NewRulesonsignificantMarketPower

10 April 2003

Pauline Kuipers, Gerrit-Jan Zwenne

1. Introduction

On the 24th of July 2003 the new regulatory framework for the electronic communications sector (“e-communications sector”) will enter into effect, that is if the new regulatory package has been implemented into national law in time. One of the major implications of the new regime will be that the relevance of general competition rules will increase significantly. One could say that the concepts of “significant market power” and “dominant economic position” will converge.

In this process the European Commission will play an important role. In order to ensure that national regulatory authorities (the “NRA’s”) in the various Member States do not designate undertakings as having significant market power in an inconsistent way, including in the way markets are defined, the new framework explicitly stipulates that the Commission will provide for guidelines for market analysis and the assessment of market power (“the Guidelines”) and a recommendation on relevant product and service markets within the electronic communications sector (“the Recommendation”). When assessing whether an undertaking is in a dominant position in a market, the NRA’s must take into the utmost account the Guidelines and the Recommendation.

2. The Framework Directive (2002/21)

Under the new regulatory framework sector specific ex ante regulation will still have an important role. However, the Directive stresses that ex ante regulatory obligations should only be imposed where there is not effective competition, i.e. in markets where there are one or more undertakings with significant market power, and where national and Community competition law remedies are not sufficient to address the problem.

In principle ex ante obligations can only be imposed upon undertakings that have been designated as having significant market power (“SMP”) on a specific relevant market. If an undertaking has no SMP, the ex ante obligations can only be imposed in a limited number of cases, for instance, in case it concerns the obligation to provide for interoperability and end-to-end connectivity.

The NRAs must determine whether an undertaking has SMP on a specific relevant market. Subsequently, the NRAs can (must) impose appropriate obligations upon such undertakings (art. 8 (2) of the Access Directive[1] and art. 17 Universal Services Directive[2]). Pursuant to the Framework Directive they must first define the relevant markets (art. 15 (3) Framework Directive) and then assess whether there are undertakings that have SMP on these markets (art. 14 (2) and (3) Framework Directive).

The starting point for defining the relevant markets and assessing SMP will be, far more than under the current framework, common competition law. Under the current framework the 25% market share criterion is decisive for SMP (cf. art. 4 (3) and art. 7 (1) and (2) Interconnection Directive[3]). Under the new framework the NRA’s must use the concept of a dominant position. This approach offers the NRA’s the flexibility they need to accommodate specific market situations and to take suitable measures.

At the same time, however, it is essential that this flexibility does not adversely affect harmonisation and legal certainty, through different NRAs defining relevant markets and designating undertakings as having SMP on the basis of different criteria. Therefore, the Framework Directive provides that NRAs must take into utmost account the markets that the Commission has defined in the Recommendation on Relevant Product and Service Markets within electronic communications (see art. 15(1) Framework Directive).

Definition of relevant markets must be done in accordance with common competition law (see art. 15(1), last sentence, of the Framework Directive). The Commission only defines the product or service dimensions of the relevant markets. The defining of the geographical dimension of the markets, and the defining of other markets than the ones defined in the Recommendation, must be left to NRAs (art. 15 (3) Framework Directive). If an NRA wishes to define such other market, he must do so in accordance with articles 6 and 7 of the Framework Directive. If the Commission finds that such other market is not compatible with Community law and would affect trade between Member States, then the Commission may veto such market definition.

3. The Guidelines

On the basis of article 15, paragraph 2, of the Framework Directive, the Commission has published Guidelines, which contain the principles to be applied by NRAs in their analyses of markets and effective competition in the e-communication sector, with the purpose of designating parties as having Significant Market Power. The Guidelines are meant to provide the NRAs with guidance for perfoming the new powers with respect to the definition of market and the assessment of significant market power. The NRAs are required, on the basis of article 15, third paragraph of the directive, to comply with the Guidelines as much as possible. This means that the Guidelines will particularly be of importance when the Commission assesses the proportionality and legality of the proposals by the NRA’s with respect to market definitions or significant market power (“SMP”). [4]

The Commission points out that market definition is not a purpose in itself, but represents a necessary condition for assessing effective competition in the market and therefore deciding whether it is necessary to impose ex ante obligations on certain companies in order to archieve effective competition.

