Market Definition Principles
3.8 Section 3(1A) of the Commerce Act provides that:
[T]he term "market" is a reference to a market in New Zealand for goods and services as well as other goods and services that, as a matter of fact and commercial common sense, are substitutable for them.
3.9 The purpose of defining a market under the Commerce Act is to provide a framework within which to analyse the extent of competition, or its antithesis, which is market power. The concept of a market is thus considered by the courts to be an instrumental one. The definition of a market is not an end in itself; rather, it is an exercise intended to assist with the analysis of the behaviour at issue. In Queensland Wire the Court stated:33
In identifying the relevant market, it must be borne in mind that the object is to discover the degree of the defendant's market power. Defining the market and evaluating the degree of power in that market are part of the same process, and it is for the sake of simplicity of analysis that the two are separated...
3.10 The process of identifying the relevant market(s) should keep the objective in mind. In the present case, the objective is to determine whether any of the three airports operate in market(s) where competition is limited such that they have the potential to exert market power.
3.11 From a technical perspective, the process of establishing market boundaries can be seen as one of identifying the smallest area of product, geographic and functional space over which a hypothetical monopolist could exert a significant degree of market power. This approach focuses attention on any close substitutes that would prevent a hypothetical monopolist from exercising market power by raising its price or by other means, should they be present. Such substitutes must be included in the market, and be under the control of the hypothetical single firm, if it is to be a monopolist. Actual and potential substitutes on both the demand and supply sides of the market are to be included.
3.12 Note that the use of the hypothetical monopoly test to define a market's boundaries has the practical consequence that when the market so defined actually contains only one firm, that firm (absent the constraints that would result from entry or countervailing power) will have the market power attributed to the hypothetical firm. Hence, the inquiries into the nature of the market, and into the exercise of market power, become blurred in instances where markets are very highly concentrated. The emphasis then tends to shift, as in the present Inquiry, to considering what competition factors might constrain the firm that is the subject of the Inquiry. If there are no constraints from existing competitors, then the firm concerned potentially wields market power (subject to the other factors just mentioned), and the market in which it operates is the relevant market. This explains why, in most of what follows, the emphasis is more upon the constraints to market power of the three airports than it is about market definition by itself.
3.13 An appropriately defined market will include products that are regarded by buyers as being similar or close substitutes ("product" dimension), and in close proximity ("geographical" dimension), and are thus products to which they could switch if a single supplier were to attempt to exert market power. It will also include those suppliers currently in production who are likely, in that event, to shift promptly to offer a suitable alternative product even though they do not do so currently.34
3.14 One approach to identifying a significant degree of market power (in the context of market definition) is in terms of the ability of the hypothetical monopolist to increase profits by imposing a small but significant and non-transitory increase in price (a "ssnip") above the competitive level. In line with overseas practice, the Commission uses as a ssnip of five per cent, lasting for at least a year.35 Starting from a small initial group of close substitutes, other potential substitutes are added to the group, until the hypothetical monopolist is able to profitably impose a ssnip. When this occurs, then all possible close substitutes must be encompassed by the proposed market definition.36
3.15 The fact that many airport facilities and services are operated under single ownership may indicate that integrated operation may be necessary for the efficient provision of airport services, in which case broader market definitions would be appropriate. This could reflect the presence of economies of scope, which would make the unbundling of some facilities or services from others, or their duplication, uneconomic. On the other hand, it may still be feasible for an airport to contract out for the supply of services, rather than to undertake them itself.
3.16 In addition to the product and geographical dimensions, markets can be defined in relation to functional level, in recognition of the fact that the production and distribution chain typically consists of a number of functional stages interlinked by markets. For example, the market between manufacturers and wholesalers might be called the "manufacturing market", that between wholesalers and retailers is usually known as the "wholesaling market", and that between retailers and end-customers the "retailing market". With regard to airport activities, the functional levels of markets generally relate to the provision of intermediate services by airports to airlines and other users.
3.17 Finally, markets may be defined in relation to time. Some airports may experience peak periods of demand that may lead to congestion. If congestion pricing is used, this could result in prices being higher during peak periods, possibly justifying treating these peak periods as representing a separate, time-delineated, market for airport services. However, there are presently only limited congestion periods at Auckland and Wellington International Airports, and no form of congestion pricing is practised, suggesting that a separate market based on time of day need not be considered.
3.18 Despite the apparently clear-cut criteria discussed above, markets are not always easy to define in practice. Transactions in the economy do not always fall neatly into a series of discrete and easily observable markets. Hence, it may not be practical - nor, indeed, always necessary - to identify the precise boundaries of the activities included in a market. Moreover, as already noted, it is appropriate to tailor the definitions used to meet the requirements of the case in hand.
3.19 None of the parties at the Conference, or in submissions, questioned the above approach to market definition used by the Commission.
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