EN Official Journal of the European Union C 101/1

EFTA SURVEILLANCE AUTHORITY GUIDELINES

of 14 July 2004

on market analysis and the assessment of significant market power under the regulatory framework for electronic communications networks and services referred to in Annex XI of the Agreement on the European Economic Area

(2006/C 101/01)

A. The present guidelines are issued by the EFTA Surveillance Authority (hereinafter the Authority) pursuant to the Agreement on the European Economic Area (hereinafter the EEA Agreement) and the Agreement between the EFTA States on the establishment of a Surveillance Authority and a Court of Justice (hereinafter the Surveillance and Court Agreement).

B. The European Commission (hereinafter the Commission) has adopted guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services (1). This non-binding act provides guidance to the national regulatory authorities (NRAs) in the EC Member States as to the application of the new regulatory framework for electronic communications and in particular, as regards the definition of relevant product and services markets, the finding of significant market power, as well as certain aspects of cooperation and coordination at national and EU level.

C. In order to secure uniform surveillance and homogeneous application of the new rules throughout the European Economic Area (hereinafter the EEA), the Authority adopts the present guidelines under the power conferred upon it by Article 5(2)(b) of the Surveillance and Court Agreement and Article 15(2) of Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services (2) (hereinafter the Framework Directive).

1. INTRODUCTION

1.1. Scope and purpose of the guidelines

1. These guidelines set out the principles for use by NRAs in the EFTA States in their analysis of markets and effective competition under the new regulatory framework for electronic communications networks and services (3).

2. This new regulatory framework comprises five Directives: the Framework Directive; the Directive 2002/20/EC of the European Parliament and of the Council of 7 March 2002 on the authorisation of electronic communications networks and services (4) (hereinafter the Authorisation Directive); the Directive 2002/19/EC of the European Parliament and of the Council of 7 March 2002 on access to, and interconnection of, electronic communications networks and associated facilities (5) (hereinafter the Access Directive); the Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002 on universal service and users' rights relating to electronic communications networks and services (6) (hereinafter the Universal Service Directive); the Directive 2002/58/EC of the European Parliament and of the Council of 12 July 2002 concerning the processing of personal data and the protection of privacy in the electronic communications (7) (hereinafter the privacy and electronic communications Directive).

3. Under the 1998 regulatory framework, the market areas of the Telecommunications sector that were subject to ex ante regulation were laid down in the relevant directives, but were not markets defined in accordance with the principles of competition law. In these areas defined under the 1998 regulatory framework, NRAs had the power to designate undertakings as having significant market power (SMP) when they possessed 25 % market share, with the possibility to deviate from this threshold taking into account the undertaking's ability to influence the market, its turnover relative to the size of the market, its control of the means of access to end-users, its access to financial resources and its experience in providing products and services in the market.

4. Under the new regulatory framework, the markets to be regulated are defined in accordance with the principles of EEA competition law. They are identified by the Authority in its recommendation on relevant product and service markets pursuant to Article 15(1) of the Framework Directive (hereinafter the Recommendation). When justified by national circumstances, other markets can also be identified by the NRAs, in accordance with the procedures set out in Articles 6 and 7 of the Framework Directive. In case of transnational markets which are susceptible to ex ante regulation, where appropriate, they will be identified by the Authority in a decision on relevant transnational markets pursuant to Article 15(4) of the Framework Directive (hereinafter the Decision on transnational markets). In case of a transnational market, which affects both an EFTA State and an EC Member State, the Authority and the Commission shall cooperate with a view to adopting identical decisions identifying cross-pillar transnational markets (hereinafter the Decision on cross-pillar transnational markets).

5. On all of these markets, NRAs will intervene to impose obligations on undertakings only where the markets are considered not to be effectively competitive (8) as a result of such undertakings being in a position equivalent to dominance within the meaning of Article 54 of the EEA Agreement (9). Article 54 of the EEA Agreement corresponds to Article 82 of the EC Treaty. The notion of dominance in Article 82 of the EC Treaty has been defined in the case-law of the Court of Justice of the European Communities as a position of economic strength affording an undertaking the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers. Therefore, under the new regulatory framework, in contrast with the 1998 framework, the Authority and the NRAs will rely on EEA competition law principles and methodologies to define the markets to be regulated ex ante and to assess whether undertakings have SMP on those markets.

6. These guidelines are intended to guide NRAs in the exercise of their new responsibilities for defining markets and assessing SMP. They have been adopted by the Authority in accordance with Article 15(2) of the Framework Directive.

7. Under Article 15(3) of the Framework Directive, NRAs should take the utmost account of these guidelines. This will be an important factor in any assessment by the Authority of the proportionality and legality of proposed decisions by NRAs, taking into account the policy objectives laid down in Article 8 of the Framework Directive.

8. These guidelines specifically address the following subjects: 1. market definition, 2. assessment of SMP, 3. SMP designation, and 4. procedural issues related to all of these subjects.

9. The guidelines have been designed for NRAs to use as follows: — to define the geographical dimension of those product and service markets identified in the Recommendation. NRAs will not define the geographic scope of any transnational markets, as any Decision on transnational markets, be it affecting two or more EFTA States or cross-pillar, will define their geographic dimension, — to carry out, using the methodology set out in Section 3 of the guidelines, a market analysis of the conditions of competition prevailing in the markets identified in the Recommendation and Decision and by NRAs, — to identify relevant national or sub-national product and service markets which are not listed in the Recommendation when this is justified by national circumstances and following the procedures set out in Articles 6 and 7 of the Framework Directive, — to designate, following the market analysis, undertakings with SMP in the relevant market and to impose proportionate ex ante measures consistent with the terms of the regulatory framework as described in Sections 3 and 4 of the Guidelines, — to assist the EFTA States and NRAs in applying Article 11(1f) of the Authorisation Directive, and Article 5(1) of the Framework Directive, and thus ensure that undertakings comply with the obligation to provide information necessary for NRAs to determine relevant markets and assess significant market power thereon, — to guide NRAs when dealing with confidential information, which is likely to be provided by: — undertakings under Article 11(1)(f) of the Authorisation Directive and Article 5(1) of the Framework Directive, — National Competition Authorities (NCAs) as part of the cooperation foreseen in Article 3(5) of the Framework Directive, — the Authority and an NRA in another EFTA State as part of the cooperation foreseen in Article 5(2) of the Framework Directive, — the NRAs of the EFTA States through the Authority and the Commission cross-pillar, as stipulated in Article 7(3) of the Framework Directive, and — the NRAs of the EC Member States through the Commission and the Authority cross-pillar, as stipulated in Article 7(3) of the Framework Directive.

10. The guidelines are structured in the following way: Section 1 provides an introduction and overview of the background, purpose, scope and content of the guidelines. Section 2 describes the methodology to be used by NRAs to define the geographic scope of the markets identified in the Recommendation as well as to define relevant markets outside this Recommendation. Section 3 describes the criteria for assessing SMP in a relevant market. Section 4 outlines the possible conclusions that NRAs may reach in their market analyses and describes the possible actions that may result. Section 5 describes the powers of investigation of NRAs, suggests procedures for coordination between NRAs and between NRAs and NCAs, and describes coordination and cooperation procedures between NRAs and the Authority, as well as between the Authority and the Commission and between the EFTA NRAs and the NRAs in the EC Member States cross-pillar. Finally, Section 6 describes procedures for public consultation and publication of NRAs' proposed decisions.

11. The major objective of these guidelines is to ensure that NRAs use a consistent approach in applying the new regulatory framework, and especially when designating undertakings with SMP in application of the provisions of the regulatory framework.

12. By issuing these guidelines, the Authority also intends to explain to interested parties and undertakings operating in the electronic communications sector how NRAs should undertake their assessments of SMP under the Framework Directive, thereby maximising the transparency and legal certainty of the application of the sector-specific legislation.

13. The Authority will amend these guidelines, whenever appropriate, taking into account experience with the application of the regulatory framework and future developments in the jurisprudence of the EFTA Court and the Court of Justice of the European Communities, as well as the approach taken by the Commission.

14. These guidelines do not in any way restrict the rights conferred by EEA law on individuals or undertakings. They are entirely without prejudice to the application of EEA law, and in particular of the EEA competition rules, by the Authority, the Commission and the relevant national authorities, and to its interpretation by the EFTA Court and the Court of Justice of the European Communities. These guidelines do not prejudice any action the Authority may take or any guidelines the Authority may issue in the future with regard to the application of EEA competition law.

1.2. Principles and policy objectives behind sector-specific measures

15. NRAs must seek to achieve the policy objectives identified in Article 8(2), (3) and (4) of the Framework Directive. These fall into three categories: — promotion of an open and competitive market for electronic communications networks, services and associated facilities, — development of the internal market, and — promotion of the interests of European citizens.

16. The purpose of imposing ex ante obligations on undertakings designated as having SMP is to ensure that undertakings cannot use their market power either to restrict or distort competition on the relevant market, or to leverage such market power onto adjacent markets.