In accordance with general competition law, a distinction is made between the relevant product market (or relevant services market) and the relevant geographic market.[5] The existence of competitive constraints on the price setting of the products and services concerned indicates the extent to which the supply of a product or the provision of a service is dertermined by (1) demand-side substitution, (2) supply-side substitution and (3) potential competition.[6]

The Commission recommends use of the so-called ‘hypotetical monopolist test’, which is also used in competition law, to assess the existence of demand and supply side substitution between certain products/services. Under this test, an NRA should investigate what would happen if, on the smallest possible relevant market there was, a small but significant lasting increase in the price of a given product, assuming that the prices of all other products remain constant. Actions of customers, suppliers and potential competitors following this relative price increase indicate whether substitutable products exist, to which a substantial part of the customers switch under these circumstances.[7] It should also be taken into account that a relative price increase could lead to a supply-side change, when new suppliers enter the market or redirect their production capacity. An increase in the retail tariffs of a mobile telephone operator could for instance be reason for a provider of fixed telephony services to enter the market for mobile telephony services (e.g. as a MVNO) [8].

According to the Guidelines, the NRA’s should start the definition of the relevant market by grouping products or services which are used for similar purposes by consumers, irrelevant of the other characteristics of the products. As an example, the Commission mentioned the use of cable and satelite services for television. Another example is internet access by use of the cable or fixed telephone lines. The starting point for the definition of relevant market is therefore the demand-side (consumer).

The hypothetical monopoly test can also be used for defining the geographical market by asking how will a consumer react if the price of a product in a certain geographic area increases substantially? Will he then start purchasing the same product outside the geographical area concerned or will he still buy the product within that geographical area?

The Commission also points to the possibility of network effects and chain substitutability.

Significant market power

Under the new regulatory framework, a provider will have significant market power if this provider, either individually or jointly with others, enjoys a position equivalent to dominance, that is to say a position of economic strength which allows it to behave to an appreciable extent independently of competitors, customers and ultimately consumers (article 14 (2) Framework Directive). This definition is derived from the United Brands decision of the EC Court of Justice, which defines the notion of dominance within the meaning of article 82 EC.[9]

The main instrument for assessing significant market power, also under the definition of dominance, remains the market share of the undertaking concerned. In the Commission’s practice and the ECJ case law with respect to article 82 EC, single dominance concerns normally arise if the undertaking has a market share of more than 40%.[10] Market shares in excess of 50% are usually seen as dominant, except where there are exceptional circumstances. This means a significant relaxation of the current 25% criterium.

Furthermore, it is important that the Commission indicates in the Guidelines that an undertaking which has SMP on a certain market with regard to ex ante regulation, does not automatically hold a dominant position within the meaning of article 82 EC or corresponding national provisions.[11]

4. The Recommendation on the Relevant Markets

On the basis of article 15 (1) Framework Directive, the Commission is obliged to do a public consultation and consult with national regulatory authorities before adopting the Recommendation. For this reason, the Commission published a draft Recommendation in June 2002 as well as a working document indicating its view on the definition of the relevant markets and explaining how the Commission defined the markets mentioned in the Recommendation’s Annex.[12] Having received a lot of input from the NRAs as well as from many market members, the Commission published the final text of the Recommendation and the Annex on 11 February 2003 together with an Explanatory Memorandum.[13]

Contrary to competition rules, the definition and demarcation of relevant markets in the electronic communication sector should be done on a forward looking basis, as the NRAs will have to apply the regulation ex ante. In this regard, market definition by the NRAs is similar to market definition in merger control, which also takes place on a forward looking basis. In defining the relevant markets, economic and technological developments should be taken into account. The Commission, however, applies a limited time-span of two or three years and intends to revise the Recommendation and its market definitions every few years.

Furthermore, it is important that the Commission only identifies in the Recommendation, those relevant product markets on which the Commission considers ex ante regulation on the basis of the universal services directive and the access directive necessary. [14] This also means that the geographical dimension of the defined relevant product markets is not demarcated, but also the precise definition of markets on which there is sufficient competition, are left out.

The Commission regards ex ante regulation as an important complement to the competition rules in the liberalised markets, in particular with respect to two important entrance problems for new market parties. The Commission first of all has in mind the problem for new market parties to gain access to existing networks in order to offer the services to customers. Secondly, the Commission refers to the problem of interconnection with existing networks for offering services on a wider scale.

The Commission explicitly remarks that the market definition in the individual competition law cases does not necessarily have to be identical to the market definition for the purpose of the regulatory framework. Whether a market is defined in view of the application of Articles 81 and 82 EC or on the basis of a forward looking assessment of market structures and the operation of markets in view of ex ante regulation. Although the NRA’s and the competition law authorities could in principal reach the same market definition, it cannot be ruled out that deviating conclusions are reached as a result of the different purposes of the market definition. Thus, the purpose of market definition can also determine the result.

