EN Official Journal of the European Communities 16. 7. 98 L 200/46
EUROPEAN ECONOMIC AREA
EFTA SURVEILLANCE AUTHORITY
DECISION OF THE EFTA SURVEILLANCE AUTHORITY
No 46/98/COL
of 4 March 1998
on the issuing of two notices in the field of competition on the definition of the
relevant market for the purpose of competition law within the European EconomicArea (EEA), and on agreements of minor importance which do not fall under Article
53(1) of the EEA Agreement
THE EFTA SURVEILLANCE AUTHORITY,
Having regard to the Agreement on the European Economic Area (1), in particular Article 55,
Having regard to the Agreement between the EFTA States on the establishment of a Surveillance
Authority and a Court of Justice (2), in particular Article 5(2)(b) and Article 25(1),
Having consulted the European Commission,Whereas the European Commission has adopted a notice on the definition of the relevant market
for the purpose of Community competition law (
3) and a notice on agreements of minor
importance which do not fall under Article 85(1) of the Treaty establishing the EuropeanCommunity (
4);
Whereas these notices are of relevance also for the European Economic Area;Whereas it is necessary to provide guidance for undertakings by indicating the principles and
rules which will guide the EFTA Surveillance Authority when applying the concept of relevantproduct and geographic market and in assessing whether an agreement has an appreciable effecton trade and competition in relation to Articles 53 to 60 of the EEA Agreement;
Whereas a uniform application of the EEA competition rules is to be ensured throughout the
European Economic Area;
Whereas according to point II under the heading ‘General' at the end of Annex XIV to the EEA
Agreement, the Surveillance Authority is to adopt, after consultation with the EC Commission,acts corresponding to those adopted by the EC Commission in order to maintain equal condi-tions of competition,
(1) Hereinafter referred to as the EEA Agreement.
(2) Hereinafter referred to as the Surveillance and Court Agree-
ment.
(3) OJ C 372, 9. 12. 1997, p. 5.
(4) OJ C 372, 9. 12. 1997, p. 13.
EN Official Journal of the European Communities 16. 7. 98 L 200/47
HAS ADOPTED THIS DECISION:
1. The following notices which are annexed to this Decision as Annexes I and II:
¾notice of the EFTA Surveillance Authority on the definition of the relevant market for the
purpose of competition law within the European Economic Area (EEA),
¾notice of the EFTA Surveillance Authority on agreements of minor importance which do not
fall under Article 53(1) of the EEA Agreement,
shall be issued.
2. This decision and the attached notices shall be authentic in the English language and shall
be published in the EEA section of and the EEA supplement to the Official Journal of the
European Communities .
Done at Brussels, 4 March 1998.
For the EFTA Surveillance Authority
President
Knut ALMESTAD
EN Official Journal of the European Communities 16. 7. 98 L 200/48
ANNEX I
NOTICE OF THE EFTA SURVEILLANCE AUTHORITY ON THE DEFINITION OF RELEV-
ANT MARKET FOR THE PURPOSE OF COMPETITION LAW WITHIN THE EUROPEAN
ECONOMIC AREA (EEA)
A. The present notice is issued pursuant to the rules of the Agreement on the European Economic Area (EEA
Agreement) and the Agreement between the EFTA States on the establishment of a Surveillance Authorityand a Court of Justice (Surveillance and Court Agreement).
B. The European Commission has issued a notice on the definition of the relevant market for the purpose of
Community competition law (
1). This non-binding act contains principles and rules which the European
Commission follows in the field of competition.
C. The EFTA Surveillance Authority considers the abovementioned act to be EEA relevant. In order to
maintain equal conditions of competition and to ensure a uniform application of the EEA competitionrules throughout the European Economic Area, the EFTA Surveillance Authority adopts the present noticeexercising the power conferred upon it by Article 5(2)(b) of the Surveillance and Court Agreement. Itintends to follow the principles and rules laid down in this notice when applying the relevant EEAcompetition rules to a particular case.