17. These regulatory obligations should only be imposed on those electronic communications markets whose characteristics may be such as to justify sector-specific regulation and in which the relevant NRA has determined that one or more operators have SMP.

18. The product and service markets whose characteristics may be such as to justify sector-specific regulation are identified by the Authority in its Recommendation and, when the definition of different relevant markets is justified by national circumstances, by the NRAs following the procedures set out in Articles 6 and 7 of the Framework Directive (10). In addition, certain other markets are specifically identified in Article 6 of the Access Directive and Articles 18 and 19 of the Universal Service Directive.

19. In respect of each of these relevant markets, NRAs will assess whether the competition is effective. A finding that effective competition exists on a relevant market is equivalent to a finding that no operator enjoys a single or joint dominant position on that market. Therefore, for the purposes of applying the new regulatory framework, effective competition means that there is no undertaking in the relevant market which holds alone or together with other undertakings a single or collective dominant position. When NRAs conclude that a relevant market is not effectively competitive, they will designate undertakings with SMP on that market, and will either impose appropriate specific obligations, or maintain or amend such obligations where they already exist, in accordance with Article 16(4) of the Framework Directive.

20. In carrying out the market analysis under the terms of Article 16 of the Framework Directive, NRAs will conduct a forward looking, structural evaluation of the relevant market, based on existing market conditions. NRAs' should determine whether the market is prospectively competitive, and thus whether any lack of effective competition is durable (11), by taking into account expected or foreseeable market developments over the course of a reasonable period. The actual period used should reflect the specific characteristics of the market and the expected timing for the next review of the relevant market by the NRA. NRAs should take past data into account in their analysis when such data are relevant to the developments in that market in the foreseeable future.

21. If NRAs designate undertakings as having SMP, they must impose on them one or more regulatory obligations, in accordance with the relevant Directives and taking into account the principle of proportionality. Exceptionally, NRAs may impose obligations for access and interconnection that go beyond those specified in the Access Directive, provided this is done with the prior agreement of the Authority, as provided by Article 8(3) of that Directive.

22. In the exercise of their regulatory tasks under Article 15 and 16 of the Framework Directive, NRAs enjoy discretionary powers which reflect the complexity of all the relevant factors that must be assessed (economic, factual and legal) when identifying the relevant market and determining the existence of undertakings with SMP. These discretionary powers remain subject, however, to the procedures provided for in Article 6 and 7 of the Framework Directive.

23. Regulatory decisions adopted by NRAs pursuant to the Directives will have an impact on the development of the EEA. In order to prevent any adverse effects on the functioning of the EEA Agreement, NRAs must ensure that they implement the provisions to which these guidelines apply in a consistent manner. Such consistency can only be achieved by close coordination and cooperation with other NRAs, with NCAs and with the Authority, as provided in the Framework Directive and as recommended in Section 5.3 of these guidelines.

1.3. Relationship with EEA competition law

24. Under the regulatory framework, markets will be defined and SMP will be assessed using the same methodologies as under EEA competition law. Therefore the definition of the geographic scope of markets identified in the Recommendation, the definition where necessary of relevant product/services markets outside the Recommendation, and the assessment of effective competition by NRAs should be consistent with EEA competition case-law and practice. To ensure such consistency, these guidelines are based on 1. existing case-law of the EFTA Court and of the Court of Justice of the European Communities concerning market definition and the notion of dominant position within the meaning of Article 82 of the EC Treaty and the merger control rules (12), 2. the Authority's ‘Guidelines on the application of EEA competition rules in the Telecommunications sector’ (13), 3. the Authority's ‘Notice on the definition of relevant markets for the purposes of competition law within the EEA’ (14), hereinafter ‘the Notice on market definition’, and 4. the Commission's ‘Notice on the application of competition rules to access agreements in the Telecommunications sector’ (15), hereinafter ‘the Access Notice’.

25. Article 54 of the EEA Agreement corresponds to Article 82 of the EC Treaty. Article 6 of the EEA Agreement provides that the provisions of the Agreement, insofar as they are identical in substance to corresponding rules of Community law, shall in their implementation and application be interpreted in conformity with the relevant rulings of the Court of Justice given prior to the date of signature of the Agreement. Moreover, Article 3(2) of the Surveillance and Court Agreement provides that the EFTA Court and the EFTA Surveillance Authority shall pay due account to the principles laid down by the relevant rulings by the Court of Justice given after the date of signature of the EEA Agreement, when interpreting and applying the provisions of the Agreement.

26. The use of the same methodologies ensures that the relevant market defined for the purpose of sector-specific regulation will in most cases correspond to the market definitions that would apply under competition law. In some cases, and for the reasons set out in Section 2 of these guidelines, markets defined by the Authority and competition authorities in competition cases may differ from those identified in the Recommendation and Decision, and/or from markets defined by NRAs under Article 15(3) of the Framework Directive. Article 15(1) of the Framework Directive makes clear that the markets to be defined by NRAs for the purpose of ex ante regulation are without prejudice to those defined by NCAs and by the Authority in the exercise of their respective powers under competition law in specific cases.

27. For the purposes of the application of EEA competition law, the Authority's notice on market definition explains that the concept of the relevant market is closely linked to the objectives pursued under EEA policies. Markets defined under Articles 53 and 54 of the EEA Agreement are generally defined on an ex post basis. In these cases, the analysis will consider events that have already taken place in the market and will not be influenced by possible future developments. Conversely, under the merger control provisions of EEA competition law, markets are generally defined on a forward-looking basis.

28. On the other hand, relevant markets defined for the purposes of sector-specific regulation will always be assessed on a forward-looking basis, as the NRA will include in its assessment an appreciation of the future development of the market. However, NRAs' market analyses should not ignore, where relevant, past evidence when assessing the future prospects of the relevant market (see also Section 2, below). The starting point for carrying out a market analysis for the purpose of Article 15 of the Framework Directive is not the existence of an agreement or concerted practice within the scope of Article 53 of the EEA Agreement, nor a concentration within the scope of the merger Regulation, nor an alleged abuse of dominance within the scope of Article 54 of the EEA Agreement, but is based on an overall forward-looking assessment of the structure and the functioning of the market under examination. Although NRAs and competition authorities, when examining the same issues in the same circumstances and with the same objectives, should in principle reach the same conclusions, it cannot be excluded that, given the differences outlined above, and in particular the broader focus of the NRAs' assessment, markets defined for the purposes of competition law and markets defined for the purpose of sector-specific regulation may not always be identical.

29. Although merger analysis is also applied ex ante, it is not carried out periodically as is the case with the analysis of the NRAs under the new regulatory framework. A competition authority does not, in principle, have the opportunity to conduct a periodic review of its decision in the light of market developments, whereas NRAs are bound to review their decisions periodically under Article 16(1) of the Framework Directive. This factor can influence the scope and breadth of the market analysis and the competitive assessment carried out by NRAs, and for this reason, market definitions under the new regulatory framework, even in similar areas, may in some cases be different from those markets defined by competition authorities.

30. It is considered that markets which are not identified in the Recommendation will not warrant ex ante sector-specific regulation, except where the NRA is able to justify such regulation of an additional or different relevant market in accordance with the procedure in Article 7 of the Framework Directive.

31. The designation of an undertaking as having SMP in a market identified for the purpose of ex ante regulation does not automatically imply that this undertaking is also dominant for the purpose of Article 54 of the EEA Agreement or similar national provisions. Moreover, the SMP designation has no bearing on whether that undertaking has committed an abuse of a dominant position within the meaning of Article 54 of the EEA Agreement or national competition laws. It merely implies that, from a structural perspective, and in the short to medium term, the operator has and will have, on the relevant market identified, sufficient market power to behave to an appreciable extent independently of competitors, customers, and ultimately consumers, and this, solely for purposes of Article 14 of the Framework Directive.

32. In practice, it cannot be excluded that parallel procedures under ex ante regulation and competition law may arise with respect to different kinds of problems in relevant markets (16). Competition authorities may therefore carry out their own market analysis and impose appropriate competition law remedies alongside any sector-specific measures applied by NRAs. However, it must be noted that such simultaneous application of remedies by different regulators would address different problems in such markets. Ex ante obligations imposed by NRAs on undertakings with SMP aim to fulfil the specific objectives set out in the relevant directives, whereas competition law remedies aim to sanction agreements or abusive behaviour which restrict or distort competition in the relevant market.

33. As far as emerging markets are concerned, recital 27 of the Framework Directive notes that emerging markets, where de facto the market leader is likely to have a substantial market share, should not be subject to inappropriate ex ante regulation. This is because premature imposition of ex ante regulation may unduly influence the competitive conditions taking shape within a new and emerging market. At the same time, foreclosure of such emerging markets by the leading undertaking should be prevented. Without prejudice to the appropriateness of intervention by the competition authorities in individual cases, NRAs should ensure that they can fully justify any form of early, ex ante intervention in an emerging market, in particular since they retain the ability to intervene at a later stage, in the context of the periodic re-assessment of the relevant markets.

