The relevant market
From an air passenger transport perspective
Bachelor’s thesis within European competition law Kandidatuppsats i affärsjuridik (EU rätt)
Author: Andreas Sioulas
Tutor: Petra Inwinkl Jönköping May 2010
Bachelor’s thesis in European competition law
Title: The relevant market within air passenger transport
Author: Andreas Sioulas
Tutor: Petra Inwinkl
Date: 2010-05-12
Subject terms: European competition law, air passenger transport, relevant market
Abstract
This thesis intends to analyze and clarify the relevant market within air passenger trans-port. Further the thesis intends to investigate if there is any difference in air passenger transport in accordance to more general business. The definition of the relevant market is an essential step in order to establish a breach under European competition law. The relevant market includes the relevant product market and the relevant geographic market. The fundamental issue in the relevant product market is whether products are considered to be substitutable and can constitute the same market. The Commission has set a notice which includes methods and criterias and serves as guidelines to courts and companies to define the relevant market. The notice is however not binding for courts. The CJ have developed implementation of the criterias which it tends to refer to even if it is a different branch, however a case-by-case based definition is needed. The defini-tion of the relevant market is based on three main criterias: demand substitutability, supply substitutability and potential competition. Even though the supply substitutabili-ty seems not be implemented in a further extension in more general branches, it seems to be of greater importance when defining the relevant market within air passenger transport. The air passenger transport has also established a test called base of origin and base of destination which includes an analysis of price, travel frequencies, comfort of the journey, transfer time to terminals and differences in the qualities and quantities in airports. However according to air passenger transport, travel sequences seems to be the criteria that courts focus most on.
Abbreviations
CJ Court of justice of the European Union TFEU Treaty on the function of the European Union TEU Treaty on European Union
Para paragraph P Page
Table of Contents
Abbreviations ... ii
1
Introduction ... 1
1.1 Background ... 1 1.2 Purpose ... 3 1.3 Method ... 3 1.4 Delimitation ... 42
Article 102 TFEU and the merger regulation ... 5
3
Services vs. products... 7
4
The relevant market ... 8
4.1 General information ... 8
4.2 Commissions definition of the relevant market ... 9
4.3 Relevant product market ... 10
4.3.1 United Brands v Commission... 11
4.3.2 Michelin v Commission ... 11 4.4 Demand substitution ... 12 4.4.1.1 Characteristics ... 14 4.4.1.2 Price ... 14 4.4.1.3 Intended use ... 14 4.5 Supply substitutability ... 15 4.6 Potential competition ... 17 4.7 Geographic market ... 17
5
Summery ... 19
6
Air transport ... 20
6.1 In general ... 20 6.2 Ahmed saeed ... 20 6.3 Air France/KLM ... 216.4 British Midland v. Aer Lingus ... 24
7
Analysis/conclusions ... 26
1
Introduction
1.1
Background
Competition can benefit both firms and consumers. Competition between firms encour-ages them to produce better products and pricing will also be more beneficial for con-sumers due to competition.1 Hence, competition law is an important area to protect. European competition law has always played an important role and it is one of the fun-damental pillars of European Union law. The European Union shall have exclusive competence to establish the necessary competition rules needed for the function of the relevant market.2 European competition law limits the freedom for companies to abuse their position, it narrows companies’ struggle to achieve superior power over other firms and it secures welfare and protect consumers from cartel agreements. It is the commission that shall ensure the application of Article 101, 102 the Treaty on the func-tion of the European Union (TFEU) and the merger regulafunc-tion 139/2004 the control of concentrations between undertakings by the initiative from a Member state or by itself.3 Market definition is a concept that is fundamental to all aspects of competition law, it is only through defining the market that inappropriate behaviour can be identified. In order for the Commission to secure that a firm is abusing its dominant position it must first establish that a firm holds a dominant position. In order to do so, the commission must first define the relevant market. Consequently, the relevant market is the first step to in-vestigate if a firm has breached competition law.
The relevant market is an impulsive, interesting area and it is always changing form, due to the constantly changing global economics and due to the curiosity how the Court of justice of the European Union (CJ) are going to define the relevant market in a cur-rent case. It even makes it more interesting to see the pattern that the CJ have estab-lished for the relevant market within a special sector as in air passenger transport which is an area that have gone through significant development in recent years. The air pas-senger transport is regarded as a special sector because of its heavy governmental
1
Competition Law, text, cases and materials, Alison Jones, Brenda Sufrin, p.15.
2 The treaty of the European Union article 3(b). 3 The treaty of the European Union, Article 105.
lation within access, capacity and prices.4 Even though the cases within air transport is limited, the EU is aiming to improve the air passenger transport both within and outside
the union5 which will lead to more legal issues and cases in the CJ. If you were going to take a regular flight, would you consider other possibilities as a
charter flight, regular flights on another distance or even road transport if your flight was cancelled?
Consider if you were going to buy bananas would you rather considering buying an-other kind of fruit if the bananas were sold out? The CJ ruled that you probably would not and ruled that bananas constitute their own market. This establishment costs a ba-nana manufacturing company a fine of one million Euros. How did CJ define the rele-vant market and come to a conclusion like that? This is one of many cases and issues that are going to be investigated in this thesis. The relevant market defines the market in which goods compete. Therefore the relevant market defines if two or more goods can be considered a separate market or substitute goods. How the relevant market is defined plays an imported role when establishing a breach under European competition legisla-tion. The importance of defining the relevant market has increased during the last years. Many breaches under competition law were enabled without a significant definition of the relevant market. However, today the market definition is fundamental in any compe-tition issue.
Why is it so important to understand the relevant market for companies? If a company knows its position in the market it can maximise its superiority in the market over other firms without breaching the regulation in EU law. Although it is the Commission who has primary enforcement power against European competition it can enforce it urges from other parties, which leads to if a company’s lawyers is aware of their competition firm’s market place it can hand it to the Commission. The definition of the relevant market has been established by the Commission and later been shaped through case law. However the definition is far from clear and many factors are taken in consideration when establishing the relevant market and it even makes it more complex in a special sector as in air passenger transport.
