Market definitions

According to Article 4 of the Competition Act, a market is the area of sale for a product and its substitute product and/or the area of sale for a service and its substitute service. Substitute products are products or services that, to a large or complete extent, fulfil the same needs and therefore provide each other with competitive restraint. When defining product and/or service markets, it is therefore necessary to research and assess which products are substitutes.

When defining markets, the sales area in which the company in question competes must also be analysed. This refers to the so-called geographical market, which is the area where the company in question offers its products and services. Within a geographical market, demand and competitive conditions must also be sufficiently similar to allow the market to be distinguished from other adjacent areas. A geographical market can be local (e.g. the capital region), national (Iceland) or international (extending beyond Iceland).

In certain circumstances, it may be necessary to define a market by time, but this is rather rare. Generally speaking, the purpose of a market definition is to identify the relevant market in which the product or service in question operates. It may be necessary to define the market in each new case, and the definition may be subject to change if circumstances, such as competitive conditions, alter.

The term „concentration“ or „degree of concentration“ (e. concentration) originates in the theory of industrial economics and refers to how turnover in a particular market is distributed among the companies operating in that market, i.e. what their respective market shares are. . Market share is generally calculated based on a company's revenue, but the nature of some markets means that it can be estimated from other economic factors, such as units sold.

To assess market concentration, a so-called concentration ratio is calculated, which provides a good indication of how intense the competition is in the relevant market. If there are few companies, or even one with a high market share, concentration is high and competition is likely to be limited.

Concentration is most often assessed by calculating the so-called Herfindahl-Hirschman Index (i.e. HHI). This is done by squaring each company's share of the market under consideration and then summing all the resulting squares to obtain the value of the index for that market: HHI = MH1² + MH2² + MH3² + MH4² …+ MHn²

In the equation above, MH12 represents the market share of the company with the highest share (number 1) to the power of two, MH22 represents the share of company number 2 to the power of two, and so on. If all three companies operating in a given market have shares of 50%, 30% and 20% respectively, the HHI index has a value of 3,800 (= [50 × 50] + [30 × 30] + [20 × 20]).

The HHI index can range from near zero, when a market has many small firms, up to 10,000, which is the value when a single firm has 100% of the market share (monopoly). Markets where the HHI value is below 1,000 are generally considered to be actively competitive markets. Markets with an HHI value between 1,000 and 1,800 are considered to be moderately concentrated markets. Markets with a value between 1,800 and 2,000 are approaching being highly concentrated.

Markets with an HHI value above 2,000 are generally considered to be highly concentrated markets. Thus, it can be said that when a few large companies operate in a market, the concentration ratio for that market is relatively high, reflecting rather limited competition. Conversely, the concentration ratio is low when only smaller companies operate in a particular market, which indicates that competition in the market is active.

Market concentration metrics are primarily used by competition authorities to assess the impact of proposed mergers on market competition. It should be noted that various other considerations are also taken into account when assessing the effects of mergers on competition, such as financial strength, barriers to market entry and potential efficiencies arising from the merger.