I. INTRODUCTION
1. The purpose of this notice is to provide guidance as to how
the EFTA Surveillance Authority applies the concept of relevantproduct and geographic market in its ongoing enforcement of thecompetition rules of the EEA Agreement, in particular theapplication of the provisions of Chapter II of Protocol 4 to theSurveillance and Court Agreement (
2) and of point 1 of Annex
XIV to the EEA Agreement together with Chapter XIII ofProtocol 4 to the Surveillance and Court Agreement (
3), and their
equivalents in other sectoral applications such as transport, andcoal and steel (
4).
2. Market definition is a tool to identify and define the bound-
aries of competition between firms. It serves to establish theframework within which competition policy is applied by theEFTA Surveillance Authority. The main purpose of market def-inition is to identify in a systematic way the competitiveconstraints that the undertakings involved (
5) face. The objective
of defining a market in both its product and geographic dimen-sion is to identify those actual competitors of the undertakingsinvolved that are capable of constraining those undertakings’behaviour and of preventing them from behaving independentlyof effective competitive pressure. It is from this perspective thatthe market definition makes it possible, inter alia, to calculate
market shares that would convey meaningful informationregarding market power for the purposes of assessing dominanceor for the purposes of applying Article 53 of the EEA Agreement.
3. It follows from the above, that the concept of ‘relevant
market' is different from other concepts of market often used inother contexts. For instance, companies often use the term‘market' to refer to the area where it sells its products or to refer
broadly to the industry or sector where it belongs.
4. The definition of the relevant market in both its product and
geographic dimensions often has a decisive influence on theassessment of a competition case. By rendering public the pro-cedures the EFTA Surveillance Authority follows when consid-ering market definition and by indicating the criteria andevidence on which it relies to reach a decision, the EFTA Surveil-lance Authority expects to increase the transparency of its policyand decision-making in the area of competition policy.
5. Increased transparency will also result in companies and
their advisors being able to anticipate better the possibility thatthe EFTA Surveillance Authority may raise competition concernsin an individual case. Companies could, therefore, take such apossibility into account in their own internal decision-makingwhen contemplating for instance, acquisitions, the creation ofjoint ventures or the establishment of certain agreements. It isalso intended that companies should be in a better position tounderstand what sort of information the Authority considers rel-evant for the purposes of market definition.
6. The EFTA Surveillance Authority’s interpretation of the
notion of ‘relevant market' is without prejudice to the inter-pretation which may be given by the EFTA Court, the Court ofJustice or the Court of First Instance of the European Commu-nities.
II. DEFINITION OF RELEVANT MARKET
Definition of relevant product and relevant geographic
market
7. Certain Acts relating to Articles 53 and 54 of the EEA
Agreement, in particular the provisions in section 6 of Form A/B
(1)OJ C 372, 9. 12. 1997, p. 5.
(2)Corresponds to Council Regulation (EEC) No 17/62 (General pro-
cedure).
(3)Corresponds to Council Regulation (EEC) No 4064/89 (Control ofconcentrations).
(4)The focus of assessment in State aid cases is the aid recipient andthe industry/sector concerned rather than identification of competitiveconstraints faced by the aid recipient. When consideration of marketpower and therefore of the relevant market are raised in any par-ticular case, elements of the approach outlined here might serve as abasis for the assessment of State aid cases.
(5)For the purposes of this notice, the undertakings involved will be, inthe case of a concentration, the parties to the concentration. In in-vestigations under Articles 54 of the EEA Agreement, they will bethe undertaking being investigated or the complainants. For investiga-tions under Article 53, they will be the parties to the agreement.
EN Official Journal of the European Communities 16. 7. 98 L 200/49
with respect to Chapter II of Protocol 4 to the Surveillance and
Court Agreement (1), as well as the provisions in section 6 of
Form CO with respect to point 1 of Annex XIV to the EEAAgreement and Chapter XIII of Protocol 4 to the Surveillanceand Court Agreement (
2) have laid down the following definitions.
‘Relevant product markets' are defined as follows:
‘A relevant product market comprises all those products and/or
services which are regarded as interchangeable or substitutable bythe consumer, by reason of the products’ characteristics, theirprices and their intended use.'