In order to assess whether relevant markets are alegeable for ex ante regulation under the new regulatory framework, the Commission uses the following (cumulative) criteria:

  1. Is a market subject to high and non-transitory entry barriers?
  2. Does a market have characteristics indicating it will tend over time towards effective competition?
  3. Is the application of competition law by itself sufficient to ensure effective competition or is it necessary to issue supplementary ex ante regulation?

The application of these criteria comprises a broad assessment of the effectiveness of competition to address persistent market failures.

In defining the different markets within the e-communication sector, the Commission first of all uses the usual distinction between retail and wholesale markets, which is also applied under the current regulatory framework, inter alia on the basis of the Commission Notice on access in the telecommunication sector.[15] Retail or end-user markets are the markets on which the products or services are sold to end-users. Wholesale or distribution markets are markets for access to facilities or services to operators in order to be able to operate on the supplyside of the retailmarkets. The Commission starts with the definition of the retail markets and subsequently defines the related wholesale markets.

Both on the relevant retail and the relevant wholesale markets, a distinction can be made between services on fixed locations and services which are offered on non-fixed locations. Also, a distinction can be made between call services (public telephone services) and non-call services (data and leaselines). Moreover, the Commission, in particular on the wholesale markets, usually distinguishes between markets for the supply of services and the supply of necessary network infrastructure.

If these principals are set out in the matrix, it becomes clear how the relevant markets, which are included by the Commission in the Annex of the Recommendation, relate to each other. This matrix is included in Table 1.

Table 1 Matrix of the relevant markets in the Annex of the Recommendation

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The numbers between brackets refer to the numbers of the corresponding markets in the Annex

5. Final remarks

The new regulatory framework offers the NRA’s far more room to define far more relevant markets than the current regulatory framework. On some markets this may lead to more ex ante regulation, while at the same time there will be less regulation on other markets. The scope of some of the new market definitions is less extensive than the market definitions that are used under the current framework. For instance, under the current framework the new definition of the market for call termination on individual mobile networks is part of the national interconnection market (cf. art. 7(2), last sentence, of the Interconnection Directive).

In the Netherlands, the NRA (OPTA) and the Competition Authority (NMa) have expressed that they endeavour to merge in the short term. [17] In view of the developments set out in this contribution, this seems no surprise at all.


[1] Directive 2002/19/EC of 7 March 2002 on access to, and interconnection of, electronic communications networks and associated facilities (Access Directive) OJ 2002 L 108/7.
[2]
Directive 2002/22/EC of 7 March 2002 on universal service and users' rights relating to electronic communications networks and services (Universal Service Directive) OJ 2002 L 108/51.
[3] Directive 97/33/EC of 30 June 1997 on interconnection in Telecommunications with regard to ensuring universal service and interoperability through application of the principles of Open Network Provision (ONP) OJ L 199.
[4] See para. 1, 5-7 Guidelines.
[5] According to the definition in the Commission Notice on the Relevant Market (OJ 1997, C372) the relevant product market comprises “all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products' characteristics, their prices and their intended use”. De relevant geographical market consists of “the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas”.
[6] See para. 38 and 39 Guidelines.
[7] This is the so-called SSNIP-test (Small but Significant Non-transitory Increase in Price).
[8]
Mobile Virtual Network Operator.
[9] Case. 27/76, Jur. 1978, p. 207.
[10] According to the decision-making practice of the Commission, it is possible to have a dominant position at a smaller market share. E.g. in the MCI WorldCom/Sprint (COMP/M.1741), the Commission established that the merged company would have a combined market share of more than ca. 35-45 % on the relevant market for top-level internet connectivity, which would be manifold compared to the market shares of its competitors, which could result to the possibility of acting independently of its customers and competitors.
[11] See para. 30 Guidelines.
[12] Working Document 17 June 2002, <europa.eu.int/information_society>
[13] C(2003)297, both texts are available on europa.eu.int/information_society/topics/telecoms/regulatory/maindocs/index_en.htm#directives[14] See Working Document p. 11: “In this Recommendation, care has been taken to identify, (in accordance with Annex I of the Framework Directive), markets whose characteristics may be such as to justify the imposition of regulatory obligations as set out in the specific directives.”
[15] Notice on the application of the competition rules to access agreements in the telecommunications sector, OJ 1998 C 265/2
[16] The first 6 markets are identified for the purpose of analysis in respect of Article 17 Universal Service Directive
[17] Joint Press Release NMa and OPTA: “OPTA and MNA ask for accelerated merger, 10 July 2002 <www.nma-org.nl> and <www.opta.nl>


Important - The information in this article is provided subject to the disclaimer. The law may have changed since first publication and the reader is cautioned accordingly.

Authors

Kuipers-Pauline

Pauline Kuipers

Managing Partner
Netherlands

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