4 European Competition Law, A practitioner guide, second edition, Lennart ritter, W. David Braun,
Fran-cis Rawlinson, p.700. 5
1.2
Purpose
The air passenger transport is categorized as a special sector because of its
governmen-tal influence. There is not many articles written and the area is constantly changing. The purpose of the thesis is the following:
1. Identify the criteria that the CJ and the Commission apply to establish the definition within air passenger transport. 2. Investigate the differences between the relevant market for air passenger transport
and other more general businesses.
1.3
Method
The incorporation of the Lisbon Treaty which includes the treaty of the function of European Union TFEU and the Treaty on the European Union (TEU) was implemented on the 1 December 2009. The TFEU regrouped its article number from previous treaty, Treaty establishing the European Community. Since the TFEU was implemented in De-cember 2009, all my case law will be based on Article 81 and 82 from the previous treaty. In accordance with this, the old article numbers (81 and 82) will be replaced from the cases with the new Article numbers (101 and 102) from the TFEU.
The thesis is established from the (TFEU) and regulations as highest value. Some of the cases will be based on the previous merger regulation 4064/89 on the control of concen-trations between undertakings with its aim to distort inappropriate competition. 6 It has however been replaced by a newer merger regulation 139/2004 the control of concentrations between undertakings (the EC merger regulation). The thesis will how-ever have most of its focus on CJ case law.
Even though the thesis is concentrated on air transport, the delimitation as such makes the subject even broader due to the general and specific definition of the relevant mar-ket. Since the subject is wide and many steps and legal sources are used to define the relevant market within air passenger transport, and in order to not make the thesis too obscure and fussy, the thesis will be subdivided in different categories. The second chapter is going to treat the legal sources that are being used. Chapter three is going to
6
treat services in accordance to products. The fourth chapter is going to investigate the criterias that are necessary to establish the relevant market in general. In the sixth chap-ter, the thesis tends to analyze the relevant market within air passenger transport.
Finally, in the seventh chapter, which is needed to get a better understanding on the area, an analysis of all the legal sources and what have been established so far in the thesis is going to be held together and a conclusion will be drawn.
1.4
Delimitation
The purpose of the thesis is to establish the relevant market within air passenger trans-port and a narrow delimitation and exclusion of factors within the concept of the rele-vant market is inconvenient due to its broad area. Both the relerele-vant product market and relevant geographic market are going to be treated but most focus will be held on the relevant product market. The thesis is going to have a focus more than delimitation on Article 102 and the merger regulation within air transport. However Article 101 holds key aspects and has relevance to Article 102 and will be mentioned. No focus will how-ever be on abuse of dominant position or potential effect on trade. The incorporation of the Lisbon treaty had a minor effect on the competition law and won’t be treated any further.
2
Article 102 TFEU and the merger regulation
Since the thesis is based on Article 102 TFEU and the merger regulation it is important to explain them. Case law regarding Article 102 TFEU is applicable on case law regard-ing merger regulation.7 The system for defining the relevant market within merger regu-lation cases is primarily the same as the definition of Article 102 TFEU and is harmo-nized in the commission notice on the definition of the relevant market.8
Article 102 TFEU states;
‘Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.’
The merger regulation
9The purpose of implementing a merger regulation was to give the Commission a power to investigate and prohibit transactions including persisting changes to the structure of
competition and add to the original jurisdiction in Article 101 and 102 TFEU.10
The merger regulation11 regulates whether companies can, and under what conditions they may merge which each other. The merger regulation applies to all concentrations and not only to merges in the technical sense.12
The merger regulation the control of concentrations between undertakings states; ‘A concentration which would significantly impede effective competition, in the
com-mon market or in a substantial part of it, in particular as a result of the creation or
7 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between
un-dertakings, para.7.
8 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law, Para. 7.
9 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between
un-dertakings.
10 C.J. Cook, C.S kerse, EC merger control, third edition, 23.
11 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between
undertakings.
strengthening of a dominant position, shall be declared incompatible with the common market.’13 A common and fundamental factor for Article 102 TFEU and the merger regulation lies in the concept of the dominant position. It is not until a company have abused its domi-nant position that it will breach article 102 and the merger regulation. In order to define if a company is dominant it is first necessary to establish the relevant market.14 The CJ
defined the dominant positions several times in case law. ‘A position of economic strength enjoyed by an undertaking which enables it to prevent
effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customer and ulti-mately of its consumers.‘15 A dominant position arises from a combination of several separately factors which are not necessarily decided.16
13 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between
undertakings (the EC Merger Regulation), para. 3.
14 Common market law of competition, fourth edition, Bellamy and Child, edited by Vivien rose, Sweet
and Maxwell 1993, p.593.
15 Case 27/76 United Brands Company and United Brands Continentaal BV v commission. para, 65. 16 Case 27/76 United Brands Company and United Brands Continentaal BV v commission. Para, 66.
3
Services vs. products
According to the commissions notice, there is no distinction between services or prod-ucts.17 The merger regulation18 also tends to incorporate the concept services as same as products. However, even if they are treated analogously, the outcome may differ from a relevant market within services than products. The leading case within interpretation of services can be found in the British Airways v Commission19.
British Airways operated a range of target incentives which were proposed to travel agents. These commission projects had one thing in common: in every case, meeting the targets for sale growth induced an increase in the commission paid on all tickets sold by the travel agent and not only on the tickets sold after target was reached. British Air-ways were found to abuse its dominant position. The commission said, to analyze the possible dominant position on a product market, the potential competition must be es-tablished in the market comprising the totality of the products or services, with regards to their characteristics, whether they are particularly applicable for enjoying needs and are only to a limited extend regarded as substitutable with other products or services. The commission also stated that an analysis of the potential competition and the supply and demand in the market is also of importance. 20
17 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law para.7.