8. ‘Relevant geographic markets' are defined as follows:
‘The relevant geographic market comprises the area in which the
undertakings concerned are involved in the supply and demandof products or services, in which the conditions of competitionare sufficiently homogenous and which can be distinguishedfrom neighbouring areas because the conditions of competitionare appreciably different in those areas.'
9. The relevant market within which to assess a given
competition issue is therefore established by the combination ofthe product and geographic markets. The EFTA SurveillanceAuthority interprets the definitions at paragraphs 7 and 8 (whichreflect the jurisprudence of the Court of Justice and the Court ofFirst Instance of the European Communities as well as its owndecision-making practice) according to the orientations definedin this notice.
Concept of relevant market and objectives of EEA
competition policy
10. The concept of relevant market is closely related to the
objectives pursued under EEA competition policy. For example,under the EEA merger control, the objective in controlling struc-tural changes in the supply of a product/service is to prevent thecreation or reinforcement of a dominant position as a result ofwhich effective competition would be significantly impeded in asubstantial part of the territory covered by the EEA Agreement.Under the EEA competition rules, a dominant position is suchthat a firm or group of firms would be in a position to behave toan appreciable extent independently of its competitors, customersand ultimately of its consumers (
3). Such a position would usually
arise when a firm or group of firms would account for a largeshare of the supply in any given market, provided that otherfactors analysed in the assessment (such as entry barriers, capacityof reaction of customers, etc.) point in the same direction.
11. The same approach is followed by the EFTA Surveillance
Authority in its application of Article 54 of the EEA Agreementto firms that enjoy a single or collective dominant position.Under Chapter II of Protocol 4 to the Surveillance and CourtAgreement (
4) the EFTA Surveillance Authority has the power to
investigate and bring to an end abuses of such a dominant posi-tion, which must also be defined by reference to the relevantmarket. Markets may also need to be defined in the application ofArticle 53 of the EEA Agreement, in particular, in determining
whether an appreciable restriction of competition exists or inestablishing if the condition under Article 53(3)(b) for an exemp-tion from the application of Article 53(1) is met.
12. The criteria to define the relevant market are applied gener-
ally for the analysis of certain behaviours in the market and forthe analysis of structural changes in the supply of products. Thismethodology, though, might lead to different results dependingon the nature of the competition issue being examined. Forinstance, the scope of the geographic market might be differentwhen analysing a concentration, where the analysis is essentiallyprospective, from an analysis of past behaviour. The differenttime horizon considered in each case might lead to the result thatdifferent geographic markets are defined for the same productsdepending on whether the EFTA Surveillance Authority is exam-ining a change in the structure of supply, such as a concentrationor a cooperative joint venture, or issues relating to certain pastbehaviour.
Basic principles for market definitionCompetitive constraints13. Firms are subject to three main sources of competitive
constraints: demand substitutability, supply substitutability andpotential competition. From an economic point of view, for thedefinition of the relevant market, demand substitution constitutesthe most immediate and effective disciplinary force on thesuppliers of a given product, in particular in relation to theirpricing decisions. A firm or a group of firms cannot have asignificant impact on the prevailing conditions of sale, such asprices, if its customers are in a position to switch easily toavailable substitute products or to suppliers located elsewhere.Basically, the exercise of market definition consists in identifyingthe effective alternative sources of supply for the customers of theundertakings involved, both in terms of products/services andgeographic location of suppliers.
14. The competitive constraints arising from supply side substi-
tutibility other than those described in paragraphs 20 to 23 andfrom potential competition are in general less immediate and inany case require an analysis of additional factors. As a result suchconstraints are taken into account at the assessment stage ofcompetition analysis.
Demand substitution15. The assessment of demand substitution entails a determina-
tion of the range of products which are viewed as substitutes bythe consumer. One way of determining this can be viewed as aspeculative experiment, postulating a hypothetical small, lastingchange in relative prices and evaluating the likely reactions ofcustomers to that increase. The exercise of market definitionfocuses on prices for operational and practical purposes, and moreprecisely on demand substitution arising from small, permanentchanges in relative prices. This concept can provide clear indica-tions as to the evidence that is relevant to define markets.
