The result of a market segmentation in a certain respect is understood as a relevant market . The term is used in particular in business administration and antitrust law .
In business administration
In business administration, the concept of the relevant market denotes the result of market definition and market definition that a company has undertaken from the subjective point of view and problematic situation.
Traditionally, industries are considered when defining the market . The problem here, however, is that there are also competitive relationships between industries (e.g. air traffic vs. rail traffic). Consequently, possible relationships between services are often considered.
- Data ring concept : The price-sales function is an exogenous variable given by the market .
- Elementary market concept : every good has its own relevant market.
- Concept of physical-technical similarity : The relevant market includes all products that are similar in terms of material, processing, shape and technical design.
- Concept of cross-price elasticity : The relevant market includes all products that are characterized by high cross-price elasticity.
- Basic need concept or concept of functional similarity : The relevant market includes all goods that fulfill the same basic need / function.
This concept is user-oriented.
- Concept of conjectural competition - situation : The relevant market includes all competing products that a provider takes into account in its sales planning. This concept is provider-oriented.
- Concept of user-oriented / subjective interchangeability : The relevant market includes all products that are viewed by the user as subjectively interchangeable .
In antitrust law
In antitrust law, the concept of the relevant market is part of the analysis that determines the anti-competitive effect of an agreement or a merger or determines whether a company has a dominant market position . For example, a producer of apples who has been classified as dominant in an apple market may not be dominant in a fruit market.
In the case of the relevant market, a distinction is made between the geographical, temporal and the relevant product market. The relevant product market includes all goods and services that are viewed as substitutable by the other side of the market with regard to their properties and their intended use. The relevant geographic market comprises the area in which the other side of the market asks for or offers the goods or services that encompass the product market. The time delimitation is particularly important in markets with strong seasonal or temporal fluctuations in demand: In the electricity market, demand for electricity is significantly higher at noon than at night, which has an impact on the size of the market and the market power of individual providers.
To determine the relevant market, demand substitutability and the flexibility of supply change are taken into account.
Demand substitutability clarifies what happens in the event of a small, permanent price increase of a product or a product group (increase of 5–10%). If the customers switch to other products and thus make the price increase unprofitable, these other products also belong to the relevant market. This analysis is called the SSNIP test (Small but significant and nontransitory increase in price). An example: If consumers buy more and more other fruits when there is a 5 to 10 percent increase in apple prices and thus make the price increase unprofitable, then the fruits that consumers mainly switch to belong to the relevant market.
The SSNIP test can be misleading for dominant companies, as the price level of the dominant company's product may already be excessive (so-called cellophane fallacy ). In addition, the SSNIP test is not used in the markets of the New Economy because the strong fluctuations prevent a meaningful result.
The flexibility to switch offers clarifies whether it is possible for suppliers of other products to switch their production to the relevant products in response to small, permanent price increases and to bring them to market at short notice without incurring noticeable additional costs or risks. Corresponding other products are also included in the relevant market. The paper markets are a good example of this, because manufacturers can switch production to other paper types and sizes almost without any financial or organizational effort. This “test” can theoretically also be used in cases such as “Cellophane Fallacy”, even if under normal circumstances, for example, B. cellophane and aluminum would not be interchangeable; Here, however, the price elasticity is already fully exhausted, so that customers can still switch to another product, even if that may not be quite as suitable, but it is much cheaper. This shows another limit of this measurement method. It should also be noted here that the changeover also causes costs on the part of the customer and so often makes the changeover unprofitable.