18 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between
undertakings (the EC Merger Regulation para.2.
19 Case T-219/99 British Airways plc v Commission.
4
The relevant market
4.1
General information
The court stated as early as 1973 that a definition of the relevant market is of major im-portance for the outcome of a competition issue.21 Defining the relevant market is a dif-ficult and complex area due to its many complicated factors. The keystone in the rele-vant market is to define the market within one or more goods compete against each other and weather it is considered as substitutable goods. The relevant market includes the relevant product market and the relevant geographic market and an ingoing analysis of both of them is necessary. The objective in defining the relevant market in both its geographic and product aspect is to identify the actual competitions involved that are capable of constraining their behaviour and preventing them from behaving independ-ently of an effective competition.22 The problems that arise when defining a market are which products or services that can be considered to be in the same market. That steel, fruit and ferry transport constitute their own market is obvious, but what about coffee and tea, bananas and fruit or regular air flights and charter flights?
A definition of the relevant market can only be made on a case-by-case basis as the courts must make a fresh analysis of the conditions.23 This means that it doesn’t matter how clear or precise the commission’s decisions or case law are, or if a previous case has similar information with a current case, it is still impossible to predict that the result will be same as the previous case. The ratizionale for this is that demand and supply are not invariable, the economy is shifting and firms’ market control changes over time due to consumer habits. Even though no connection can be made between market definitions because of the need for case-by-case definitions there is however a common dominator when defining the relevant market. The main principles are stated by the Commission in the commission notice on the definition of relevant market. Even though previous case law is not binding for a current case, there is, however cases with major importance which holds essential aspects of the relevant market, thus CJ often refers to previous
21 Case 6/72 Europemballage corp and Contintal can Co inc v. Commission [1973], para. 32.
22 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law, para.3.
cases although they are totally different. The main tool and outset to find help to inden-tify relevant market can be found in the commission notice of the relevant market.
4.2
Commissions definition of the relevant market
24Although the Commission plays a key role in the enforcement of competition law, the Commission was criticized by doctrine for a long time for not having taken a realistic approach to market definition. The Commission notice on the definition of relevant market for the purposes of Community competition law of the relevant market C 372, 09/12/1997 P. 0005 – 0013 was considered a welcomed and realistic step. The commis-sion notice25 is based on economic principles and provides framework for determining the relevant market.26 The commissions notice27 points out that its purpose is to provide guidelines as to how the Commission applies the concept of relevant product and geo-graphic market in its ongoing enforcement of European competition law28. It helps companies to be aware of their position in the market and whether they are about to breach competition legislation.
The commission notice29 is however not binding legislation and ‘is without prejudice to the interpretation which may be given by the Court of Justice or the Court of First In-stance of the European Communities.’30 The commission notice31 is however of essen-tial importance since it sets out the Commission’s current approach to the matter.32 The
24 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law.
25 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law.
26 EC Competition Law, text, cases and materials, Alison Jones, Brenda Sufrin, p. 42.
27 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law.
28 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law, para. 1.
29 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law.
30 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law, para. 6.
31 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law.
Commission has stated that the purpose for the definition of a relevant market is a tool to indentify the boundaries of competition between firms and which behaviour that is considered to have competitive constrains elements against the exposed firms.33 The commission have established three main principles for competitive constrains: demand substitutability, supply substitutability and potential competition,34 which will be treated in chapter 4.4, 4.5, and 4.6.
4.3
Relevant product market
The definition of the relevant product market depends on the determination of which products that are substitutes for each other known as interchangeably. If a product is ex-ceedingly substitutable, the producer of such product will have an insignificant market power due to if a potential raise in price occurs, the consumer will easily turn to the substitutes that the products have to offer.35 The issue that have to be established is to how close products or services have to be in order to be competitors against each other. The CJ has established that; ‘The concept of the relevant market in fact implies that there can be effective competi-tion between the products which form part of it and this presupposes that there is a suf-ficient degree of interchangeability between all the products forming part of the same market in so far as a specific use of such products is concerned’.36 Hence, all products that have a sufficient level of substitutability constitute the same market. The impor-tance of sufficient degree of substitutability can be found in the United Brands37 and Michelin38 cases.
33 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law, para.2.
34 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law, para. 13.
35 EC Competition Law, text, cases and materials, Alison Jones, Brenda Sufrin, p. 39. 36
Case 85/76, Hoffmann-La Roche & Co. AG v Commission, para 3. 37
Case 27/76 United Brands Company and United Brands Continentaal BV v commission.
4.3.1 United Brands v Commission39
The United Brands was a company which manufactured bananas. The Commission found that the United Brands breached Article 102 by abusing its dominant position and established that bananas consist of their own market separate from fresh fruit because of its special features. Further it was important to establish if bananas constituted their own market or whether they were substitutable for other fresh fruit. The United Brands ar-gued that the seasonal peak period, when there is a lot of other fresh fruit available, have an effect on not only on prices but the sales of bananas and its imports.40 However, the court stated that there is no need for substitutable products since the consumer can buy bananas the entire year41 and the substitutability was regarded as limited. The CJ ruling implies that, a technically high degree of substitutability is needed in order for a firm to be considered in a same market.
4.3.2 Michelin v Commission42
Michelin NV was a Dutch subsidiary of the Michelin group and was responsible for the production and sale of Michelin tyres in the Netherlands. The Commission found that Michelin has abused its dominant position on the market for operating anticompetitive target aimed to discount for new replacement for tyres for buses and lorries. Michelin claimed that the commission had made a too narrow definition of the market and that they didn’t hold a dominant position. The CJ held that the competition from retreads was too limited in order to effect Michelin’s position on the market.