2. MARKET DEFINITION

2.1 Introduction

34. In the competition guidelines issued in 1994 (17), the Authority recognised the difficulties inherent in defining the relevant market in an area of rapid technological change, such as the Telecommunications sector. Whilst this statement still holds true today as far as the electronic communications sector is concerned, since the publication of those guidelines, the Authority, alongside the Commission, has gained experience in applying the EEA competition rules in a dynamic sector shaped by constant technological changes and innovation, as a result of its role in managing the transition from monopoly to competition in this sector. It should however be recalled that the present guidelines do not purport to explain how the EEA competition rules apply, generally, in the electronic communications sector, but focus only on issues related to (i) market definition and (ii) the assessment of SMP within the meaning of Article 14 of the Framework Directive.

35. In assessing whether an undertaking has SMP, that is whether it ‘enjoys a position of economic strength affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately consumers’ (18), the definition of the relevant market is of fundamental importance since effective competition can only be assessed by reference to the market thus defined (19). The use of the term ‘relevant market’ implies the description of the products or services that make up the market and the assessment of the geographical scope of that market (the terms ‘products’ and ‘services’ are used interchangeably throughout this text). In that regard, it should be recalled that relevant markets defined under the 1998 regulatory framework were distinct from those identified for competition law purposes, since they were based on certain specific aspects of end-to-end communications rather than on the demand and supply criteria used in a competition law analysis (20).

36. Market definition is not a mechanical or abstract process but requires an analysis of any available evidence of past market behaviour and an overall understanding of the mechanics of a given sector. In particular, a dynamic rather than a static approach is required when carrying out a prospective, or forward-looking, market analysis (21). In this respect, any experience gained by NRAs, NCAs, the Authority and the Commission through the application of EEA competition rules to the Telecommunications sector clearly will be of particular relevance in applying Article 15 of the Framework Directive. Thus, any information gathered, any findings made and any studies or reports commissioned or relied upon by NRAs (or NCAs) in the exercise of their tasks, in relation to the conditions of competition in the Telecommunications markets (provided of course that market conditions have since remained unchanged), should serve as a starting point for the purposes of applying Article 15 of the Framework Directive and carrying out a prospective market analysis (22).

37. The main product and service markets whose characteristics may be such as to justify the imposition of ex ante regulatory obligations are identified in the Recommendation which the Authority is required to adopt pursuant to Article 15(1) of the Framework Directive, as well as any Decision on transnational markets which the Authority decides to adopt pursuant to Article 15(4) of the Framework Directive. Therefore, in practice the task of NRAs will normally be to define the geographical scope of the relevant market, although NRAs have the possibility under Article 15(3) of the Framework Directive to define markets other than those listed in the Recommendation in accordance with Article 7 of the Framework Directive (see below, Section 6).

38. Whilst a prospective analysis of market conditions may in some cases lead to a market definition different from that resulting from a market analysis based on past behaviour (23), NRAs should nonetheless seek to preserve, where possible, consistency in the methodology adopted between, on the one hand, market definitions developed for the purposes of ex ante regulation, and on the other hand, market definitions developed for the purposes of the application of the competition rules. Nevertheless, as stated in Article 15(1) of the Framework Directive and Section 1 of the guidelines, markets defined under sector-specific regulation are defined without prejudice to markets that may be defined in specific cases under competition law.

2.2. Main criteria for defining the relevant market

39. The extent to which the supply of a product or the provision of a service in a given geographical area constitutes the relevant market depends on the existence of competitive constraints on the price-setting behaviour of the producer(s) or service provider(s) concerned. There are two main competitive constraints to consider in assessing the behaviour of undertakings on the market, (i) demand-side and, (ii) supply-side substitution. A third source of competitive constraint on an operator's behaviour exists, namely potential competition. The difference between potential competition and supply-substitution lies in the fact that supply-side substitution responds promptly to a price increase whereas potential entrants may need more time before starting to supply the market. Supply substitution involves no additional significant costs whereas potential entry occurs at significant sunk costs (24). The existence of potential competition should thus be examined for the purpose of assessing whether a market is effectively competitive within the meaning of the Framework Directive, that is whether there exist undertakings with SMP (25).

40. Demand-side substitutability is used to measure the extent to which consumers are prepared to substitute other services or products for the service or product in question (26), whereas supply-side substitutability indicates whether suppliers other than those offering the product or services in question would switch in the immediate to short term their line of production or offer the relevant products or services without incurring significant additional costs.

41. One possible way of assessing the existence of any demand and supply-side substitution is to apply the so-called ‘hypothetical monopolist test’ (27). Under this test, an NRA should ask what would happen if there were a small but significant, lasting increase in the price of a given product or service, assuming that the prices of all other products or services remain constant (hereafter, relative price increase). While the significance of a price increase will depend on each individual case, in practice, NRAs should normally consider customers' (consumers or undertakings) reactions to a permanent price increase of between 5 to 10 % (28). The responses by consumers or undertakings concerned will aid in determining whether substitutable products do exist and, if so, where the boundaries of the relevant product market should be delineated (29).

42. As a starting point, an NRA should apply this test firstly to an electronic communications service or product offered in a given geographical area, the characteristics of which may be such as to justify the imposition of regulatory obligations, and having done so, add additional products or areas depending on whether competition from those products or areas constrains the price of the main product or service in question. Since a relative price increase of a set of products (30) is likely to lead to some sales being lost, the key issue is to determine whether the loss of sales would be sufficient to offset the increased profits which would otherwise be made from sales made following the price increase. Assessing the demand-side and supply-side substitution provides a way of measuring the quantity of the sales likely to be lost and consequently of determining the scope of the relevant market.

43. In principle, the ‘hypothetical monopolist test’ is relevant only with regard to products or services, the price of which is freely determined and not subject to regulation. Thus, the working assumption will be that current prevailing prices are set at competitive levels. If, however, a service or product is offered at a regulated, cost-based price, then such price is presumed, in the absence of indications to the contrary, to be set at what would otherwise be a competitive level and should therefore be taken as the starting point for applying the ‘hypothetical monopolist test’ (31). In theory, if the demand elasticity of a given product or service is significant, even at relative competitive prices, the firm in question lacks market power. If, however, elasticity is high even at current prices, that may mean only that the firm in question has already exercised market power to the point that further price increases will not increase its profits. In this case, the application of the hypothetical monopoly test may lead to a different market definition from that which would be produced if the prices were set at a competitive level (32). Any assessment of market definition must therefore take into account this potential difficulty. However, NRAs should proceed on the basis that the prevailing price levels provide a reasonable basis from which to start the relevant analysis unless there is evidence that this is not in fact the case.

44. If an NRA chooses to have recourse to the hypothetical monopolist test, it should then apply this test up to the point where it can be established that a relative price increase within the geographic and product markets defined will not lead consumers to switch to readily available substitutes or to suppliers located in other areas.

2.2.1. The relevant product/service market

45. According to settled case-law, the relevant product/service market comprises all those products or services that are sufficiently interchangeable or substitutable, not only in terms of their objective characteristics, by virtue of which they are particularly suitable for satisfying the constant needs of consumers, their prices or their intended use, but also in terms of the conditions of competition and/or the structure of supply and demand on the market in question (33). Products or services which are only to a small, or relative degree interchangeable with each other do not form part of the same market (34). NRAs should thus commence the exercise of defining the relevant product or service market by grouping together products or services that are used by consumers for the same purposes (end use).

46. Although the aspect of the end use of a product or service is closely related to its physical characteristics, different kind of products or services may be used for the same end. For instance, consumers may use dissimilar services such as cable and satellite connections for the same purpose, namely to access the Internet. In such a case, both services (cable and satellite access services) may be included in the same product market. Conversely, paging services and mobile telephony services, which may appear to be capable of offering the same service, that is, dispatching of two-way short messages, may be found to belong to distinct product markets in view of their different perceptions by consumers as regards their functionality and end use.

47. Differences in pricing models and offerings for a given product or service may also imply different groups of consumers. Thus, by looking into prices, NRAs may define separate markets for business and residential customers for essentially the same service. For instance, the ability of operators engaged in providing international retail electronic communications services to discriminate between residential and business customers, by applying different sets of prices and discounts, has led the Authority, alongside the Commission, to decide that these two groups form separate markets as far as such services are concerned (see following). However, in order for products to be viewed as demand-side substitutes it is not necessary that they are offered at the same price. A low quality product or service sold at a low price could well be an effective substitute to a higher quality product sold at higher prices. What matters in this case is the likely responses of consumers following a relative price increase (35).

48. Furthermore, product substitutability between different electronic communications services will arise increasingly through the convergence of various technologies. Use of digital systems leads to an increasing similarity in the performance and characteristics of network services using distinct technologies. A packet-switched network, for instance, such as Internet, may be used to transmit digitalised voice signals in competition with traditional voice telephony services (36).

49. In order, therefore, to complete the market-definition analysis, an NRA, in addition to considering products or services whose objective characteristics, prices and intended use make them sufficiently interchangeable, should also examine, where necessary, the prevailing conditions of demand and supply substitution by applying the hypothetical monopolist test.

