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Legal Update

China Publishes Draft Market Definition Guidelines

12 January 2009
Mayer Brown JSM Legal Update

China's Anti-Monopoly Enforcement Authorities ("AMEAs") have taken a further step towards more active enforcement of the Anti-Monopoly Law ("AML"), with the publication of draft Guidelines for Defining the Relevant Market for public comment.

The draft Guidelines explain the market definition methodology that the AMEAs will apply when enforcing key AML prohibitions such as those relating to monopoly agreements, abuse of a dominant market position, and concentrations that eliminate or restrict competition. 

The draft Guidelines were developed by the Anti-Monopoly Bureau of the Ministry of Commerce ("MOFCOM"), which has previously solicited input from a number of antitrust experts in an effort to ensure alignment with international best practice.  Public comment on the draft Guidelines has now been invited, with a submission deadline of 31 January 2009. 

Purpose of the Guidelines

As noted in the text of the draft Guidelines, the process of market definition is central to the application of the main AML prohibitions, as it is often a necessary first step before a determination can be reached on matters such as:

  • whether two or more businesses are properly considered to be competitors;
  • where a business has a dominant market position; and
  • whether a proposed concentration may impact a relevant market in China.
Additionally, most of the key prohibitions in the AML are only considered to be breached when relevant conduct has the effect or likely effect of eliminating or restricting competition in a relevant market in China.

Given the pivotal role of market definition in determining such issues, and the fact that three different AMEAs will be engaging in AML enforcement activities (MOFCOM, the State Administration of Industry and Commerce ("SAIC") and the National Development and Reform Commission ("NDRC")), it is appropriate that there be clear and comprehensive market definition guidelines. The new draft goes some way to meeting this requirement.

Market Definition Methodology

Article 12 of the AML defines the term “relevant market” as referring to the scope of commodity or territorial area within which undertakings compete against each other during a certain period of time for relevant products or services. The draft Guidelines explain how the AMEAs should approach their assessment of the 'product', 'geographic' and 'temporal' (time) dimensions of markets referenced in this definition.

Specifically, the draft Guidelines provide that the relevant product market is comprised of the group or types of product which can be considered substitutes for each other based on factors such as product nature, price and use. The draft Guidelines state that consideration of substitutability from the 'demand-side' (that is, from the perspective of purchasers) is the main consideration in this context, and Article 8 sets out a list of matters that are usually taken into account in such analysis. 

However, the draft Guidelines also note that 'supply-side substitutability' can be taken into consideration where it has a constraining influence on behaviour in the concerned market.  In essence, supply-side substitutability exists where there are producers of other goods who can readily and cost-effectively adjust their manufacturing processes so as to produce products that compete with those that are the focus of the market definition analysis.

Article 9 of the draft Guidelines lists factors relevant to consideration of the geographic dimension of the relevant market. Consistent with international best practice, these factors include matters such as how transportation costs and trade barriers affect consumers' sources of supply, and the specific preferences that customers in a specific territory may have.  Interestingly, however, the list does not reference intellectual property rights (and particularly the role of patents), which can play a significant role in shaping the geographic boundaries of relevant markets.  However, it is clear that Article 9 is not intended to be an exhaustive list of relevant considerations.

The draft Guidelines also note that it may also be relevant to consider temporal issues when analysing the market, such as when a product's production, seasonal features, fashion style or intellectual property protection schedule constitute inevitable characteristics of the product.

Hypothetical Monopolist Test

The draft Guidelines also reference the 'Hypothetical Monopolist Test', which is a market definition tool that is commonly used by economists and competition analysts around the world.

The Hypothetical Monopolist Test is an economics-based test which aims to identify the smallest range of products, and the limits of the geographic territory, in which a hypothetical monopolist may be able to maintain prices above what may be considered 'competitive' levels. Employing this test in relation to the product area under consideration in a specific market definition case can aid the process of determining the relevant market in which a concerned business competes.

Article 10 of the draft Guidelines outlines the mechanics of the Hypothetical Monopolist Test in some detail, and Article 11 explains the approach that the AMEAs will take to certain aspects of the test that have been the subject of varied treatment by competition regulators around the world. As a general matter, this explanation suggests that the AMEAs will apply the test in a manner broadly consistent with the prevailing regulatory approach in mature competition law jurisdictions such as the US and E.U.

However, according to the draft Guidelines, the Hypothetical Monopolist Test may only be applied in the more complex market definition cases. Some foreign observers have suggested that the test should not be reserved only for these cases, as this may open the door for 'intuitive' (rather than economics-based) market definition assessment by the AMEAs.

Nonetheless, as application of the Hypothetical Monopolist Test can require collection and analysis of some significant economic data (and, in appropriate cases, views from economic experts), many parties required to make filings to MOFCOM will welcome the opportunity to omit such detail from their filings for reasonably straightforward transactions that do not appear to raise competition issues. In such cases, it may be prudent for parties to consult with MOFCOM during the filing drafting stage to confirm what level (if any) of information MOFCOM requires to be included relating to application of the test.

Next Steps

The draft Guidelines are relatively brief, however they largely reflect international best practice in terms of referencing a familiar framework and methodology for defining relevant markets. However, as noted above, some aspects of the draft Guidelines may attract criticism.

MOFCOM is accepting public comment on the draft Guidelines until 31 January 2009, which provides an opportunity for interested parties to propose appropriate adjustments. In this context, it is appropriate to note that MOFCOM has previously demonstrated its readiness to heed constructive input on AML-related rules and guidelines, as evidenced by the significant changes it made to the Rules of the State Council on Notification Thresholds for Concentration of Undertakings after public consultation on a draft of these Rules during 2008. Parties who would like to make a submission to MOFCOM in relation to the draft Guidelines are invited to contact Mayer Brown JSM for assistance, as the firm has been working closely with Chinese authorities in relation to a range of AML issues.

It is expected that finalised market definition Guidelines will be published relatively quickly once the present consultation period ends, as MOFCOM is currently moving swiftly to finalise relevant procedures and guidance documents relating to the AML's merger review regime. 

For further information, please contact:
 
Hannah Ha ( )
John M. Hickin ( )
Gerry O'Brien ( )

Learn more about our Hong Kong office and Antitrust & Competition practice.

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