There are two features of substitutability that have to be considered. Demand substitut-ability which is related with the substitut-ability of users of the products to switch to substitute products. Supply substitution is related with the ability of similar products to produce the product. Potential competition is also an important aspect because a firm’s behav-iour on market will be constrained if potential competitors have it too easy to enter the market in question. The potential competition is not very common, when defining the relevant market. It is, however, important later on in the competitive assessments, when
39 Case 27/76 United Brands Company and United Brands Continentaal BV. 40
Case 27/76 United Brands Company and United Brands Continentaal BV, para 17.
41 Case 27/76 United Brands Company and United Brands Continentaal BV, para 26. 42 Case 322/81 NV Nederlandsche Banden Industrie Michelin v Commission.
considering a firms position in the market.43 The Commission notice44 points however that the Commission will focus mostly on the demand substitution.45
4.4
Demand substitution
Demand substitution determines which products a consumer thinks are substitutes for another product. Unless products are totally consistent there will be no clear substitutes. However, most products do have substitutes of some kind. There are many factors to take into account in order to establish if a product is substitutable for another, mainly on customer preferences, whether customers can change directly or need time to convert, whether there is similar quality or price and whether substitutes are accessible. The cir-cumstances can be even more complicated if some customers can change products while others can’t or if a product has several functions and there are substitutes available for some of those functions but not for others.46 Interchangeability is set by measuring cross-elasticity of demand. The Commission have established a method called the SNIPP test to measure cross-elasticity of demand.47 SNIPP stands for a small but sig-nificant, non-transitory increase in price and can be described as following, if a cus-tomer would switch to available substitutes or to other suppliers due to a small increase in price (5-10) percent. If the substitutes made the increase of price unprofitable: due to loss of sales, additional substitutes and areas are involved in the relevant market.48 Fur-ther, the test can be described as if a small rise occur in five to ten percent of draught beer, would it make consumers to change to lager beer such that the price increase would not be efficacious to beer producers owing to loss of sales, then the draught beer and lager beer taken commonly constitute a separate product market. If an increase in
43EC Competition Law, text, cases and materials, Alison Jones, Brenda Sufrin, p. 43.
44 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law.
45 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law, para 13 and 14.
46 EC Competition Law, text, cases and materials, Alison Jones, Brenda Sufrin, p.44. 47
COMMISSION NOTICE on the definition of relevant market for the purposes of Community competi-tion law, para 17.
both lager and draught beer constitute consumers to drink cider, the relevant market is draught beer, lager and cider.49
The SNIPP test evaluates interchangeability and consumer selection by considering the effect on the market due to an increase of a product. Even though, the SNIPP test is a helpful tool to calculate demand substitutability, bear in mind, the commission notice is not a binding source, and it is the CJ which interprets Article 102. Hence, the definition of the relevant market should therefore not be determined by the Commissions notice, but by the case law established from the courts.50
The Commission and the CJ have establish additional factors than the SNIPP test in or-der to define the relevant market. However, the Commission and the courts have been criticized for using too many factors and that it have numerous times made a too narrow definition of the relevant market. According to the previous lager beer example, whether or not such an increase will have an impact on the consumer choice will depend on sev-eral factors. The CJ and the commission have developed and focused on three criteria in order to define substitutability from a consumer’s viewpoint.51 ‘A relevant product mar-ket comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products' characteristics, their prices and their intended use.’52 These criteria played a major role in the United Brands53 case, where the CJ stated due for bananas characteristics it was considered to be distinguished from other fresh fruit.54
49 EC Compettioin Law Robert Lane, European law series, 2000, p.9.
50 EC Competition Law, text, cases and materials, Alison Jones, Brenda Sufrin, p. 271. 51
EC Competition Law, text, cases and materials, Alison Jones, Brenda Sufrin, p. 271.
52 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law para, 7.
53 Case 27/76 United brands v commission.
4.4.1.1 Characteristics
A product is distinct from other products if its characteristics are likely to satisfy an ine-lastic need of consumers.55 If two products physically differ a lot, they cannot be used for the same end use and will not consider being substitutes.56
An investigation in products characteristics can mean both its physical and its technical capacity. However, products’ functional characteristics are in greater importance in its connection rather than in its appearance or physical capacity.57 The United Brands58 case is the leading case of interpretation a products characteristics, due to bananas char-acteristics, taste, softness, seed lenses, easy handling, and constant level of production, bananas were considered to constitute their own distinct product market.59
4.4.1.2 Price
Price is a fundamental factor when determining if a product is substitutable. From a practical point of view, market definitions are based on focusing on prices, and whether demand substitution arising from small permanent changes in relative prices.60 If a simi-lar product sells in vastly different prices in the same geographic market, they are most unlikely to have close substitute products. Different product markets have consequently been recognized according to price differences. In the Hasselblad case the court stated, due to Hasselblad’s outrageous prices in cameras its range of consumers was limited to professional photographers, specialists, keen amateurs or prestige buyers and therefore constituted it own market. Hence, price was a prime factor when establishing the rele-vant market.
4.4.1.3 Intended use
The last objective factor concerns the intended use which is associated with the struc-ture of demand. As previous established, a definition is made on a case-by-case basis, if
55
European Competition Law, A practioner guide, second edition, Lennart ritter, W. David Braun, Fran-cis Rawlinson, p. 25.
56
The economics of EC competition law, Simon Bishop and Mike Walker, p.58.
57 European Competition Law, A practioner guide, secone edition, Lennart ritter, W. David Braun,
Fran-cis Rawlinson, p. 25.
58 Case 27/76 United brands v commission.
59 Case 27/76 United brands v commission para, 31.
60 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
a consumer is in need of a specific service or product it will only be categorized within other products or services if it fulfils the same intended use. The interpretation of in-tended use may however induce to markets being defined more narrowly or to widely than the native characteristics of the products would urge.61 The leading case of inter-pretation in intended use is the Hoffman la Roche case. Hoffman la Roche was found to have abused its dominant position in the market for vitamins, Roche resisted the Com-mission’s decision regarding the definition of the relevant market. The company which produced several kinds of vitamins agreed that most of the vitamins constituted its own market.