2.2.1.1. Demand-side substitution

50. Demand-side substitution enables NRAs to determine the substitutable products or range of products to which consumers could easily switch in case of a relative price increase. In determining the existence of demand substitutability, NRAs should make use of any previous evidence of consumers' behaviour. Where available, an NRA should examine historical price fluctuations in potentially competing products, any records of price movements, and relevant tariff information. In such circumstances evidence showing that consumers have in the past promptly shifted to other products or services, in response to past price changes, should be given appropriate consideration. In the absence of such records, and where necessary, NRAs will have to seek and assess the likely response of consumers and suppliers to a relative price increase of the service in question.

51. The possibility for consumers to substitute a product or a service for another because of a small, but significant lasting price increase may, however, be hindered by considerable switching costs. Consumers who have invested in technology or made any other necessary investments in order to receive a service or use a product may be unwilling to incur any additional costs involved in switching to an otherwise substitutable service or product. In the same vein, customers of existing providers may also be ‘locked in’ by long-term contracts or by the prohibitively high cost of switching terminals. Accordingly, in a situation where end users face significant switching costs in order to substitute product A for product B, these two products should not be included in the same relevant market (37).

52. Demand substitutability focuses on the interchangeable character of products or services from the buyer's point of view. Proper delineation of the product market may, however, require further consideration of potential substitutability from the supply side.

2.2.1.2. Supply-side substitution

53. In assessing the scope for supply substitution, NRAs may also take into account the likelihood that undertakings not currently active on the relevant product market may decide to enter the market, within a reasonable time frame (38), following a relative price increase, that is, a small but significant, lasting price increase. In circumstances where the overall costs of switching production to the product in question are relatively negligible, then that product may be incorporated into the product market definition. The fact that a rival firm possesses some of the assets required to provide a given service is immaterial if significant additional investment is needed to market and offer profitably the services in question (39). Furthermore, NRAs will need to ascertain whether a given supplier would actually use or switch its productive assets to produce the relevant product or offer the relevant service (for instance, whether their capacity is committed under long-term supply agreements, etc.). Mere hypothetical supply-side substitution is not sufficient for the purposes of market definition.

54. Account should also be taken of any existing legal, statutory or other regulatory requirements which could defeat a time-efficient entry into the relevant market and as a result discourage supply-side substitution. For instance, delays and obstacles in concluding interconnection or co-location agreements, negotiating any other form of network access, or obtaining rights of ways for network expansion (40), may render unlikely in the short term the provision of new services and the deployment of new networks by potential competitors.

55. As can been seen from the above considerations, supply substitution may serve not only for defining the relevant market but also for identifying the number of market participants.

2.2.2. Geographic Market

56. Once the relevant product market is identified, the next step to be undertaken is the definition of the geographical dimension of the market. It is only when the geographical dimension of the product or service market has been defined that an NRA may properly assess whether or not there are market players with SMP on the relevant market.

57. According to established case-law, the relevant geographic market comprises an area in which the undertakings concerned are involved in the supply and demand of the relevant products or services, in which area the conditions of competition are similar or sufficiently homogeneous and which can be distinguished from neighbouring areas in which the prevailing conditions of competition are appreciably different (41). The definition of the geographic market does not require the conditions of competition between traders or providers of services to be perfectly homogeneous. It is sufficient that they are similar or sufficiently homogeneous, and accordingly, only those areas in which the conditions of competition are ‘heterogeneous’ may not be considered to constitute a uniform market (42).

58. The process of defining the limits of the geographic market proceeds along the same lines as those discussed above in relation to the assessment of the demand and supply-side substitution in response to a relative price increase.

59. Accordingly, with regard to demand-side substitution, NRAs should assess mainly consumers' preferences as well as their current geographic patterns of purchase. In particular, linguistic reasons may explain why certain services are not available or marketed in different language areas. As far as supply-side substitution is concerned, where it can be established that operators which are not currently engaged or present on the relevant market, will, however, decide to enter that market in the short term in the event of a relative price increase, then the market definition should be expanded to incorporate those ‘outside’ operators.

60. In the electronic communications sector, the geographical scope of the relevant market has traditionally been determined by reference to two main criteria (43): (a) the area covered by a network (44); and (b) the existence of legal and other regulatory instruments (45).

61. On the basis of these two main criteria (46), geographic markets can be considered to be local, regional, national or covering territories of two or more countries (for instance, pan-European, EEA-wide or global markets).

2.2.3. Other issues of market definition

62. For the purposes of ex ante regulation, in certain exceptional cases, the relevant market may be defined on a route-by-route basis. In particular, when considering the dimension of markets for international retail or wholesale electronic communications services, it may be appropriate to treat paired countries or paired cities as separate markets (47). Clearly, from the demand side, the delivery of a call to one country is not a substitute for the delivery of the same to another country. On the other hand, the question of whether indirect transmission services, that is, re-routing or transit of the same call via a third country, represent effective supply-side substitutes depends on the specificities of the market and should be decided on a case-by-case basis (48). However, a market for the provision of services on a bilateral route would be national in scope since supply and demand patterns in both ends of the route would most likely correspond to different market structures (49).

63. In its notice on market definition the Authority drew attention to certain cases where the boundaries of the relevant market may be expanded to take into consideration products or geographical areas which, although not directly substitutable, should be included in the market definition because of so-called ‘chain substitutability’ (50). In essence, chain substitutability occurs where it can be demonstrated that although products A and C are not directly substitutable, product B is a substitute for both product A and product C and therefore products A and C may be in the same product market since their pricing might be constrained by the substitutability of product B. The same reasoning also applies for defining the geographic market. Given the inherent risk of unduly widening the scope of the relevant market, findings of chain substitutability should be adequately substantiated (51).

2.3. The Commission's practice

64. The Commission has adopted a number of decisions under Regulation No 17 and the merger control Regulation relating to the electronic communications sector. These decisions may be of particular relevance for NRAs with regard to the methodology applied by the Commission in defining the relevant market (52). As stated above, however, in a sector characterised by constant innovation and rapid technological convergence, it is clear that any current market definition runs the risk of becoming inaccurate or irrelevant in the near future (53). Furthermore, markets defined under EEA competition law are without prejudice to markets defined under the new regulatory framework as the context and the timeframe within which a market analysis is conducted may be different (54).

65. As stated in the Access notice, there are in the electronic communications sector at least two main types of relevant markets to consider, that of services provided to end users (services market) and that of access to facilities necessary to provide such services (access market) (55). Within these two broad market definitions further market distinctions may be made depending on demand and supply side patterns.

66. In particular, in its decision-making practice, the Authority and the Commission will normally make a distinction between the provision of services and the provision of underlying network infrastructure. For instance, as regards the provision of infrastructure, the Commission has identified separate markets for the provision of local loop, long distance and international infrastructure (56). As regards fixed services, the Commission has distinguished between subscriber (retail) access to switched voice telephony services (local, long distance and international), operator (wholesale) access to networks (local, long distance and international) and business data communications services (57). In the market for fixed telephony retail services, the Commission has also distinguished between the initial connection and the monthly rental (58). Retail services are offered to two distinct classes of consumers, namely, residential and business users, the latter possibly being broken down further into a market for professional, small and medium sized business customers and another for large businesses (59). With regard to fixed telephony retail services offered to residential users, demand and supply patterns seem to indicate that two main types of services are currently being offered, traditional fixed telephony services (voice and narrowband data transmissions) on the one hand, and high speed communications services (currently in the form of xDSL services) on the other hand (60).

67. As regards the provision of mobile communications services, the Commission has found that, from a demand-side point of view, mobile telephony services and fixed telephony services constitute separate markets (61). Within the mobile market, evidence gathered from the Commission has indicated that the market for mobile communications services encompasses both GSM 900 and GSM 1800 and possibly analogue platforms (62).

68. The Commission has found that with regard to the ‘access’ market, the latter comprises all types of infrastructure that can be used for the provision of a given service (63). Whether the market for network infrastructures should be divided into as many separate submarkets as there are existing categories of network infrastructure, depends clearly on the degree of substitutability among such (alternative) networks (64). This exercise should be carried out in relation to the class of users to which access to the network is provided. A distinction should, therefore, be made between provision of infrastructure to other operators (wholesale level) and provision to end users (retail level) (65). At the retail level, a further segmentation may take place between business and residential customers (66).

69. When the service to be provided concerns only end users subscribed to a particular network, access to the termination points of that network may well constitute the relevant product market. This will not be the case if it can be established that the same services may be offered to the same class of consumers by means of alternative, easily accessible competing networks. For example, in its Communication on unbundling the local loop (67), the Commission stated that although alternatives to the PSTN for providing high speed communications services to residential consumers exist (fibre optic networks, wireless local loops or upgradeable TV networks), none of these alternatives may be considered as a substitute to the fixed local loop infrastructure (68). Future innovative and technological changes may, however, justify different conclusions (69).

