market position based? How does it justify the fact that its definition differs so radically from the concept of a market as seen by business?

In practice the Commission's interpretation hitherto in the light of the above-mentioned principles has led firms, particularly those from economically small areas to regard the Commission's intervention in their mutual cooperation arrangements as illegal. The present application of the competition rules places business cooperation systems in large and thinly populated border areas on an unequal footing with those in the centre of the EU. The Commission has been much keener to intervene in business consortiums in border areas, even though their market share is relatively small, than in cases where the market share is perceptibly larger. No intervention takes place in comparable consortiums in the centre of the EU. How does the Commission propose to take account of this state of affairs and ensure that its interpretation of a market area does not harm the development of competitive units in small market areas?

Answer given by Mr Monti on behalf of the Commission

(1 August 2000)

It is certainly true, as the Honourable Members indicate, that the concept of the relevant market for a merger or anti-trust assessment can be different from other definitions, including those used by companies. Companies may use the term market simply as a reference to the area where they sell their products or to refer broadly to the industry or sector to which they belong. This is in contrast to the term relevant market, as used in the competition rules, which has a legal and economic meaning, based on the interpretation given by the Court of justice.

In the latter sense, market definition is a tool to identify and define the boundaries of competition between firms. It serves to establish the framework within which the Commission applies competition policy. The main purpose of market definition is to identify in a systematic way the competitive constraints that the firms face. The objective of defining a market in both its product and geographic dimension is to identify those competitors of the firms involved that are capable of constraining the latter's behaviour and of preventing them from behaving independently of effective competitive pressure. It is from this perspective that the market definition makes it possible to calculate market shares that convey meaningful information regarding the market power of the involved firms.

These principles are applied to all merger cases (as well as in the context of Articles 81 and 82 (ex Articles 85 and 86) of the EC Treaty). The Commission does not share the Honourable Members' view that its competition policy has led to discriminatory treatment of operations between companies from smaller market areas. As no particular case is mentioned where, in the Honourable Members' view, such discrimination would have occurred, the Commission will use the recent example of the Volvo/Scania case to illustrate its statement above.

As the Honourable Members may be aware, the Commission decided, on 14 March 2000, to declare the proposed merger between the two Swedish heavy vehicle manufacturers incompatible with the common market. The reason for this decision was that the two merged companies would have achieved a dominant position on 15 relevant markets for heavy trucks, buses and coaches in Denmark, Finland, Ireland, Norway, Sweden and the United Kingdom. Indeed, following that decision some commentators raised similar questions as the Honourable Members', i.e. whether the Merger Regulation (Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings(1)) sufficiently takes into consideration the situation of smaller Member States, with an important industrial sector.

In this context, it must be stressed that the purpose of merger control is to ascertain that dominant positions are not created or reinforced on any relevant market (regardless of whether the market in question is small or large). Looking at many of the markets affected by the proposed Volvo/Scania merger, the effect would have been to eliminate almost entirely the existing competition. For a merger to be acceptable, it must not create such problems. Unfortunately, even after due consideration of the commitments proposed by Volvo, these concerns remained.

Second, it should be remembered that the success of companies such as Volvo and Scania has been due largely to the competition between them. This explains, to a large degree, why they have become successful international companies with more than 80 % of their sales outside the Nordic region. Even from an industrial point of view it is therefore not clear why it would be in anyone's interest to have competition between such companies eliminated through a merger.

Third, to allow mergers leading to dominant positions in even small home markets would, in addition to being unlawful under the Merger Regulation, lead to discrimination against customers and consumers in smaller Member States. These customers would become exposed to the dominance and would not be protected in the same way as if they had lived in a large Member State. It would also lead to discrimination against companies from larger Member States, which would be barred from entering the markets of the dominant firm, whereas the merged entity would be able to enter the more open (and possibly larger) Member States. Companies from larger Member States would also be discriminated by not being able to claim this peculiar small market defence.

Finally, firms based in smaller countries and which have high market shares in their home markets, such as Volvo and Scania, are certainly not precluded from expanding through mergers. In fact they have many options for cross-border mergers, a fact which is amply shown by the involvement of both firms in new transactions (with Volkswagen and Renault respectively), within a very short period after the Commission's decision.

In conclusion, the Commission strongly believes that there are no grounds for the allegation that the application of the competition rules discriminates against firms from smaller Member States. The process of market definition treats all companies in a uniform way. It does not focus on whether the relevant geographic area is large or small, neither whether this area constitutes a border area or central region. Instead, the focus is, and must be, on the competitive constraints faced by the companies operating in the economically relevant area.

(1) OJ L 395, 30.12.1989.