The problematic that occurred, was that the vitamins C and E could be used for different purposes, it had several intended uses, first as supplement and as well as technological uses.62 The vitamin C and E for supplement constituted its own market and wasn’t con-sidered to be substitutable goods.63 However, vitamins C and E was considered to be substitutable goods within their technological uses.64 The commission stated if a prod-uct could be used for different reasons and if these consumers are in accordance with economic needs, which are different, there is a reason to justify the product in separate markets which may have specific elements which is dissimilar from the standpoint both of the substance and of the condition of demands. The Court however argued that there wasn’t enough substitutability to make the product part of a broader market definition.65
4.5
Supply substitutability
The CJ stated in the Continental can66 case that the supply side must be defined when establishing the relevant market.67 The Commission also stated that, the supply-side substitutability may be taken into consideration, when its impact is equivalent to the
61European Competition Law, A practioner guide, secone edition, Lennart ritter, W. David Braun, Francis
Rawlinson, p.27.
62 Case 85/76 Hoffmann-La Roche & Co. AG v Commission, p.25. 63 Case 85/76 Hoffmann-La Roche & Co. AG v Commission, p.23. 64 Case 85/76 Hoffmann-La Roche & Co. AG v Commission, p.25. 65
Case 85/76 Hoffmann-La Roche & Co. AG v Commission, p.27.
66 Case 6/72 Europemballage corp and Contintal can Co inc v. Commsiion [1973].
demand side-substitutability in meaning of effectiveness and immediacy.68 This meas-ure will essentially depend on supplier’s capacity to change production sufficiently fast and at low cost.69
In focus, supply side substitutability is desired to estimate the extent to which business that do not currently produce demand-substitutable product would change to produce such products in response to a minor but permanent increase in price on the market for those products. The Commission have stated that a practical example of the concerning the supply substitution can be found in the case of paper. Where is says that paper is normally supplied in a wide range of different qualities, from high quality papers for publishing books to standard writing paper. Looking at this from a demand viewpoint, different kinds of paper cannot be used for any given use. Hence, it’s not applicable to use low quality paper on art books. However, paper plants can manufacture different qualities and it is available to adjust production with negligible costs in a short period. Because of the avoidance of difficulties that can occur in distribution, companies which produce paper are therefore able to compete for orders of the respective qualities, in par-ticular if orders are placed with an acceptable lead time period to endure for modifica-tion of producmodifica-tion plans. The Commission would therefore, under such circumstances, not define a separate market for each quality of paper and its intended use.70
In order for supply-side substitutability to be effective, suppliers must be capable to change production to the relevant products and market them in acceptable time without incurring greater costs or risks. This may often happen when suppliers produce a broad range of qualities of a specific product. Even if a consumer might think that the different qualities are not substitutable, the different qualities may together forms a single rele-vant market provided that most suppliers can offer all the respective qualities quickly and without a major cost.71
68 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law, para. 20.
69 Competition Law of the European community, fifth edition, Van Bael and Bellis 2010, p.123.
70 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law, para.22.
4.6
Potential competition
The implementation of the potential competition should be consistent, the adeptness to potential suppliers to change production a short time period should result in a broader defined relevant market. If suppliers demand a longer period of time to change produc-tion, it will lead to a more narrow market with higher market shares, which eliminate potential competitors from the relevant market.72 The Commission has stated that the potential competition is normally not taken into account when defining the relevant market. Because of the conditions under which potential competition will feature an ef-fective competitive constrain, this relies on the analysis of categorical factors and occa-sions connected to the conditions of market entry. Hence, the implementation of poten-tial competition is only used at subsequent level and might play a key role in merger regulation cases.73
4.7
Geographic market
The second essential market to establish in the relevant market is the geographic market. The purpose is to delaminate the circle of actual competitors through investigate if firms from other geographical areas can be considered as alternative competitor sources, to identify the area where the objective conditions of competition applying to the product in question are the same for all traders.74 The method to define the geographical relevant market is similar as defining the relevant product market, i.e. applying the demand and supply substitutability criteria. Focus is aimed on the reference to the substitutability, whether a consumer in Sweden would consider changing to Danish products, due to a small price increase, if so, the producer will have an insignificant market power.
Whether or not the geographical market is exclusive or weather the geographical market is local or global depends on many factors that should be taking into consideration, it is seldom that one factor determines the geographical market but rather a conclusion made of all the factors, however, there is no need take all the factors in consideration.75 There
72 European Competition Law, A practioner guide, secone edition, Lennart ritter, W. David Braun,
Fran-cis Rawlinson, P.33.
73 European Competition Law, A practioner guide, secone edition, Lennart ritter, W. David Braun,
Fran-cis Rawlinson,p.32.
74 Case 27/76 United brands v commission, para 44.
75 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
are however some main factors that the court implements, the nature of the product, the cost of transport and legal regulation.
If transport costs are high in accordance to the value of the product, the geographical market in question may be small, probably local.76 The commission has set out numbers of criteria in order to establish the geographical market. The geographical market will in its whole be determined by the commission as following; It will first get a preliminary view of the geographic market on the ground of wide indications as the distribution of market shares between the companies and their potential competitors furthermore it will analyze price difference at national or community level.77 The geographical analyze of the relevant market will also be based on theoretical experiment based on the SNIPP test, focusing, aimed on the question of whether business grounded elsewhere in fact constitute relevant alternative source of supply.78
76 EC Competition Law, text, cases and materials, Alison Jones, Brenda Sufrin, p.49.
77 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
competi-tion law, para.28.