70. Access to mobile networks may also be defined by reference to two potentially separate markets, one for call origination and another for call termination. In this respect, the question whether the access market to mobile infrastructure relates to access to an individual mobile network or to all mobile networks, in general, should be decided on the basis of an analysis of the structure and functioning of the market (70).

3. ASSESSING SIGNIFICANT MARKET POWER (DOMINANCE)

71. According to Article 14 of the Framework Directive ‘an undertaking shall be deemed to have significant market power if, either individually or jointly with others, it enjoys a position equivalent to dominance, that is to say a position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers’. This is the definition that the Court of Justice case-law ascribes to the concept of dominant position in Article 82 of the Treaty (71). The new framework has aligned the definition of SMP with the Court's definition of dominance within the meaning of Article 82 of the Treaty (72), respectively Article 54 of the EEA Agreement. Consequently, in applying the new definition of SMP, NRAs will have to ensure that their decisions are in accordance with the relevant jurisprudence of the EFTA Court and of the Court of Justice of the European Communities on dominance (73) as well as bearing in mind the Commission's practice. However, the application of the new definition of SMP, ex ante, calls for certain methodological adjustments to be made regarding the way market power is assessed. In particular, when assessing ex ante whether one or more undertakings are in a dominant position in the relevant market, NRAs are, in principle, relying on different sets of assumptions and expectations than those relied upon by a competition authority applying Article 82 of the Treaty and Article 54 of the EEA Agreement ex post, within a context of an alleged committed abuse (74). Often, the lack of evidence or of records of past behaviour or conduct will mean that the market analysis will have to be based mainly on a prospective assessment. The accuracy of the market analysis carried out by NRAs will thus be conditioned by information and data existing at the time of the adoption of the relevant decision.

72. The fact that an NRA's initial market predictions do not finally materialise in a given case does not necessarily mean that its decision at the time of its adoption was inconsistent with the Framework Directive. In applying ex ante the concept of dominance, NRAs must be accorded discretionary powers correlative to the complex character of the economic, factual and legal situations that will need to be assessed. In accordance with the Framework Directive, market assessments by NRAs will have to be undertaken on a regular basis. In this context, therefore, NRAs will have the possibility to react at regular intervals to any market developments and to take any measure deemed necessary.

3.1. Criteria for assessing SMP

73. As the Court of Justice of the European Communities has stressed, a finding of a dominant position does not preclude some competition in the market. It only enables the undertaking that enjoys such a position, if not to determine, at least to have an appreciable effect on the conditions under which that competition will develop, and in any case to act in disregard of any such competitive constraint so long as such conduct does not operate to its detriment (75).

74. In an ex post analysis, a competition authority may be faced with a number of different examples of market behaviour each indicative of market power within the meaning of Article 82 of the Treaty and/or Article 54 of the EEA Agreement. However, in an ex ante environment, market power is essentially measured by reference of the power of the undertaking concerned to raise prices by restricting output without incurring a significant loss of sales or revenues.

75. The market power of an undertaking can be constrained by the existence of potential competitors (76). An NRA should thus take into account the likelihood that undertakings not currently active on the relevant product market may in the medium term decide to enter the market following a small but significant non-transitory price increase. Undertakings which, in case of such a price increase, are in a position to switch or extend their line of production/services and enter the market should be treated by NRAs as potential market participants even if they do not currently produce the relevant product or offer the relevant service.

76. As explained in the paragraphs below, a dominant position is found by reference to a number of criteria and its assessment is based, as stated above, on a forward-looking market analysis based on existing market conditions. Market shares are often used as a proxy for market power. Although a high market share alone is not sufficient to establish the possession of SMP (dominance), it is unlikely that a firm without a significant share of the relevant market would be in a dominant position. Thus, undertakings with market shares of no more than 25 % are not likely to enjoy a (single) dominant position on the market concerned (77). In the Commission's decision-making practice, single dominance concerns normally arise in the case of undertakings with market shares of over 40 %, although the Commission may in some cases have concerns about dominance even with lower market shares (78), as dominance may occur without the existence of a large market share. According to established case-law, very large market shares, in excess of 50 %, are in themselves, save in exceptional circumstances, evidence of the existence of a dominant position (79). An undertaking with a large market share may be presumed to have SMP, that is, to be in a dominant position, if its market share has remained stable over time (80). The fact that an undertaking with a significant position on the market is gradually losing market share may well indicate that the market is becoming more competitive, but it does not preclude a finding of SMP. On the other hand, fluctuating market shares over time may be indicative of a lack of market power in the relevant market.

77. As regards the methods used for measuring market size and market shares, both volume sales and value sales provide useful information for market measurement (81). In the case of bulk products preference is given to volume whereas in the case of differentiated products (i.e. branded products) sales in value and their associated market share will often be considered to reflect better the relative position and strength of each provider. In bidding markets the number of bids won and lost may also be used as approximation of market shares (82).

78. The criteria to be used to measure the market share of the undertaking(s) concerned will depend on the characteristics of the relevant market. It is for NRAs to decide which are the criteria most appropriate for measuring market presence. For instance, leased lines revenues, leased capacity or numbers of leased line termination points are possible criteria for measuring an undertaking's relative strength on leased lines markets. As the Commission has indicated, the mere number of leased line termination points does not take into account the different types of leased lines that are available on the market — ranging from analogue voice-quality to high-speed digital leased lines, short distance to long distance international leased lines. Of the two criteria, leased lines revenues may be more transparent and less complicated to measure. Likewise, retail revenues, call minutes or numbers of fixed telephone lines or subscribers of public telephone network operators are possible criteria for measuring the market shares of undertakings operating in these markets (83). Where the market defined is that of interconnection, a more realistic measurement parameter would be the revenues accrued for terminating calls to customers on fixed or mobile networks. This is so because the use of revenues, rather than for example call minutes, takes account of the fact that call minutes can have different values (i.e. local, long distance and international) and provides a measure of market presence that reflects both the number of customers and network coverage (84). For the same reasons, the use of revenues for terminating calls to customers of mobile networks may be the most appropriate means to measure the market presence of mobile network operators (85).

79. It is important to stress that the existence of a dominant position cannot be established on the sole basis of large market shares. As mentioned above, the existence of high market shares simply means that the operator concerned might be in a dominant position. Therefore, NRAs should undertake a thorough and overall analysis of the economic characteristics of the relevant market before coming to a conclusion as to the existence of SMP. In that regard, the following criteria can also be used to measure the power of an undertaking to behave to an appreciable extent independently of its competitors, customers and consumers. These criteria include amongst others: — overall size of the undertaking, — control of infrastructure not easily duplicated, — technological advantages or superiority, — absence of or low countervailing buying power, — easy or privileged access to capital markets/financial resources, — product/services diversification (e.g. bundled products or services), — economies of scale, — economies of scope, — vertical integration, — a highly developed distribution and sales network, — absence of potential competition, — barriers to expansion.

80. A dominant position can derive from a combination of the above criteria, which taken separately may not necessarily be determinative.

81. A finding of dominance depends on an assessment of ease of market entry. In fact, the absence of barriers to entry deters, in principle, independent anti-competitive behaviour by an undertaking with a significant market share. In the electronic communications sector, barriers to entry are often high because of existing legislative and other regulatory requirements which may limit the number of available licences or the provision of certain services (i.e., GSM/DCS or 3G mobile services). Furthermore, barriers to entry exist where entry into the relevant market requires large investments and the programming of capacities over a long time in order to be profitable (86). However, high barriers to entry may become less relevant with regard to markets characterised by on-going technological progress. In electronic communications markets, competitive constraints may come from innovative threats from potential competitors that are not currently in the market. In such markets, the competitive assessment should be based on a prospective, forward-looking approach.

82. As regards the relevance of the notion of ‘essential facilities’ for the purposes of applying the new definition of SMP, there is for the moment no jurisprudence in relation to the electronic communications sector. However, this notion, which is mainly relevant with regard to the existence of an abuse of a dominant position under Article 82 of the EC Treaty and/or Article 54 of the EEA Agreement, is less relevant with regard to the ex ante assessment of SMP within the meaning of Article 14 of the Framework Directive. In particular, the doctrine of ‘essential facilities’ is complementary to existing general obligations imposed on dominant undertaking, such as the obligation not to discriminate among customers and has been applied in cases under Article 82 of the EC Treaty and Article 54 of the EEA Agreement in exceptional circumstances, such as where the refusal to supply or to grant access to third parties would limit or prevent the emergence of new markets, or new products, contrary to Article 82(b) of the Treaty and Article 54(b) of the EEA Agreement. It has thus primarily been associated with access issues or cases involving a refusal to supply or to deal under Article 82 of the Treaty and Article 54 of the EEA Agreement, without the presence of any discriminatory treatment. Under existing case-law, a product or service cannot be considered ‘necessary’ or ‘essential’ unless there is no real or potential substitute. Whilst it is true that an undertaking which is in possession of an ‘essential facility’ is by definition in a dominant position on any market for that facility, the contrary is not always true. The fact that a given facility is not ‘essential’ or ‘indispensable’ for an economic activity on some distinct market, within the meaning of the existing case-law (87) does not mean that the owner of this facility might not be in a dominant position. For instance, a network operator can be in a dominant position despite the existence of alternative competing networks if the size or importance of its network affords him the possibility to behave independently from other network operators (88). In other words, what matters is to establish whether a given facility affords its owner SMP in the market without thus being necessary to further establish that the said facility can also be considered ‘essential’ or ‘indispensable’ within the meaning of existing case-law.

