Introduction

Market definition is a tool to identify and define the boundaries of competition between firms. The Competition Act, 2002 defines ‘relevant market,’ as a market to be determined by Commission with reference of the ‘relevant product’ and ‘relevant geographic’ market. The objective of defining a market in both its product and geographic dimension is to identify an undertaking’s actual competitors that are capable of constraining its behaviour and to prevent it from behaving independently of the competitive pressure. Section 2(t) of the Act defines ‘relevant product market’ as a market which comprises of products or services that regarded as interchangeable or substitutable by consumer or supplier.

Amendment to the definition of 'Relevant Product market (RPM)'

The Competition (Amendment) Act, 2023, expanded the scope of RPM by making the definition under Section 2(t) more comprehensive. The revised definition defines RPM as the market comprising of goods or services that are regarded as interchangeable or substitutable by the consumers as well as the supplier, as contrast to the previous definition which considered substitutability only from the consumer’s perspective. Section 2(t)(ii) states that “the production or supply of, which are regarded as interchangeable or substitutable by the supplier, by reason of the ease of switching production between such products and services and marketing them in the short term without incurring significant additional costs or risks in response to small and permanent changes in relative prices.” Thus, the amendment aims at considering the substitutability of products and services from supplier’s perspective as well. Further, amendment to Section 19(7), which lists several factors to be considered by the Commission while determining relevant product market, clause (g) i.e., “costs associated with switching demand or supply to other goods or services,” thereby adding ‘supply side substitutability’ as a factor to determine the relevant product market.

Supply side substitutability & the EU Approach

Supply side substitutability, along with ‘demand side substitutability’ and ‘potential competition,’ constitutes one of the competitive constraints. It deals with the ability of supplier/producer of products similar to the relevant product, to switch their production to the relevant product and such products might not be substitutable from the consumer’s perspective. Demand side substitutability imposes competitive constraints on enterprises by allowing the consumers to shift to alternative products in case of increase in price and such competitive constraint might also be imposed by competing undertakings by immediately shifting the production capabilities without incurring significant costs, in order to exploit the increase in price of the product. Thus, supply substitutability is a production counterpart of availability of demand substitutes that may restrict the alleged dominant firm to exercise market power.

The EU’s competition law framework recognises demand side as well as supply side substitutability to define relevant market. As per the Commission Notice, 11 demand substitution is the most immediate and effective disciplinary force on the suppliers for their pricing decisions and the competitive constraints that arises from the supply side substitutability are generally less immediate and also requires assessment of additional factors. Demand substitution considers a range of products that consumers considers as substitutes and the reaction of consumers is evaluated after a hypothetical small but permanent change in the prices of such product, to determine products that forms part of that relevant market.

On the other hand, supply side substitutability may be applied in cases where its effects are equivalent to those of demand substitution in terms of effectiveness and immediacy. Its impact would be equivalent to demand substitution when the suppliers are able to switch the production to the relevant product, while marketing them in the short term and without incurring significant additional costs or risks in response to such small and permanent changes in price. Thus, upon fulfilment of such condition, the overall additional production in the market would impact the competitive behaviour of the enterprises. Such situation arises when the enterprise produces a wide range of qualities or grades of a single product and such varied grades of products would constitute a single product market, despite them not being substitutable for the end-consumers, provided that a number of suppliers produces the variety of qualities immediately and without significant price increase.

Application of 'supply-side substitutability'

The CCI generally relies upon the substitutability of products and services from the consumer’s perspective to determine competitive constraints for defining the relevant market. However, in certain cases, the Commission had also assessed the supply side substitutability. As, in JK Tyre & Industries Ltd, it was observed that tyre manufacturers could easily substitute between manufacturing tyres for different vehicles and thus, the Commission gave due consideration to supply side substitutability for competition assessment in the tyre market.

Prior to the inclusion of clause (g) under Section 19(7) i.e., ‘costs associated with switching demand or supply to other goods or services,’ the Commission only considered demand side substitutability for market definition. Further, the substitutability from the perspective of supplier under Section 2(t)(ii) specifies the ease of switching production in ‘short term’ and without incurring ‘significant additional costs.’ Such terms might result in vague and subjective interpretations due to lack of proper definition of these terms.

Also, the EU’s Commission Notice that permits the use of supply side substitution enables such application conditionally and only upon being satisfied that its effects are equivalent to that of demand substitution. Thus, the ability of suppliers to switch production without incurring significant costs and without significant adjustment to existing assets shall be analysed and such application would be suitable in cases where an enterprise in engaged in production of wide range or qualities of a product.

Also, for the effective application of supply side substitutability, it must be considered that the producer has the capacity to shift production to other products in terms of production, marketing, and distribution at low switching costs and not involving additional investment. As held by the European Commission, in Volvo/Scania, that the truck manufacturers were in a position to offer a range of different types of trucks and there were no substantial switching costs. And, in Microsoft v. Commission, no supply side substitution could be established due to significant switching costs. Further, in Aerospatiale, the Commission denied the application of supply substitutability due to the considerable time that the manufacturers would take for switching production. Therefore, the applying supply substitutability for competition assessment relies on fulfilment of certain factors such as switching production without incurring additional costs; presence of assets for production of the relevant product; incentives for suppliers to switch production such as profits from increased prices; end-consumers considers such products as equivalent substitutes for the relevant product; a significant number of suppliers could switch production to the relevant product after increase in prices.

Lastly, the insertion of clause (g) into Section 19(7) makes it mandatory for the Commission to consider such factor of supply side substitutability while defining the relevant market. Such mandatory requirement on the Commission to consider substitutability from the supplier’s perspective, without fulfilment of certain conditions, as required in the EU law, could potentially lead to a reduction in reliance of considering the demand side substitutability, that currently provides the most appropriate assessment of actual competitive constraints on enterprises that operate in a relevant market, by assessing the ability of end-consumers to switch to substitute products in case of increase in price of the relevant product.

Conclusion

The Competition (Amendment) Act, 2023 inserted into the definition of relevant product market, the substitutability of products or services from the supplier’s perspective. Also, an additional factor regarding supply side substitutability was added to the list under Section 19(7). Prior to such amendment, the Commission relied on demand substitution and analysed the substitutability or interchangeability of products and services from the consumer’s perspective only. However, such amendment would allow the Commission to consider the substitutability from supplier’s perspective as well and the products to which such the supplier could switch production in short term and without incurring additional costs, would also be included in the similar relevant market as that of the relevant product, due to the capability of the supplier to produce such substitutable goods without incurring significant costs and time.

The application of supply side substitutability for market definition would benefit the suppliers for delineating the relevant market in a broader sense so as to include a wide array of products into a single and non-fragmented relevant product market, owing to the ease of switching the production. The application of supply side substitutability by CCI has been limited due to heavy reliance on demand substitution. The Commission Notice provides for such application by the European Commission on a condition that its effects shall be equivalent to those of demand substitution. However, the insertion of supply side substitutability by the amendment, provides for no such condition and thus, its mandatory and absolute application while delineating relevant market without fulfilment of such conditions and without requisite checks and balances could lead to counter-productive impacts and a possible reduction in application of demand side substitutability as the primary basis of relevant market definition as per Section 2(t) r/w Section 19(7) of the Act.