78 COMMISSION NOTICE on the definition of relevant market for the purposes of Community
5
Summery
Before this thesis tends to investigate the relevant market within in air passenger trans-port, I will summarize the main aspects of what has been stated so far. It is the Commis-sion which has the primary enforcement of competition issues. Even though there are no stated differences in services and products, the outcome will be different when defining a relevant market within service. The commission has set out a notice which serves as guidelines to courts and companies. When defining the relevant product market focus is held on whether products or services are considered to be substitutable and can consti-tute the same market. If so, a company will have minor market power because if a po-tential raise in price occurs, the consumer will easily turn to the substitutes that the product or service has to offer. The Commission have established three fundamental cri-terias, demand substitutability, supply substitutability and potential competition. How-ever, the Commission stated that most focus should be held on the demand substitutabil-ity which includes an analysis of the product or services character, price and intended use. According to the analyzed case law, price and character seems to be in focus. Even though there are established criterias and methods and even if a current case holds iden-tical information from a previous case, a case-by-case based definition is needed.
6
Air transport
6.1
In general
The enforcement of competition law within air transport sector endures special consid-eration. The ongoing liberalization of air transport and related markets within and out-side the European Union and to third world countries contribute to the distinctive quali-ty of competition law issues. A large amount of case law within air transport has devel-oped the past years, the development is fundamental to any competition law issues with-in air transport.79 When defining the relevant market for the purposes of evaluate airline alliances and agreements under the merger regulation, the commission begins with every combination of points of origin and points of destination and appreciate the dif-ferent possibilities available to consumers to travel between these points. The commis-sion will not only focus on direct flights, but also other transport to the extent that they are alternatives and substitutable to these direct flights.80 Further, an analysis in case law within air passenger transport will be held in order to define the relevant market within it.
6.2
Ahmed saeed
81The Ahmed saeed case concerned an airline duty which was approved by the public authority, the agreement was however in contradiction to Article 101 TFEU. The court stated, in order to establish whether a company that pursue airline traffic is in a domi-nant position in the market, it is first important to delaminate the transport service mar-ket which it operates within. The court noticed that there were two possible options in order to delaminate the market. The first options was to establish a separate market for regular flights, the second, alternative transport services such as charter flights, railway and road transportation as well as scheduled flights on other ruts which may serve as substitutes should constitute a market.82 The main test that should be applied was whether a regular flight on particular route could be distinguished from the other
79 Competition Law of the European community, fifth edition, Van Bael and Bellis 2010, p. 1342. 80 Competition Law of the European community, fifth edition, Van Bael and Bellis 2010, p.1352. 81 Case 66/86 Ahmed Saeed Flugreisen and Silver Line Reisebüro GmbH v Zentrale zur Bekämpfung
un-lauteren Wettbewerbs.
82 Case 66/86 Ahmed Saeed Flugreisen and Silver Line Reisebüro GmbH v Zentrale zur Bekämpfung
natives due to its special characteristics since it is not considered to be substitutable and only affected insignificant by its alternative competitors.83 The commission observed that the result of the test could be different in every case. There are indeed some airline routes that are in a situation where no effective competition is likely to occur. However, according to intra community routs, the economic strength of an airline on a route served by planned flights may count on the competitive position of other carriers func-tioning on the same route or on a route capable of serving as a substitute.84 The com-mission’s definition was vague.
However the advocate general stated that the nature of regular flights come from regular passengers, such as businessmen, officials and politicians who often need to travel to particular destinations at a certain time. Hence, neither charter flights or other kinds of transport constitute an alternative and can not be considered as substitute. Therefore, scheduled flights are unlikely to be in competition with other forms of transport and are considered a separate market.85
6.3
Air France/KLM
86The case concerned a concentration between Air France and KLM. Air France is a well-organised, French-based, full-service air carrier with significant international enterprise. Air France had three kinds of businesses: passenger airline transport, cargo transport and maintenance services.87 KLM was a Dutch company operating worldwide within service carrier. The KLM have four main business passenger airline transport, cargo transport, maintenance services and the operation of charter.88 The commission stated in order to define the relevant market it first considers demand substitution. The competi-tive restrains that occurs from supply side substitutability in usually only considered in
83 Case 66/86 Ahmed Saeed Flugreisen and Silver Line Reisebüro GmbH v Zentrale zur Bekämpfung
un-lauteren Wettbewerbs, para.40.
84 Case 66/86 Ahmed Saeed Flugreisen and Silver Line Reisebüro GmbH v Zentrale zur Bekämpfung
un-lauteren Wettbewerbs, para.41.
85 Case 66/86 Opinion of Mr Advocate General Lenz delivered on 28 April 1988. - Ahmed Saeed
Flugrei-sen and Silver Line Reisebüro GmbH v Zentrale zur Bekämpfung unlauteren Wettbewerbs e.V. - Refe-rence for a preliminary ruling: Bundesgerichtshof - Germany. - Competition - Air tariffs .para 29.
86
Case No IV/M.3280 - AIR FRANCE / KLM.
