Determining horizontal competition and defining relevant markets

Determining horizontal competition is a key consideration for enterprises; relevant to issues ranging from IPO eligibility and qualification for refinancing or major asset restructuring to compliance of operations and whether directors, supervisors or senior managers violate the non-compete obligation.

Market delineation

According to the China Securities Regulatory Commission (CSRC) Opinion No.17 on the Application of Securities and Futures, horizontal competition occurs when a competitor engages in the same or similar business as the issuer’s principal activity, constituting a competitive relationship.

Determining horizontal competition involves two facets: whether entities engage in the same or similar business, and whether a competitive relationship exists.

The State Council Anti-monopoly Commission’s Guidelines on Definition of Relevant Market define relevant market as the scope of commodities and geographical areas where operators compete with specific goods or services within a certain period of time.

Relevant market delineation means defining the market scope where operators compete.

The stronger the competitive relationship within this range, the more likely they are considered in the same market. Relevant market delineation therefore hinges on analysing competitive relationships within these scopes.
Evidently, identifying horizontal competition and defining relevant markets both involve analysing competitive relationships.

Determining factors

According to the CSRC opinion, the following factors should be considered in determining whether the same or similar activities constitute competition:

• Factor 1: The business relationship between the relevant entity and the issuer, including historical ties, assets, personnel and principal activities;
• Factor 2: Whether the business is substitutable and competitive. Generally speaking, the higher the substitutability, the stronger the competition;
• Factor 3: Existence of conflicts of interest in business. This reflects the contradictions and divergences between the two parties in pursuing their respective maximum interests, such as competing for market share, customers and profits; and
• Factor 4: Whether the business sells within the same market.

Approach to market delineation

For Factor 1, the CSRC opinion gives detailed provisions, enabling clear conclusions through factual analysis and due diligence results. However, the provisions are less detailed for the other three factors. Therefore, analysis of the competitive relationship can be based on the approach to relevant market delineation.

For Factor 2, substitutability analysis can be adopted. This is the most important and mainstream approach to defining a relevant market. Demand substitution analysis and supply substitution analysis are two perspectives used in this assessment. The substitutability of different commodities/geographical areas in key dimensions is tested to determine a competitive relationship and identify the same relevant market. Generally, higher substitutability indicates a stronger competitive relationship and a greater likelihood of the same relevant market.

Assessing whether a business has substitutability and competitiveness requires consideration of the substitutability and competitiveness of the business itself as well as the geographical area in which it operates. The third chapter of the guidelines sets out specific factors to be considered in the demand substitution analysis and supply substitution analysis of commodity markets and geographical markets. The above-mentioned provisions provide a useful reference when setting the analysis dimensions of business substitutability and competitiveness between the issuer and its competitor.

For Factor 3, the hypothetical monopolist test can be adopted. This method involves assuming that under specific conditions, a monopolist could consistently raise the price of a target commodity by small increments. If consumers do not switch to other commodities, then that commodity is deemed to constitute a relevant commodity market. There are various circumstances and reasons that can lead to conflicts of interest in business.
The fourth chapter of the guidelines gives a detailed introduction to the hypothetical monopolist test, which is helpful for assessing whether there is a conflict of interest at the level of market competition between the issuer and its competitor.

For Factor 4, geographical market substitution analysis can be adopted. By market scope, substitutability analysis can be divided into geographical market substitution analysis and commodity market substitution analysis. Based on the methods of systematic interpretation and semantic interpretation, the term “market scope” in “whether the business sells within the same market scope” is more akin to the “geographical scope” in the context of the Anti-Monopoly Law.

Therefore, the analysis should include both the fact of selling within the same market scope – in the past and present – and potential for selling within the same market in the future.

Article 9 of the guidelines sets forth the specific factors to be considered in demand substitution analysis and supply substitution analysis in a geographical market, providing a reference for the assessment of factor 4.
Horizontal competition and relevant markets show significant disparities in the connotation, application, purpose of delineation and criteria for competition intensity. They are not equivalent to each other.

However, when clarifying the scope of competition and analysing the competitive relationship, the substitutability analysis and hypothetical monopolist test applicable to relevant markets can better identify the competitive relationship and assess, and determine horizontal competition.

Huqi is a partner and Fu Hanbing is an associate at Grandway Law Offices