(1)See footnote 2 of the Decision.
(2)See footnote 3 of the Decision.
(3)Definition given by the EC Court of Justice in its judgement of 13
February 1979 in Case 85/76 Hoffmann-La Roche [1979] ECR, p.461, and confirmed in subsequent judgements.
(4)See footnote 2 of the Decision.
EN Official Journal of the European Communities 16. 7. 98 L 200/50
16. Conceptually, this approach implies that starting from the
type of products that the undertakings involved sell and the areain which they sell them, additional products and areas will beincluded in or excluded from the market definition, dependingon whether competition from these other products and areasaffect or restrain sufficiently the pricing of the parties’ products inthe short term.
17. The question to be answered is whether the parties’
customers would switch to readily available substitutes or tosuppliers located elsewhere in response to a hypothetical, small(in the 5 to 10 % range) but permanent relative price increase inthe products and areas being considered. If substitution wereenough to make the price increase unprofitable because of theresulting loss of sales, additional substitutes and areas would beincluded in the relevant market. This would be done until the setof products and geographic areas is such that small, permanentincreases in relative prices would be profitable. The equivalentanalysis is applicable in cases concerning the concentration ofbuying power, where the stating point would then be the supplierand the price test serves to identify the alternative distributionchannels or outlets for the supplier’s products. In the applicationof these principles, careful account should be taken of certainparticular situations as described under paragraphs 56 and 58.
18. A practical example of this test can be provided by its
application to a merger of, for instance, soft drink bottlers. Anissue to examine in such a case would be to decide whetherdifferent flavours of soft drinks belong to the same market. Inpractice, the question to address would be whether consumers offlavour A switched to other flavours when confronted with apermanent price increase of 5 to 10 % for flavour A. If a suffi-cient number of consumers switched to say, flavour B, to such anextent that the price increase for flavour A was not profitable dueto the resulting loss of sales, then the market would comprise atleast flavours A and B. The process would have to be extended inaddition to other available flavours until a set of products isidentified for which a price rise would not induce a sufficientsubstitution in demand.
19. Generally, and in particular for the analysis of merger cases,
the price to take into account will be the prevailing market price.This might not be the case where the prevailing price has beendetermined in the absence of sufficient competition. In particularfor investigation of abuses of dominant positions, the fact that theprevailing price might already have been substantially increasedwill be taken into account.
Supply substitution20. Supply-side substitutability may also be taken into account
when defining markets in those situations in which its effects areequivalent to those of demand substitution in terms of effective-ness and immediacy. This means that suppliers are able to switchproduction to the relevant products and market them in the short
term (
1) without incurring significant additional costs or risks in
response to small and permanent changes in relative prices.When these conditions are met, the additional production that isput on the market will have a disciplinary effect on the competi-tive behaviour of the companies involved. Such an impact interms of effectiveness and immediacy is equivalent to the demandsubstitution effect.
21. These situations typically arise when companies market a
wide range of qualitites or grades of one product; even if for agiven final customer or group, of consumers, the different quali-ties are not substituable, the different qualities will be groupedinto one product market, provided that most of the suppliers areable to offer and sell the various qualities immediately andwithout the significant increases in costs described above. In suchcases, the relevant product market will encompass all productsthat are substituable in demand and supply, and the current salesof those products will be aggregated so as to give the total valueor volume of the market. The same reasoning may lead to groupdifferent geographic areas.