87 Case No IV/M.3280 - AIR FRANCE / KLM, para.3. 88 Case No IV/M.3280 - AIR FRANCE / KLM, para.4.
the market definition when it has an essential and effective impact on the relevant prod-uct market. Hence, the commission has found the relevant prodprod-uct market for passenger air transport should be determined on the basis of point of origin and point of destina-tion. When considering this approach, every combination of point of origin and point of distance should be considered to be a separate market from a consumer’s point of view. Whether this approach forms a relevant product market, the commission will take ac-count of all different possibilities available for the consumers to travel between these points. The commission will not only concentrate on the direct flight between the two airports in question, but also on other alternatives of transport that are considered to be substitutes to these direct flights, these substitutes might include direct flights between other airports which have overlapping roundup areas with the airports concerned at each end, also in indirect flights between the airports should be taken in account, Or other types of transport, such as train, sea or road transport. Whether one of those alternatives can be considered as substitutes to the direct route depends on several factors, such as overall travel time, the regularity of services and the cost of the different alternatives. This however can only be determined on a route-by-route basis. The parties accepted this approach, but claimed that, from the supple side perspective, there are obvious indi-cations that airlines increasingly compete against each other on a network-to-network basis.89
The commission considered abandoning the traditional points of origin and points of distance and instead concentrate on competition between different carriers networks. The Commission, however, rejected this idea and continued with its old approach. The Commission found that consumers that traveled on unrestricted tickets (time sensitive passengers) may constitute a separate market from passengers with restricted tickets (non-time passengers) which are concerned more about the price than the frequency and are allowing for longer travels.90 Concerning whether indirect flights was considered to be substitutable, the Commission concluded that indirect flights may constitute a com-petitive alternative to nonstop services if they categorized as connecting flights on the city pair on computer systems and are functioning on a daily basis with a maximum 150
89 Case No IV/M.3280 - AIR FRANCE / KLM, para.9. 90 Case No IV/M.3280 - AIR FRANCE / KLM, para.19.
minutes extension on the trip.91 Airport transport has to be considered from both the demand and supply side. From the demand side perspective the, passenger who begin or end their travel in a catchment area of two or more airports have the privilege to choose from and to which airport they like to travel to. Hence, if consumer has a wider selec-tion between airlines the competiselec-tion will increase if they are independent from each other.92 From the supply side perspective, airlines who are providing transport services, the substitutability doesn’t only depends on the consumers need but also they kind of service they intend to provide. On specific services provided on the ground by the air-port and on the airlines existing activities, a carrier with network which provides major connecting and feeder services has different needs at the airport than a low cost carrier who normally provides point to point services. Airlines tend to bind all their activities at one airport because to fixed overhead and operation costs at the airport.93
The Commission stated that the two airports that were located in Paris were substituta-ble to each because they are located in the same catchment area and have contrastasubstituta-ble access facilities.94 From the supply side, the substitutability of airports depends on a car-riers need. For some airlines they are not substitutable, due to its market they are operat-ing in, airports costs and or whether passenger is consider to be time sensitive.95 The parties argued that high speed train was considered to be substitutable for direct short haul flights.96 The Commission said, due to previous investigation that the high speed train can be considered a competitor for non sensitive time passenger but it doesn’t however, apply to time sensitive passengers due to its extend time travel and its smaller number of travels.97 A comparison in price also shows that the competitive constrains of high speed train are limited to noon time sensitive passengers. However, because of the infrastructure constant advancement the commission left a future development open. 98
91
Case No IV/M.3280 - AIR FRANCE / KLM, para.21.
92 Case No IV/M.3280 - AIR FRANCE / KLM, para.24. 93 Case No IV/M.3280 - AIR FRANCE / KLM, para.26. 94 Case No IV/M.3280 - AIR FRANCE / KLM, para.29. 95
Case No IV/M.3280 - AIR FRANCE / KLM, para.33.
96 Case No IV/M.3280 - AIR FRANCE / KLM, para.35. 97 Case No IV/M.3280 - AIR FRANCE / KLM, para.71. 98 Case No IV/M.3280 - AIR FRANCE / KLM, para.72.
6.4
British Midland v. Aer Lingus
99The case concerned a refusal to interline. Interline, which is generally not a common concept but a standard in the air transport sector. Interlining, which is operated by IATA trough a multilateral agreement to which interested air lines become parties and are au-thorized to sell services from each other. Hence, a ticket can be issued which includes parts to be performed by diverse airlines.100 The Commission held Aer Lingus which was Irelands national airline abusing its dominant position within the London and Dub-lin air route. The Commission defined the relevant market as followed, due to surface transports characteristics, speed and several changes in transport it will not consider to be substitutable by most passengers.
The options of air transport at this rout is limited, many passengers, especially those who cannot consider to travel for a longer time, cannot consider slow surface or air transport in restricted conditions as substitutable. Due to the demand of speed, flexibili-ty and the pleasant travel on this route which can only be supported by air transport, passengers on this route pay a higher price than the price than other available transports. There is also no indication suggesting that the availability of low price surface transport can constrain the market of air travel. Only a small minority of passengers can consider air journeys between Dublin and London airports other than Heathrow to be substitutes to travel to Heathrow.
Business people prefer Heathrow due to Heathrow’s frequencies in travels. When the sale is made, some travelers will have the opportunity to choose other airports than Heathrow in that area. Air Lingus refusal to supply will affect passengers who already holds a ticket between Heathrow and Dublin, hence a change of airport is considered to be impossible, if for example they have their car parked at Heathrow. Other air ports in the relevant product market than Heathrow would not decrease Air Lingus market share to a level where it doesn’t hold a dominant position.101
99
IV/33.544, British Midland v. Aer Lingus.
100 EC Competition Law, text, cases and materials, Alison Jones, Brenda Sufrin, p.388. 101 IV/33.544, British Midland v. Aer Lingus, para.14.
Geographic market within the air sector
The definition of the geographic market within air passenger seems not to be treated cir-cumstantially, maybe because it is easy to distinguish the route which it operates within, however airline companies tends to offer a wide of services, which lead to different geographic markets, according to maintenance, parties argued in the KLM/Alitalia102 case that is not necessary to put an aircraft out of service, which is usually the case for other maintenance services. Whether a geographic market should be determined to be local or global within an air sector service usually depends whether a carrier is need of specific service that is outside its normal route range or can be provided at its local air-port. Many commentators argue that the geographical market can be more delimitated due to transport costs.
