Written by Fatin Ismail
Market definition is the starting point of any competition law analysis. Before determining whether an agreement has the effect of significantly preventing, restricting or distorting competition, or whether an enterprise has abused a dominant position, the Malaysia Competition Commission (MyCC) must first identify the ‘relevant market’ within which competition is assessed.
The MyCC’s Guidelines on Market Definition clarify how markets are defined under the Competition Act 2010 and provide valuable insight into the analytical framework applied in investigations under Chapters 1 and 2 of the Act. For businesses operating in Malaysia, understanding this framework is critical, as market definition often shapes the outcome of a competition assessment.
The Concept of a ‘Relevant Market’
Under s 2 of the Competition Act, a market refers to a market in Malaysia or any part of Malaysia and includes goods or services that are substitutable for, or otherwise competitive with, the product under consideration. In competition law, the term ‘market’ has a technical meaning that may differ from how businesses internally define their commercial segments. The purpose is not to describe industry categories but to identify the competitive constraints faced by an enterprise.
Defining the relevant market enables the MyCC to identify which enterprises compete with one another, to assess whether an agreement produces a significant anti-competitive effect, and to determine whether an enterprise possesses substantial market power. It also plays a role in penalty calculations, as turnover in the relevant market is taken into account.
The Hypothetical Monopolist Test
The MyCC adopts the Hypothetical Monopolist Test (HMT), commonly known internationally as the SSNIP test (Small but Significant and Non-Transitory Increase in Price). The test asks whether a hypothetical monopolist controlling a defined group of products within a particular geographic area could profitably sustain a price increase of 5–10% above the competitive price.
If such a price increase would be profitable, the market is considered properly defined. If not, the market is deemed too narrow and must be expanded to include the closest substitutes. The analysis continues iteratively until a price increase of 5–10% can be sustained. The objective is to identify the smallest product and geographic grouping within which competitive constraints are sufficiently limited.
Although the HMT provides a structured framework, it is ultimately an analytical tool rather than a mechanical formula. Considerable practical judgment is involved, particularly where evidence is imperfect or markets are dynamic.
Demand-Side and Supply-Side Substitution
A central element of market definition is substitution. On the demand side, the key question is whether consumers would switch to alternative products in response to a price increase. Evidence may include internal business documents, marketing materials, consumer surveys, interviews with customers and competitors, and economic data such as own-price and cross-price elasticity. Switching costs, whether financial, technical, or behavioural, may significantly affect the scope of substitution. Where switching costs are high, substitution is less likely, and markets may be defined more narrowly.
Supply-side substitution may also be relevant. If other producers can quickly and profitably switch production to supply the product in question, without substantial sunk costs and typically within a 12-month period, they may be included in the relevant market. In such circumstances, even if consumers are reluctant to switch, the credible threat of rapid supply-side entry can constrain pricing behaviour.
However, where supply-side substitution requires significant investment, long lead times, or substantial risk, it will generally be treated as longer-term entry and considered separately in the competitive assessment rather than within the market definition exercise.
Geographic Market Considerations
Market definition also requires identifying the relevant geographic scope. The Competition Act confines the relevant market to ‘a market in Malaysia or any part of Malaysia’. While imports may exert competitive pressure, foreign territories are not included within the geographic market definition itself; instead, imports are considered at the subsequent stage of competition analysis.
The geographic market encompasses the area in which competitive conditions are sufficiently similar and within which consumers can reasonably substitute suppliers. The same HMT framework applies: would a hypothetical monopolist operating in a defined area be able to sustain a 5–10% price increase? If consumers would travel to neighbouring areas or suppliers from outside the area would enter in response, the geographic scope must be expanded.
Transport costs, the value of the product relative to travel costs, and the nature of the product or service are often decisive. For example, personal services such as hairdressing or accounting may have narrow geographic markets, whereas high-value goods may support broader geographic substitution.
The Competitive Price and the ‘Cellophane Fallacy’
A conceptual difficulty in applying the HMT lies in identifying the ‘competitive price’. If prevailing prices are already elevated due to existing market power, assessing substitution at those prices may lead to an overly broad market definition. This issue is known as the ‘Cellophane Fallacy’, derived from the US Supreme Court decision in United States v EI du Pont de Nemours & Co. In that case, the court evaluated substitution at an already monopolistic price level, thereby overstating the availability of substitutes and defining the market too broadly.
The MyCC acknowledges this risk and will consider whether current prices reflect competitive conditions when analysing market definition. Evidence such as excess profits or historic pricing patterns may be relevant in this regard.
Product Differentiation and Complex Markets
The HMT functions most cleanly in homogeneous product markets. Many markets involve differentiated products based on brand, quality, features, or location. In such settings, market boundaries may be less distinct. The Guidelines recognise that pragmatic judgment is required, and in certain cases it may be more appropriate to focus directly on competitive constraints rather than to insist on precise boundaries.
Similarly, bundled products or vertically related markets may require a more nuanced assessment. Where enterprises bundle distinct products together, the relevant frame of reference may depend on whether consumers perceive the bundle as a single integrated offering. In other situations, upstream or downstream substitution may constrain pricing behaviour even where products are not strictly in the same market.
Practical Implications for Businesses
From a compliance perspective, market definition is not merely theoretical. It directly affects assessments of market share, dominance, and the potential impact of agreements. Businesses should be mindful that their internal market segmentation may not align with competition law definitions. Regular self-assessment, supported by documented analysis of competitive constraints, can significantly mitigate enforcement risk.
The MyCC’s approach underscores that market definition is an intermediate step toward evaluating market power and competitive effects. While it is a foundational exercise, it is not an end in itself. In some cases, particularly where market shares are small or where certain horizontal agreements are deemed anti-competitive under Section 4(2) of the Act, a detailed market definition may not be determinative.
Conclusion
The MyCC’s Guidelines on Market Definition provide a structured yet flexible framework grounded in economic principles. Through the Hypothetical Monopolist Test and a careful assessment of substitution, the Commission seeks to identify the true competitive constraints operating within Malaysia.
For enterprises, a clear understanding of how relevant markets are defined is essential. Market definition often shapes the trajectory of an investigation and can significantly influence findings on dominance and anti-competitive effects. A proactive and informed approach to competition compliance remains the most effective safeguard against regulatory exposure.
Published on 20 February 2026