22. A practical example of the approach to supply side substitu-
ability when defining product markets is to be found in the caseof paper. Paper is usually supplied in a range of different quali-ties, from standard writing paper to high quality papers to be usedfor instance, to publish art books. From a demand point of view,different qualitites of paper cannot be used for any given use, i.e.an art book or a high quality publication cannot be based onlower quality papers. However, paper plants are prepared tomanufacture the different qualities, and production can beadjusted with negligible costs and in a short time-frame. In theabsence of particular difficulties in distribution, paper manufac-turers are therefore able to compete for orders of the variousqualities, in particular if orders are passed with a sufficient leadtime to allow for modifying production plans. Under suchcircumstances, the EFTA Surveillance Authority would not definea separate market for each quality of paper and its respectiveusage. The various qualities of paper are included in the relevantmarket, and their sales added up to estimate total market valueand volume.
23. When supply side substitutability entails the need to adjust
significantly existing tangible and intangible assets, additionalinvestments, strategic decisions or time delays, it will not beconsidered at the stage of market definition. Examples of wheresupply side substitution is not likely to lead the EFTA Surveil-lance Authority to enlarge the definition of the market may befound in the area of consumer products, for instance with respectto branded beverages. Although bottling plants may in principlebottle different beverages, there are costs and lead times involved(in terms of advertising, product testing and distribution) beforethe products can actually be sold. In these cases, the effects ofsupply side substitutability and other forms of potentialcompetition would then be examined at a later stage.
Potential competition24. The third source of competitive constraint, potential
competition, is not taken into account when defining markets.since the conditions under which potential competition willactually represent an effective competitive constraint depend onthe analysis of specific factors and circumstances related to the
(1)That is, the period which does not imply a significant adjustment of
existing tangible and intangible assets (see paragraph 23).
EN Official Journal of the European Communities 16. 7. 98 L 200/51
conditions of entry. If required, this analysis is only carried out at
a subsequent stage, in general once the position of the companiesinvolved in the relevant market has already been ascertained, andwhen such position is indicative of concerns from a competitionpoint of view.
III. EVIDENCE RELIED UPON TO DEFINE RELEVANT
MARKETS
The process of defining the relevant market in practiceProduct dimension25. There is a range of evidence permitting an assessment of the
extent to which substitution would take place. In individual cases,certain types of evidence will be determined, depending verymuch on the characteristics and specificity of the industry andproducts or services that are being examined. The same type ofevidence may be of no importance in other cases. In most cases, adecision will have to be based on the consideration of a numberof criteria and different items of evidence. The EFTA SurveillanceAuthority follows an open approach to empirical evidence, aimedat making an effective use of all available information which maybe relevant in individual cases. The Authority does not follow arigid hierarchy of different sources of information or types ofevidence.
26. The process of defining relevant markets may be summar-
ised as follows: on the basis of the preliminary information avail-able or information submitted by the undertakings involved, theEFTA Surveillance Authority will usually be in a position tobroadly establish the possible relevant markets within which, forinstance, a concentration or a restriction of competition has to beassessed. In general, and for all practical purposes when handlingindividual cases, the question will usually be to decide on a fewalternative possible relevant markets. For instance, with respect tothe product market, the issue will often be to establish whetherproduct A and product B belong or do not belong to the sameproduct market. It is often the case that the inclusion of productB would be enough to remove any competition concerns.
27. In such situations it is not necessary to consider whether the
market includes additional products, or to reach a definitiveconclusion on the precise product market. If under the conceiv-able alternative market definitions the operation in question doesnot raise competition concerns, the question of market definitionwill be left open, reducing thereby the burden on companies tosupply information.
Geographical dimension28. The EFTA Surveillance Authority’s approach to geographic
market definition might be summarised as follows: it will take apreliminary view of the scope of the geographic market on thebasis of broad indications regarding the distribution of marketshares of the parties and their competitors, as well as a prelim-inary analysis of pricing and price differences at national andEEA levels. This initial view is used basically as a working
hypothesis to focus the Authority’s enquiries for the purposes ofarriving at a precise geographic market definition.