7
Analysis/conclusions
A definition of a relevant market is the first step in order to establish a breach under competition legislation and it is made on a case-by-case basis, even if a previous case holds near to identical facts as current case, it is still difficult to predict the outcome. Many different factors and tools to identify the relevant market have been developed by the Commission and the CJ, the Commission has been criticized in doctrine for using to many of these, which have lead to a more narrow definition. Which one these factors that are going to be essential in a case is also hard to determine. Lawyers who are work-ing for major companies within air passenger transport must continuously update their company’s legal position as the relevant market develops. Although, previous cases and legislation within the relevant market is appropriate within in all branches and even though legislation make no distinction between products or services, the air transport is regarded as a special sector due to its governmental superiority which makes a defini-tion as such dissimilar and another focus of the criteria’s applied. Looking from an ob-jective point of view, none of the cases that have been analyzed so far seems to poke out from each other according to the implementation of the criteria because the implementa-tion of the relevant market follows the same pattern within all branches applying a nu-merous range of criterias. However, some branches focus more on some criterias than others tends to do and it is possible to draw a pattern according to different branches. What is common for both passenger air transport and general business, probably all branches, is the implementation and the importance of the on the demand substitutabili-ty (characteristics, price, intended use). Looking at these three criteria at hand, a prod-ucts’ or service’s characteristics are fundamental in the market definition, if a product’s or service’s characteristics differ from its competitors, it can’t be considered to be subs-titutable at any kind. According what have been established previously related to the Commission’s notice, market definitions are usually based on differences in price. Even though the air sector mentions the price factor and in order to establish whether a route is considered to be substitutable, price is still not a prime factor and courts seems to put less effort on it. Moreover, when focusing on price in the air sector the courts add time aspect and categorized the price criteria into two kinds of passengers non-time sensitive and time sensitive passengers which non sensitive passengers cares more about the price and the applying of the SNIPP test seems abandoned. However, the court seems to
fo-cus on travel frequencies in order to constitute if a travel is substitutable or not. Accord-ing to the intended use, if a passenger is in need a of specific service seems not be in-vestigated, but rather the capacity of the service, if it is likely to satisfy needs.
According to the Continental case, a definition should also be made on the supply subs-titutability, however, the courts implementation in generally branches according to the supply substitutability seems to be limited, in contrast, according to the air passenger sector the supply substitutability seems to play a more important role. It’s not only a consumer’s need that depend if an airport is substitutable, but also the kind of services the airline provide. Major airline companies have different needs in an airport than low cost carriers.
Even thought the courts never excluded that passenger air transport can’t be substituted for other forms of transport the definition of the relevant market within air passenger transport seems to be drawn narrowly and the courts seem to limits its criteria applying too less numerous of factors. The definition of the relevant market within passenger air transport is established on a test grounded on the base of origin and base of destination, which include an analysis of different factors. As price, frequencies of travels, comfort of the journey, transfer time to terminals and differences in the qualities and quantities in airports. Even though there is a systematic approach to define the relevant market within the air sector, the relevant market can expect to change form in the near future due to the infrastructure development.
Appendix
List of references
Treaties:
Treaty on the function of the European Union, consolidated text, OJ C 83, 30.3.2010 Treaty on the European Union, consolidated text, OJ C 83, 30.3.2010
Treaty establishing the European Community, consolidated text, OJ C 321, 29.12.2006
Regulation:
Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentra-tions between undertakings OJ L 24, 29.1.2004
Commission Decisions:
Commission Decision of 26 February 1992 relating to a procedure pursuant to Articles 85 and 86 of the EEC Treaty (IV/33.544), British Midland v. Aer Lingus
Commission Decision of 11/02/2004 declaring a concentration to be compatible with the common market (Case No IV/M.3280 - AIR FRANCE / KLM) according to Coun-cil Regulation (EEC) No 4064/89
Case M/JV-19 KLM-Alitalia Notification of 29 June 1999 pursuant to Article 4 of Reg-ulation N°4064/89
Notice:
COMMISSION NOTICE on the definition of relevant market for the purposes of Community competition law Official Journal C 372, 09/12/1997 P. 0005 – 0013
Brussels, 19.11.2002 COM (2002) 649 final, COMMUNICATION FROM THE COMMISSION on the consequences of the Court judgements of 5 November 2002 for European air transport policy
Case law from CJ:
Case 6/72 Europemballage corp and Contintal can Co inc v. Commission Case 85/76, Hoffmann-La Roche & Co. AG v Commission
Case 27/76 United Brands Company and United Brands Continentaal BV v commission Case 322/81 NV Nederlandsche Banden Industrie Michelin v Commission
Case 66/86 Ahmed Saeed Flugreisen and Silver Line Reisebüro GmbH v Zentrale zur Bekämpfung unlauteren Wettbewerbs
Case 66/86 Opinion of Mr Advocate General Lenz delivered on 28 April 1988. - Ahmed Saeed Flugreisen and Silver Line Reisebüro GmbH v Zentrale zur Bekämpfung
unlaute-Appendix
ren Wettbewerbs e.V. - Reference for a preliminary ruling: Bundesgerichtshof - Germa-ny. - Competition - Air tariffs
Court of first instance:
T-125/97 The Coca-Cola Company and Coca-Cola Enterprises Inc. v commission Case T-219/99 British Airways plc v Commission
Doctrine:
Alison Jones, Brenda Sufrin, EC Competition Law, text, cases and materials, Oxford, 2001
Ariel Ezrachi, EC Competition law, An analytical guide to the leading cases, Oxford, 2008
Bellamy and Child, Common market law of competition, fourth edition, edited by Vivien rose, sweet and Maxwell, 1993
C.J. Cook, C.S kerse, EC merger control, third edition, Sweet and Maxwell, London, 2000
Lennart Ritter, W. David Braun, Francis Rawlinson, European Competition Law, A practioner´s guide, second edition, Kluwer law international, 2000
Robert Lane, EC Competition Law, European law series, Pearson education limited, 2000
Simon bishop and mike walker, the economics of EC competition law, Sweet and Maxwell, 1999
Van Bael and Bellis, Competition Law of the European community, fifth edition, Klu-wer law, 2010
Internet source:
http://www.lepanoptique.com/sections/politique-economie/assessing-the-european-community%E2%80%99s-merger-regulations