83. It follows from the foregoing that the doctrine of the ‘essential facilities’ is less relevant for the purposes of applying ex ante Article 14 of the Framework Directive than applying ex post Article 82 of the EC Treaty and Article 54 of the EEA Agreement.

3.1.1. Leverage of market power

84. According to Article 14(3) of the Framework Directive, ‘where an undertaking has significant market power on a specific market, it may also be deemed to have significant market power on a closely related market, where the links between the two markets are such as to allow the market power held in one market to be leveraged into the other market, thereby strengthening the market power of the undertaking’.

85. This provision is intended to address a market situation comparable to the one that gave rise to the Court's judgement in Tetra Pak II (89). In that case, the Court decided that an undertaking that had a dominant position in one market, and enjoyed a leading position on a distinct but closely associated market, was placed as a result in a situation comparable to that of holding a dominant position on the markets in question taken as a whole. Thanks to its dominant position on the first market, and its market presence on the associated, secondary market, an undertaking may thus leverage the market power which it enjoys in the first market and behave independently of its customers on the latter market (90). Although in Tetra Pak the markets taken as a whole in which Tetra Pak was found to be dominant were horizontal, close associative links, within the meaning of the Court's case-law, will most often be found in vertically integrated markets. This is often the case in the Telecommunications sector, where an operator often has a dominant position on the infrastructure market and a significant presence on the downstream, services market (91). Under such circumstances, an NRA may consider it appropriate to find that such operator has SMP on both markets taken together. However, in practice, if an undertaking has been designated as having SMP on an upstream wholesale or access market, NRAs will normally be in a position to prevent any likely spill-over or leverage effects downstream into the retail or services markets by imposing on that undertaking any of the obligations provided for in the Access Directive which may be appropriate to avoid such effects. Therefore, it is only where the imposition of ex ante obligations on an undertaking which is dominant in the (access) upstream market would not result in effective competition on the (retail) downstream market that NRAs should examine whether Article 14(3) of the Framework Directive may apply.

86. The foregoing considerations are also relevant in relation to horizontal markets (92). Moreover, irrespective of whether the markets under consideration are vertical or horizontal, both markets should be electronic communications markets within the meaning of Article 2 of the Framework Directive and both should display such characteristics as to justify the imposition of ex ante regulatory obligations (93).

3.1.2. Collective dominance

87. Under Article 82 of the EC Treaty and Article 54 of the EEA Agreement, a dominant position can be held by one or more undertakings (‘collective dominance’). Article 14(2) of the Framework Directive also provides that an undertaking may enjoy SMP, that is, it may be in a dominant position, either individually or jointly with others.

88. In the Access Notice, the Commission had stated that, although at the time both its own practice and the case-law of the Court were still developing, it would consider two or more undertakings to be in a collective dominant position when they had substantially the same position vis-à-vis their customers and competitors as a single company has if it is in a dominant position, provided that no effective competition existed between them. The lack of competition could be due, in practice, to the existence of certain links between those companies. The Commission had also stated, however, that the existence of such links was not a prerequisite for a finding of joint dominance (94).

89. Since the publication of the Access Notice, the concept of collective dominance has been tested in a number of decisions taken by the Commission under Regulation 17 and under the merger control Regulation. In addition, both the Court of First Instance (CFI) and the Court of Justice of the European Communities (ECJ) have given judgements which have contributed to further clarifying the exact scope of this concept.

3.1.2.1. The jurisprudence of the CFI/ECJ

90. The expression ‘one or more undertakings’ in Article 82 of the EC Treaty and Article 54 of the EEA Agreement implies that a dominant position may be held by two or more economic entities which are legally and economically independent of each other (95).

91. Until the ruling of the ECJ in Compagnie Maritime Belge (96) and the ruling of the CFI in Gencor (97) (see below), it might have been argued that a finding of collective dominance was based on the existence of economic links, in the sense of structural links, or other factors which could give rise to a connection between the undertakings concerned (98). The question of whether collective dominance could also apply to an oligopolistic market, that is a market comprised of few sellers, in the absence of any kind of links among the undertakings present in such a market, was first raised in Gencor. The case concerned the legality of a decision adopted by the Commission under the merger control Regulation prohibiting the notified transaction on the grounds that it would lead to the creation of a duopoly market conducive to a situation of oligopolistic dominance (99). Before the CFI, the parties argued that the Commission had failed to prove the existence of ‘links’ between the members of the duopoly within the meaning of the existing case-law.

92. The CFI dismissed the application by stating, inter alia, that there was no legal precedent suggesting that the notion of ‘economic links’ was restricted to the notion of structural links between the undertakings concerned: According to the CFI, ‘there is no reason whatsoever in legal or economic terms to exclude from the notion of economic links the relationship of interdependence existing between the parties to a tight oligopoly within which, in a market with the appropriate characteristics, in particular in terms of market concentration, transparency and product homogeneity, those parties are in a position to anticipate one another's behaviour and are therefore strongly encouraged to align their conduct in the market, in particular in such a way as to maximise their joint profits by restricting production with a view to increasing prices. In such a context, each trader is aware that highly competitive action on its part designed to increase its market share (for example a price cut) would provoke identical action by the others, so that it would derive no benefit from its initiative. All the traders would thus be affected by the reduction in price levels’ (100). As the Court pointed out, market conditions may be such that ‘each undertaking may become aware of common interests and, in particular, cause prices to increase without having to enter into an agreement or resort to concerted practice’ (101).

93. The CFI's ruling in Gencor was later endorsed by the ECJ in Compagnie Maritime Belge, where the Court gave further guidance as to how the term of collective dominance should be understood and as to which conditions must be fulfilled before such a finding can be made. According to the Court, in order to show that two or more undertakings hold a joint dominant position, it is necessary to consider whether the undertakings concerned together constitute a collective entity vis-à-vis their competitors, their trading partners and their consumers on a particular market (102). This will be the case when 1. there is no effective competition among the undertakings in question; and 2. the said undertakings adopt a uniform conduct or common policy in the relevant market (103). Only when that question is answered in the affirmative, is it appropriate to consider whether the collective entity actually holds a dominant position (104). In particular, it is necessary to ascertain whether economic links exist between the undertakings concerned which enable them to act independently of their competitors, customers and consumers. The Court recognised that an implemented agreement, decision or concerted practice (whether or not covered by an exemption under Article 81(3) of the Treaty or Article 53(3) of the EEA Agreement) may undoubtedly result in the undertakings concerned being linked in a such way that their conduct on a particular market on which they are active results in them being perceived as a collective entity vis-à-vis their competitors, their trading partners and consumers (105).

94. The mere fact, however, that two or more undertakings are linked by an agreement, a decision of associations of undertakings or a concerted practice within the meaning of Article 81(1) of the Treaty or Article 53(1) of the EEA Agreement does not, of itself, constitute a necessary basis for such a finding. As the Court stated, ‘a finding of a collective dominant position may also be based on other connecting factors and would depend on an economic assessment and, in particular, on an assessment of the structure of the market in question’ (106).

95. It follows from Gencor and Compagnie Maritime Belge judgements that, although the existence of structural links can be relied upon to support a finding of a collective dominant position, such a finding can also be made in relation to an oligopolistic or highly concentrated market whose structure alone, in particular, is conducive to coordinated effects on the relevant market (107).

3.1.2.2. The Commission's decision-making practice and Annex II of the Framework Directive

96. In a number of decisions adopted under the merger control Regulation, the Commission considered the concept of collective dominance. It sought in those cases to ascertain whether the structure of the oligopolistic markets in question was conducive to coordinated effects on those markets (108).

97. When assessing ex ante the likely existence or emergence of a market which is or could become conducive to collective dominance in the form of tacit co-ordination, NRAs, should analyse: (a) whether the characteristics of the market makes it conducive to tacit coordination; and (b) whether such form of coordination is sustainable that is, (i) whether any of the oligopolists have the ability and incentive to deviate from the coordinated outcome, considering the ability and incentives of the non-deviators to retaliate and (ii) whether buyers/fringe competitors/potential entrants have the ability and incentive to challenge any anti-competitive coordinated outcome (109).