29. The reasons behind any particular configuration of prices
and market shares need to be explored. Companies might enjoyhigh market shares in their domestic markets just because of theweight of the past, and conversely, a homogenous presence ofcompanies throughout the EEA might be consistent withnational or regional geographic markets. The initial workinghypothesis will therefore be checked against an analysis ofdemand characteristics (importance of national or local prefer-ences, current patterns of purchases of customers, product differ-entiation/brands, etc.) in order to establish whether companies indifferent areas do indeed constitute a real alternative source ofsupply for consumers. The theoretical experiment is again basedon substitution arising from changes in relative prices, and thequestion to answer is again whether the customers of the partieswould switch their orders to companies located elsewhere in theshort term and at a negligible cost.
30. If necessary, a further check on supply factors will be carried
out to ensure that those companies located in differing areas donot face impediments in developing their sales on competitiveterms throuhgout the whole geographic market. This analysis willinclude an examination of requirements for a local presence inorder to sell in that area, the conditions of access to distributionchannels, costs associated with setting up a distribution network,and the presence or absence of regulatory barriers arising frompublic procurement, price regulations, quotas and tariffs limitingtrade or production, technical standards, monopolies, freedom ofestablishment, requirements for administrative authorisations,packaging regulations, etc. In short, the EFTA SurveillanceAuthority will identify possible regulations, etc. In short, theEFTA Surveillance Authority will identify possible obstacles andbarriers isolating companies, located in a given area from thecompetitive pressure of companies located outside that area, so asto determine the precise degree of market interpenetration atnational, European or global level.
31. The actual pattern and evolution of trade flow offers useful
supplementary indications as to the economic importance of eachdemand or supply factor mentioned above, and the extent towhich they may or may not constitute actual barriers creatingdifferent geographic markets. The analysis of trade flow willgenerally address the question of transport costs and the extent towhich these may hinder trade between different areas, havingregard to plant location, costs of production and relative pricelevels.
Market integration in the European Economic Area32. Finally, the EFTA Surveillance Authority also takes into
account the continuing process of market integration in the EEAwhen defining geographic markets. Within the scope of the EEAAgreement (
1), the measures adopted and implemented to remove
barriers to trade and further integrate the EEA markets cannot beignored when assessing the effects on competition of, for examplea concentration or a structural joint venture. A situation wherenational markets have been artificially isolated from each otherbecause of the existence of legislative barriers that have now beenremoved, will generally lead to a cautious assessment of pastevidence regarding prices, market shares or trade patterns. Aprocess of market integration that would, in the short term, leadto wider geographic markets may therefore be taken into consid-eration when defining the geographic market for the purposes ofassessing concentrations and joint ventures.
(1) It should be noted that the EEA Agreement is limited in
scope compared to the EC Treaty. For instance, the absenceof a customs union and limited application to certainproducts may affect the assessment of market integrationbetween the EFTA States and between the EFTA States andthe Community.
EN Official Journal of the European Communities 16. 7. 98 L 200/52
The process of gathering evidence
33. When a precise market definition is deemed necessary, the
EFTA Surveillance Authority will often contact the maincustomers and the main companies in the industry to enquireinto their views about the boundaries of product and geographicmarkets, and to obtain the necessary factual evidence to reach aconclusion. The Authority might also contact the relevant profes-sional associations, and companies active in upstream markets, soas to be able to define, insofar as necessary, separate product andgeographic markets, for different levels of production or distribu-tion of the products/services in question. It might also requestadditional information from the undertakings involved.
34. Where appropriate, the EFTA Surveillance Authority will
address written requests for information to the market playersmentioned above. These requests will usually include questionsrelating to the perceptions of companies about reactions to hypo-thetical price increases and their views on the boundaries of therelevant market. They will also include requests to provide thefactual information the Authority deems necessary to reach aconclusion on the extent of the relevant market. The Authoritymight also discuss with marketing directors or other officers ofthose companies to gain a better understanding on how nego-tiations between suppliers and customers take place and to under-stand better issues relating to the definiton of the relevant market.Where appropriate, it might also carry out visits or inspections tothe premises of the parties, their customers and/or their competi-tors, in order to undertand better how products are manufacturedand sold.
