The starting point in any type of competition analysis is the definition of the “relevant” market. There are two fundamental dimensions of market definition: (i) the product market, that is, which products to group together and (ii) the geographic market, that is, which geographic areas to group together. Market definition takes into account both the demand and supply considerations. On the demand side, products must be substitutable from the buyer’s point of view. On the supply side, sellers must be included who produce or could easily switch production to the relevant product or close substitutes. Market definition generally includes actual and potential sellers, that is, firms that can rapidly alter their production processes to supply substitute products if the price so warrants. The rationale for this is that these firms will tend to dampen or curb the ability of existing firms in the market to raise price above the competitive level. The location of buyers and sellers will determine whether the geographic market is local, regional, national or international. If markets are defined too narrowly in either product or geographic terms, meaningful competition may be excluded from the analysis. On the other hand, if the product and geographic markets are too broadly defined, the degree of competition may be overstated. Too broad or too narrow market definitions lead to understating or overstating market share and concentration measures.

Source: OECD