98. This analysis is facilitated by looking at a certain number of criteria which are summarised in Annex II of the Framework Directive, which have also been used by the Commission in applying the notion of collective dominance under the merger control Regulation. According to this Annex, ‘two or more undertakings can be found to be in a joint dominant position within the meaning of Article 14 if, even in the absence of structural or other links between them, they operate in a market, the structure of which is considered to be conducive to coordinate effects’ (110). Without prejudice to the case-law of the Court of Justice on joint dominance, this is likely to be the case where the market satisfies a number of appropriate characteristics, in particular in terms of market concentration, transparency and other characteristics mentioned below: — mature market, — stagnant or moderate growth on the demand side, — low elasticity of demand, — homogeneous product, — similar cost structures, — similar market shares, — lack of technical innovation, mature technology, — absence of excess capacity, — high barriers to entry, — lack of countervailing buying power, — lack of potential competition, — various kind of informal or other links between the undertakings concerned, — retaliatory mechanisms, — lack or reduced scope for price competition.

99. Annex II of the Framework Directive expressly states that the above is not an exhaustive list, nor are the criteria cumulative. Rather, the list is intended to illustrate the sorts of evidence that could be used to support assertions concerning the existence of a collective (oligopolistic) dominance in the form of tacit coordination (111). As stated above, the list also shows that the existence of structural links among the undertakings concerned is not a prerequisite for finding a collective dominant position. It is however clear that where such links exist, they can be relied upon to explain, together with any of the other abovementioned criteria, why in a given oligopolistic market coordinated effects are likely to arise. In the absence of such links, in order to establish whether a market is conducive to collective dominance in the form of tacit coordination, it is necessary to consider a number of characteristics of the market. While these characteristics are often presented in the form of the abovementioned list, it is necessary to examine all of them and to make an overall assessment rather than mechanistically applying a ‘check list’. Depending on the circumstances of the case, the fact that one or another of the structural elements usually associated with collective dominance may not be clearly established is not in itself decisive to exclude the likelihood of a coordinated outcome (112).

100. In an oligopolistic market where most, if not all, of the abovementioned criteria are met, it should be examined whether, in particular, the market operators have a strong incentive to converge to a coordinated market outcome and refrain from reliance on competitive conduct. This will be the case where the long-term benefits of an anti-competitive conduct outweigh any short-term gains resulting from a resort to a competitive behaviour.

101. It must be stressed that a mere finding that a market is concentrated does not necessarily warrant a finding that its structure is conducive to collective dominance in the form of tacit coordination (113).

102. Ultimately, in applying the notion of collective dominance in the form of tacit coordination (114), the criteria which will carry the most sway will be those which are critical to a coordinated outcome in the specific market under consideration. For example, in Case COMP/M.2499, Norske Skog/Parenco/Walsum, the Commission came to the conclusion that even if the markets for newsprint and wood-containing magazine paper were concentrated, the products were homogeneous, demand was highly inelastic, buyer power was limited and barriers to entry were high, nonetheless the limited stability of market shares, the lack of symmetry in costs structures and namely, the lack of transparency of investment decisions and the absence of a credible retaliation mechanism rendered unlikely and unsustainable any possibility of tacit co-ordination among the oligopolists.

3.1.2.3. Collective dominance and the Telecommunications sector

103. In applying the notion of collective dominance, NRAs may also take into consideration decisions adopted under the merger control Regulation in the electronic communications sector, in which the Commission has examined whether any of the notified transactions could give rise to a finding of collective dominance.

104. In MCI WorldCom/Sprint, the Commission examined whether the merged entity together with Concert Alliance could be found to enjoy a collective dominant position on the market for global Telecommunications services (GTS). Given that operators on that market competed on a bid basis where providers were selected essentially in the first instances of the bidding process on the basis of their ability to offer high quality, tailor-made sophisticated services, and not on the basis of prices, the Commission's investigation was focused on the incentives for market participants to engage in parallel behaviour as to who wins what bid (and who had won what bids) (115). After having examined in depth the structure of the market (homogenous product, high barriers of entry, customers countervailing power, etc.) the Commission concluded that it was not able to show absence of competitive constraints from actual competitors, a key factor in examining whether parallel behaviour can be sustained, and thus decided not to pursue further its objections in relation to that market (116).

105. In BT/Esat (117), one of the issues examined by the Commission was whether market conditions in the Irish market for dial-up Internet access lent themselves to the emergence of a duopoly consisting of the incumbent operator, Eircom, and the merged entity. The Commission concluded that this was not the case for the following reasons. First, market shares were not stable; second, demand was doubling every six months; third, internet access products were not considered homogeneous; and finally, technological developments were one of the main characteristics of the market (118).

106. In Vodafone/Airtouch (119), the Commission found that the merged entity would have joint control of two of the four mobile operators present on the German mobile market (namely D2 and E-Plus, the other two being T-Mobil and VIAG Interkom). Given that entry into the market was highly regulated, in the sense that licences were limited by reference to the amount of available radio frequencies, and that market conditions were transparent, it could not be ruled out that such factors could lead to the emergence of a duopoly conducive to coordinated effects (120).

107. In France Télécom/Orange the Commission found that, prior to the entry of Orange into the Belgian mobile market, the two existing players, Proximus and Mobistar, were in a position to exercise joint dominance. As the Commission noted, for the four years preceding Orange's entry, both operators had almost similar and transparent pricing, their prices following exactly the same trends (121). In the same decision the Commission further dismissed claims by third parties as to the risk of a collective dominant position of Vodafone and France Télécom in the market for the provision of pan-European mobile services to internationally mobile customers. Other than significant asymmetries between the market shares of the two operators, the market was considered to be emerging, characterised by an increasing demand and many types of different services on offer and on price (122).

4. IMPOSITION, MAINTENANCE, AMENDMENT OR WITHDRAWAL OF OBLIGATIONS UNDER THE REGULATORY FRAMEWORK

108. Section 3 of these guidelines dealt with the analysis of relevant markets that NRAs must carry out under Article 16 of the Framework Directive to determine whether a market is effectively competitive, i.e. whether there are undertakings in that market who are in a dominant position. This Section aims to provide guidance for NRAs on the action they should take following that analysis, i.e. the imposition, maintenance, amendment or withdrawal, as appropriate, of specific regulatory obligations on undertakings designated as having SMP. This section also describes the circumstances in which similar obligations than those that can be imposed on SMP operators may, exceptionally, be imposed on undertakings who have not been designated as having SMP.

109. The specific regulatory obligations which may be imposed on SMP undertakings can apply both to wholesale and retail markets. In principle, the obligations related to wholesale markets are set out in Articles 9 to 13 of the Access Directive. The obligations related to retail markets are set out in Articles 17 to 19 of the Universal Service Directive.

110. The obligations set out in the Access Directive are: transparency (Article 9); non-discrimination (Article 10); accounting separation (Article 11), obligations for access to and use of specific network facilities (Article 12), and price control and cost accounting obligations (Article 13). In addition, Article 8 of the Access Directive provides that NRAs may impose obligations outside this list. In order to do so, they must submit a request to the Authority, which will take a decision, after seeking the advice of the EFTA Communications Committee, as to whether the NRA concerned is permitted to impose such obligations.

111. The obligations set out in the Universal Service Directive are: regulatory controls on retail services (Article 17), availability of the minimum set of leased lines (Article 18 and Annex VII) and carrier selection and pre-selection (Article 19).

112. Under the regulatory framework, these obligations should only be imposed on undertakings which have been designated as having SMP in a relevant market, except in certain defined cases, listed in section 4.3 of these guidelines.

4.1. Imposition, maintenance, amendment or withdrawal of obligations on SMP operators

113. As explained in Section 1, the notion of effective competition means that there is no undertaking with dominance (SMP) on the relevant market. In other words, a finding that a relevant market is effectively competitive is, in effect, a determination that there is neither single nor joint dominance on that market. Conversely, a finding that a relevant market is not effectively competitive is a determination that there is single or joint dominance on that market.

114. If an NRA finds that a relevant market is subject to effective competition, it is not allowed to impose obligations on any operator on that relevant market under Article 16 of the Framework Directive. If the NRA has previously imposed regulatory obligations on undertaking(s) in that market, the NRA must withdraw such obligations and may not impose any new obligation on that undertaking(s). As stipulated in Article 16(3) of the Framework Directive, where the NRA proposes to remove existing regulatory obligations, it must give the affected parties a reasonable period of notice.

115. If an NRA finds that competition in the relevant market is not effective because of the existence of an undertaking or undertakings in a dominant position, it must designate in accordance with Article 16(4) of the Framework Directive the undertaking or undertakings concerned as having SMP and impose appropriate regulatory obligations on the undertaking(s) concerned. However, merely designating an undertaking as having SMP on a given market, without imposing any appropriate regulatory obligations, is inconsistent with the provisions of the new regulatory framework, notably Article 16(4) of the Framework Directive. In other words, NRAs must impose at least one regulatory obligation on an undertaking that has been designated as having SMP. Where an NRA determines the existence of more than one undertaking with dominance, i.e. that a joint dominant position exists, it should also determine the most appropriate regulatory obligations to be imposed, based on the principle of proportionality.

116. If an undertaking was previously subject to obligations under the 1998 regulatory framework, the NRA must consider whether similar obligations continue to be appropriate under the new regulatory framework, based on a new market analysis carried out in accordance with Article 16 of the Framework Directive and these Guidelines. If the undertaking is found to have SMP in a relevant market under the new framework, regulatory obligations similar to those imposed under the 1998 regulatory framework may therefore be maintained. Alternatively, such obligations could be amended, or new obligations provided in the new framework might also be imposed, as the NRA considers appropriate.