35. The type of evidence relevant to reach a conclusion as to the
product market can be categorised as follows:
Evidence to define markets ¾product dimension
36. An analysis of the product characteristics and its intended
use allows the EFTA Surveillance Authority, as a first step, tolimit the field of investigation of possible substitutes. However,product characteristics and intended use are insufficient toconclude whether two products are demand substitutes. Func-tional interchangeability or similarity in characteristics may notprovide in themselves sufficient criteria, because the responsive-ness of customers to relative price changes may be determined byother considerations as well. For example, there may be differentcompetitive constraints in the original equipment market for carcomponents and in spare parts, thereby leading to a separatedelineation of two relevant markets. Conversely, differences inproduct characteristics are not in themselves sufficient to excludedemand substitutatibility, since this will depend to a large extenton how customers value different characteristics.37. The type of evidence the EFTA Surveillance Authority
considers relevant to assess whether two products are demandsubstitutes can be categorised as follows:
38. Evidence of substitution in the recent past
In certain cases, it is possible to analyse evidence relating to
recent past events or shocks in the market that offer actualexamples of substitution between two products. When available,this sort of information will normally be fundamental for marketdefinition. If there have been changes in relative prices in thepast (all else being equal), the reactions in terms of quantitiesdemanded will be determinant in establishing substitutability.Launches of new products in the past can also offer useful in-formation, when it is possible to precisely analyse which productshave lost sales to the new product.
39. There are a number of quantitative tests that have
specifically been designed for the purpose of delineating markets.These tests consist of various econometric and statisticalapproaches: estimates of elasticities and cross-price elasticities (
1)
for the demand of a product, tests based on similarity of pricemovements over time, the analysis of causality between priceseries and similarity of price levels and/or their convergence. TheEFTA Surveillance Authority will take into account the availablequantitative evidence capable of withstanding rigorous scrutinyfor the purposes of establishing patterns of substitution in thepast.
40. Views of customers and competitors
The EFTA Surveillance Authority may contact the main
customers and competitors of the companies involved in itsenquiries, to gather their views on the boundaries of the productmarket as well as most of the factual information it requires toreach a conclusion on the scope of the market. Reasoned answersof customers and competitors as to what would happen if relativeprices for the candidate products were to increase in the candi-date geographic area by a small amount (for instance 5 to 10 %)are taken into account when they are sufficiently backed byfactual evidence.
41. Consumer preferences
In cases of consumer goods, it might be difficult for the EFTA
Surveillance Authority to gather the direct views of endconsumers about substitute products. Marketing studies thatcompanies have commissioned in the past and that are used bycompanies in their own decision making as to pricing of theirproducts and/or marketing actions, may provide useful informa-tion for the Authority’s delineation of the relevant market.Consumer surveys on usage patterns and attitudes, data fromconsumer’s purchasing patterns, the views expressed by retailersand more generally, market research studies submitted by the
(1)Own price elasticity of demand for product X is at measure of the
responsiveness of demand for X to a percentage change in its ownprice. Cross-price elasticity between products X and Y is the re-sponsiveness of demand for product X to a percentage change in theprice of product Y.
EN Official Journal of the European Communities 16. 7. 98 L 200/53
parties and their competitors will be taken into account to estab-
lish whether an economically significant proportion of consumersconsider two products as substitutable, also taking into accountthe importance of brands for the products in question. Themethodology followed in consumer surveys carried out ad hoc bythe undertakings involved or their competitors for the purposesof a merger procedure or a procedure pursuant to Chapter II ofProtocol 4 to the Surveillance and Court Agreement (
1) will
usually be scrutinised with utmost care. Unlike pre-existingstudies, they have not been prepared in the normal course ofbusiness for the adoption of business decisions.
42. Barriers and costs associated with switching
demand to potential substitutes
There are a number of barriers and costs that might prevent the
EFTA Surveillance Authority from considering two prima facie
demand substitutes as belonging to one single product market. Itis not possible to provide an exhaustive list of all the possiblebarriers to substitution and of switching costs. These barriers orobstacles might have a wide range of origins, and in its decisions,the authority may be confronted with regulatory barriers or otherforms of State intervention, constraints arising in downstreammarkets, need to incur specific capital investment or loss incurrent output in order to switch to alternative inputs, the loca-tion of customers, specific investment in production process,learning and human capital investment, retooling costs or otherinvestments, uncertainty about quality and reputation ofunknown suppliers, and others.
