The first step in any competition analysis is to define the relevant market.
The purpose of market definition is to determine the boundaries of a given market. Only then will it be possible to analyze the prospects for competition in the market, opportunities for particular firms to acquire and exercise market power, and implications for consumer welfare.
A market exists where buyers wishing to buy a good or service come into contact with sellers wishing to sell that good or service, so that transactions occur. For competition purposes, a market includes all those suppliers, and buyers, between whom there is close competition, that is:
- All those goods or services that are close substitutes in the eyes of buyers, and
- All those suppliers who produce (or could easily switch to produce) those goods or services.
The “SSNIP” or “Hypothetical Monopolist” Test
The “SSNIP” or “hypothetical monopolist” test defines a market as:
The smallest group of products and the smallest geographical area in which a hypothetical monopoly could successfully implement a “small but significant and non-transitory increase in price” (or "SSNIP").
For example, imagine that a hypothetical firm has a monopoly over the supply of the all widgets within a defined geographical area. Could that firm increase the price of widgets, for example by 5 or 10 percent, and sustain the increased price in the future?
If such a price increase would cause consumers to switch to alternative products or to suppliers in neighboring areas, then the relevant market includes those products or areas. Similarly, if the price increase would cause other suppliers to start selling widgets in the geographic area being considered then the relevant market includes those suppliers.
Market Definition and Substitutability
Market definition focuses on the substitutability of differentiated products or services. Whether two differentiated products should be considered to be in the same market depends on the extent to which they are reasonable substitutes:
- From the point of view of consumers (are they “functionally equivalent”)
- From the point of view of suppliers (how easily can firms not already supplying the product or service in question start doing so?)
As well as considering whether products are substitutes based on their product attributes, market definition must also determine the geographic boundaries of the market. The test for assessing the geographic scope of a market is:
Can a SSNIP for a product in one location substantially affect the price of the same product in another location?
If the answer is “yes”, then the relevant geographic market includes both locations.
Market definition in the ITC sector can be difficult. Effective substitutes may not be only those services supplied by similar telecommunications carriers (or by carriers at all). For example:
- Voice and data services are now available from conventional wireline or wireless networks, using either circuit-switched or packet-switched technologies,
- Voice mail services are available from telecommunications networks, answering machines, or manned answering services.
Other Dimensions of Market Definition
Market definition may consider other dimensions of the product or service in question, where they are relevant. Other dimensions include:
- The functional dimension: The relevant level of the production or distribution chain. For example is the market at the wholesale or retail level?
- The temporal dimension: The timeframe or timing within which the market operates
- The customer dimension: The different customer types within a market. For example should large business customers and residential customers be viewed as separate markets?