117. Except where the Directives prescribe particular remedies as under Article 18 and 19 of the Universal Service Directive, NRAs will have to choose between the range of regulatory obligations set out in the Directives in order to remedy a particular problem in a market found not to be effectively competitive. Where NRAs intend to impose other obligations for access and interconnection than those listed in the Access Directive, they must submit a request for the Authority's approval of their proposed course of action. The Authority must seek the advice of the EFTA Communications Committee before taking its decision.

118. EEA law, and in particular Article 8 of the Framework Directive, requires NRAs to ensure that the measures they impose on SMP operators under Article 16 of the Framework Directive are justified in relation to the objectives set out in Article 8 and are proportionate to the achievement of those objectives. Thus any obligation imposed by NRAs must be proportionate to the problem to be remedied. Article 7 of the Framework Directive requires NRAs to set out the reasoning on which any proposed measure is based when they communicate that measure to other NRAs and to the Authority. Thus, in addition to the market analysis supporting the finding of SMP, NRAs need to include in their decisions a justification of the proposed measure in relation to the objectives of Article 8, as well as an explanation of why their decision should be considered proportionate.

119. Respect for the principle of proportionality will be a key criterion used by the Authority to assess measures proposed by NRAs under the procedure of Article 7 of Framework Directive. The principle of proportionality is well-established in EEA law (123). In essence, the principle of proportionality requires that the means used to attain a given end should be no more than what is appropriate and necessary to attain that end. In order to establish that a proposed measure is compatible with the principle of proportionality, the action to be taken must pursue a legitimate aim, and the means employed to achieve the aim must be both necessary and the least burdensome, i.e. it must be the minimum necessary to achieve the aim.

120. However, particularly in the early stages of implementation of the new framework, the Authority would not expect NRAs to withdraw existing regulatory obligations on SMP operators which have been designed to address legitimate regulatory needs which remain relevant, without presenting clear evidence that those obligations have achieved their purpose and are therefore no longer required since competition is deemed to be effective on the relevant market. Different remedies are available in the new regulatory framework to address different identified problems and remedies should be tailored to these specified problems.

121. The Authority, when consulted as provided for in Article 7(3) of the Framework Directive, will also check that any proposed measure taken by the NRAs is in conformity with the regulatory framework as a whole, and will assess the impact of the proposed measure on the functioning of the EEA Agreement.

122. The Authority will assist NRAs to ensure that as far as possible they adopt consistent approaches in their choice of remedies where similar situations exist in different EEA States. Moreover, as noted in Article 7(2) of the Framework Directive, NRAs shall seek to agree on the types of remedies best suited to address particular situations in the marketplace.

4.2. Transnational markets: Decisions and joint analysis by NRAs

123. Article 15(4) of the Framework Directive gives the Authority the power, after having consulted the NRAs and the EFTA Communications Committee, to adopt a Decision identifying transnational markets between two or more EFTA States. Article 15(4) of the Framework Directive as incorporated in the EEA Agreement (124) further provides for identification of transnational markets which affect both an EFTA State and an EC Member State. In such cases, the Authority and the Commission shall cooperate with a view to agreeing on identical Decisions to identify a cross-pillar transnational market, which affects both an EFTA State and an EC Member State. The general cooperation rules under Article 109 of the EEA Agreement shall apply mutatis mutandis.

124. Under the terms of Article 16(5) of the Framework Directive, the NRAs concerned must jointly conduct the market analysis and decide whether obligations need to be imposed. In practice, the European Regulators Group is expected to provide a suitable forum for such a joint analysis, but other multilateral meetings and cooperation would also be deemed necessary.

125. In general, joint analysis by NRAs would follow similar procedures (e.g. for public consultation) to those required when a single national regulatory authority is conducting a market analysis. Precise arrangements for collective analysis and decision-making will need to be drawn up.

4.3. Imposition of certain specific regulatory obligations on non-SMP operators

126. The preceding parts of this section set out the procedures whereby certain specific obligations may be imposed on SMP undertakings, under Articles 7 and 8 of the Access Directive and Articles 16 to 19 of the Universal Service Directive. Exceptionally, similar obligations may be imposed on operators other than those that have been designated as having SMP, in the following cases, listed in Article 8(3) of the Access Directive: — obligations covering, inter alia, access to conditional access systems, obligations to interconnect to ensure end-to-end interoperability, and access to application program interfaces and electronic programme guides to ensure accessibility to specified digital TV and radio broadcasting services (Articles 5(1), 5(2) and 6 of the Access Directive), — obligations that NRAs may impose for co-location where rules relating to environmental protection, health, security or town and country planning deprive other undertakings of viable alternatives to co-location (Article 12 of the Framework Directive, — obligations for accounting separation on undertakings providing electronic communications services who enjoy special or exclusive rights in other sectors (Article 13 of the Framework Directive), — obligations relating to commitments made by an undertaking in the course of a competitive or comparative selection procedure for a right of use of radio frequency (Condition B7 of the Annex to the Authorisation Directive, applied via Article 6(1) of that Directive), — obligations to handle calls to subscribers using specific numbering resources and obligations necessary for the implementation of number portability (Articles 27, 28 and 30 of the Universal Service Directive), — obligations based on the relevant provisions of the privacy and electronic communications Directive.

5. POWERS OF INVESTIGATION AND COOPERATION PROCEDURES FOR THE PURPOSE OF MARKET ANALYSIS

5.1. Overview

127. This section of the guidelines covers procedures in respect of an NRA's powers to obtain the information necessary to conduct a market analysis.

128. The regulatory framework contains provisions to enable NRAs to require undertakings that provide electronic communications networks and services to supply all the information, including confidential information, necessary for NRAs to assess the state of competition in the relevant markets and impose appropriate ex ante obligations and thus to ensure compliance with the regulatory framework.

129. This section of the guidelines also includes guidance as to measures to ensure effective cooperation between NRAs and NCAs at national level, and among NRAs and between NRAs and the Authority at EEA level, as well as cross-pillar between NRAs in the EFTA States and NRAs in the EC States through the Authority and the Commission. In particular, this section deals with the exchange of information between those authorities.

130. Many electronic communication markets are fast-moving and their structures are changing rapidly. NRAs should ensure that the assessment of effective competition, the public consultation, and the designation of operators having SMP are all carried out within a reasonable period. Any unnecessary delay in the decision could have harmful effects on incentives for investment by undertakings in the relevant market and therefore on the interests of consumers.

5.2. Market analysis and powers of investigation

131. Under Article 16(1) of the Framework Directive, NRAs must carry out an analysis of the relevant markets identified in the Recommendation and any Decision as soon as possible after their adoption or subsequent revision. The conclusions of the analysis of each of the relevant markets, together with the proposed regulatory action, must be published and a public consultation must be conducted, as described in Section 6 of these guidelines.

132. In order to carry out their market analysis, NRAs will first need to collect all the information they consider necessary to assess market power in a given market. To the extent that such information needs to be obtained directly from undertakings, Article 11 of the Authorisation Directive provides that undertakings are required by the terms of their general authorisation to supply the information necessary for NRAs to conduct a market analysis within the meaning of Article 16(2) of the Framework Directive. This is reinforced by the more general obligation in Article 5(1) of the Framework Directive which provides that EFTA States shall ensure that undertakings providing electronic communications networks and services provide all the information necessary for NRAs to ensure conformity with EEA law.

133. When NRAs request information from an undertaking, they should state the reasons justifying the request and the time limit within which the information is to be provided. As provided for in Article 10(4) of the Authorisation Directive, NRAs may be empowered to impose financial penalties on undertakings for failure to provide information.

134. In accordance with Article 5(4) of the Framework Directive, NRAs must publish all information that would contribute to an open and competitive market, acting in accordance with national rules on public access to information and subject to EEA and national rules on commercial confidentiality.

135. However, as regards information that is confidential in nature, the provisions of Article 5(3) of the Framework Directive require NRAs to ensure the confidentiality of such information in accordance with EEA and national rules on business confidentiality. This confidentiality obligation applies equally to information that has been received in confidence from another public authority.

5.3. Cooperation procedures

Between NRAs and NCAs

136. Article 16(1) of the Framework Directive requires NRAs to associate NCAs with the market analyses as appropriate. EFTA States should put in place the necessary procedures to guarantee that the analysis under Article 16 of the Framework Directive is carried out effectively. As the NRAs conduct their market analyses in accordance with the methodologies of EEA competition law, the views of NCAs in respect of the assessment of competition are highly relevant. Cooperation between NRAs and NCAs will be essential, but NRAs remain legally responsible for conducting the relevant analysis. Where under national law the tasks assigned under Article 16 of the Framework Directive are carried out by two or more separate regulatory bodies, EFTA States should ensure clear division of tasks and set up procedures for consultation and cooperation between reg