In merger cases, market definition is the most crucial factor as it determines the market share of the merging parties and the competitors. The market definition is therefore a pivotal factor while deciding as to whether or not the proposed merger has any appreciable adverse effect on competition. The determination of relevant market has two dimensions i.e. specifying the relevant product and carving out the relevant geographic area. The starting point to define the relevant market is to identify whether the product in question has any close substitutes from the consumer’s perspective (i.e. demand side substitution) or from the supplier’s perspective (i.e. supply side substitution). Demand side substitutability means the ability of the consumers to switch from one product to another, in response to an increase in the price of the product. On the other hand, supply side substitution means when the suppliers are able to switch production to the relevant product and increase its supply to meet the demand in a short period of time without incurring any significant cost or risks. Similarly, the relevant geographic market comprises the area in which the competitive conditions of demand and supply are homogeneous and can be distinguished from the conditions in the neighbouring areas. The competition authorities use different techniques and merger simulation models to define the relevant geographic market. Some of the widely used tests for delineating the relevant geographic market are Critical loss analysis, Catchment area and Elzinga

Critical loss is the percentage sale at which a hypothetical monopolist is able to make the same profit before and after the small but significant increase in price. Critical loss approach of determining the relevant market is, therefore, based on the premise that if a hypothetical monopolist is able to raise the price of a set of products profitably, then the market that would consist of those products need not be further widened.

The geographical market definition making use of the catchment area analysis and EH tests are widely used in cases where the market is localised, for example, in mergers of retail and supermarket chains, cinemas and multiplexes, hospitals and in respect of bulk commodities like cement which entail huge transportation cost. In most of the above cases, as the consumer has to travel a distance to buy the product or services or likewise the patients have to travel to the hospital to receive treatment, there is always a local element added to the geographic market. Catchment area analysis based on fixed radii or isochrones captures the region where the sizeable proportion of the universe of consumers of a product (say 60 to 90 percent) is located. It is easier to define a catchment area if concentric circles are built around the service

rendering site based on the distance which may be travelled by different percentages of the population. The area is also drawn on the basis of driving time since the concentric circles drawn on the basis of fixed radii may not account for the road and traffic conditions and other barriers.

The CCI used the catchment area analysis in combination case (C-2015/04/268) regarding acquisition by IndusInd Bank Limited (Acquirer) of the banking portfolio of the customers engaged in gem and jewellery business of the Royal Bank of Scotland N.V. (RBS). The CCI observed that the relevant geographic market for the combination would be the local market as RBS provided service to its customers engaged in gems and jewellery business from its sole branch located at Fort in Mumbai. The CCI observed that as the average distance between the sole RBS branch and its customers as well as the average distance between the Acquirer’s branches and their respective customers was about [15-20] kilometres, the radius of [15-20] kilometres was the primary service area and the possible narrowest relevant geographic market. The CCI also noted that in view of the chain reaction sequence, there could also be a possibility that even the competitors, not having a direct overlap in the primary service area, would also become part of the relevant geographic market. However, notwithstanding its observation on the catchment area analysis that the competitive constraints could be underestimated or overestimated by excluding or including the competitors located at the periphery or outside it, the CCI reached to a finding that given the well-established connectivity between the districts of Mumbai and Mumbai sub-urban (‘Mumbai’), it was presumed that due to the chain reaction sequence, the relevant geographic market in respect of the proposed combination would comprise the districts of Mumbai.

Elzinga Hogarty (EH) test: EH test is also one of the most widely used tests for delineating relevant geographic market in cases of shipments of bulk commodities like cement and mergers involving supermarket chains and hospitals. The test is based on the premise that the areas engaged in trade with each other belong to the same geographic market. The test has two dimensions i.e. Little in from outside (LIFO) which measures how much of the product is imported into an area and Little out from inside (LOFI) measuring the extent of export from that area. Elzinga and Hogarty in their original paper, “The problem of geographic market delineation in antimerger suits” mentioned the following steps for estimation of market size: a) Find the minimum area to account for at least 75 percent of the shipments of the firm/plant (larger one of the merging firms) and designate the area as hypothetical market area. If merging firms are separate geographically, the same step is to be followed for each merging firm. The hypothetical market can be square miles, city blocks or even states which need not be contiguous; b) LIFO test is to be met when out of the total sale of the product within the hypothetical area, 75 percent or more is shipped from plants located within this area, if not, then hypothetical market area is redrawn by determining the minimum area necessary to account for 75 percent of the shipments of the product from all the plants within the area. If LIFO test is met, determine if at least 75 percent of the shipment by the firms within the hypothetical market area is to customers within the area to meet the LOFI criterion; c) If both the tests are met, then calculate total consumption from all shipping points in the hypothetical market to get the market size in terms of volume. Considering 75 percent threshold of LIFO and LOFI in their original article as understating the scope of relevant market, the authors in their subsequent article gave indication of 90 percent threshold as characteristic of a more realistic situation.

The CCI used the EH test in combination case (C-2014/07/190) pertaining to merger of Holcim Ltd. and Lafarge S.A. and other cement cases. Cement being a bulk commodity involving significant transportation cost and its consumption generally been centred on production clusters having homogeneous competitive conditions, the CCI noted that such self-contained areas would constitute the relevant geographic market. The CCI noted that as regards the eastern region, the definition of geographic market given by the merging parties was too wide since the market was expanded till 90 percent of LIFO and LOFI thresholds. While applying the EH and catchment area tests, the CCI also noted that regardless of the choice of the threshold for inclusion of an additional state/area, the said tests should be applied in a manner that the geographic market definition truly reflects the competitive constraint on the parties. The inclusion of a new state that does not trade substantially with other states included in the relevant market can widen the market definition to include even those states with which only such newly added state trades substantially and such chains of substitution may have the impact of widening the relevant market without reflecting effective competitive constraint. In the given case, with respect to the eastern region, the CCI first applied the EH Test with Chhattisgarh as the base being the state with maximum overlap between the parties based on the location of their plants and then expanded the market definition to include states of Odisha, West Bengal, Bihar and Jharkhand. However, the CCI noted that any further additions of states, like Assam and Madhya Pradesh, were not justified on the basis of actual pattern of inter-state trade flows.

Notwithstanding that the CCI did not determine any specific thresholds, these cases have facilitated the stakeholders as to how the relevant geographic market may be defined in the course of merger analysis, especially in similar type of cases in future.