43. Different categories of customers and price
discrimination
The extent of the product market might be narrowed in the
presence of distinct groups of customers. A distinct group ofcustomers for the relevant product may constitute a narrower,distinct market when such a group could be subject to pricediscrimination. This will usually be the case when two conditionsare met: (a) it is possible to identify clearly which group anindividual customer belongs to at the moment of selling therelevant products to him; and (b) trade among customers orarbitrage by third parties should not be feasible.
Evidence to define markets ¾geographic dimension
44. The type of evidence the EFTA Surveillance Authority
considers relevant to reach a conclusion as to the geographicmarket can be categorised as follows:
45. Past evidence of diversion of orders to other
areas
In certain cases, evidence on changes in prices between different
areas and consequent reactions by customers might be available.Generally, the same quantitative tests used for product marketdefinition might be used in geographic market definition, bearing
in mind that international comparisons of prices might be morecomplex due to a number of factors such as exchange rate move-ments, taxation and product differentiation.
46. Basic demand characteristics
The nature of demand for the relevant product may in itself
determine the scope of the geographical market. Factors such asnational preferences or preferences for national brands, language,culture and life style, and the need for a local presence have astrong potential to limit the geographic scope of competition.
47. Views of customers and competitors
Where appropriate, the EFTA Surveillance Authority will contact
the main customers and competitors of the parties in its en-quiries, to gather their views on the boundaries of the geographicmarket, as well as most of the factual information it requires toreach a conclusion on the scope of the market, when they aresufficiently backed by factual evidence.
48. Current geographic pattern of purchases
An examination of the customers’ current geographic pattern of
purchases provides useful evidence as to the possible scope of thegeographic market. When customers purchase from companieslocated anywhere in the EEA on similar terms, or they procuretheir supplies through effective tendering procedures in whichcompanies from anywhere in the EEA submit bids, thegeographic market will usually be considered to be EEA-wide.
49. Trade flows/pattern of shipments
When the number of customers is so large that it is not possible
to obtain through them a clear picture of geographic purchasingpatterns, information on trade flows might be used alternatively,provided that the trade statistics are available with a sufficientdegree of detail for the relevant products. Trade flows, and aboveall, the rationale behind trade flows provide useful insights andinformation for the purpose of establishing the scope of thegeographic market but are not in themselves conclusive.
50. Barriers and switching costs associated to divert
orders to companies located in other areas
The absence of cross-border purchases or trade flows, for instance,
does not necessarily mean that the market is at most national inscope. Still, barriers isolating the national market have to beidentified before it is concluded that the relevant geographicmarket in such a case is national. Perhaps the clearest obstacle fora customer to divert its orders to other areas is the impact oftransport costs and transport restrictions arising from legislationor from the nature of the relevant products. The impact of trans-port costs will usually limit the scope of the geographical market
(1)See footnote 2 of this Decision.
EN Official Journal of the European Communities 16. 7. 98 L 200/54
for bulky, low-value products, bearing in mind that a transport
disadvantage might also be compensated by a comparative advan-tage in other costs (labour costs or raw materials). Access todistribution in a given area, regulatory barriers still existing incertain sectors, quotas and custom tariffs might also constitutebarriers isolating a geographic area from the competitive pressureof companies located outside that area. Significant switching costsin procuring supplies from companies located in other countriesconstitute additional sources of such barriers.
51. On the basis of the evidence gathered, the EFTA Surveil-
lance Authority will then define a geographic market that couldrange from a local dimension to a global one.
52. The paragraphs above describe the different factors which
might be relevant to define markets. This does not imply that ineach individual case it will be necessary to obtain evidence onand assess each of these factors. Often in practice the evidenceprovided by a subset of these factors will be sufficient to reach aconclusion.
IV. CALCULATION OF MARKET SHARES
53. The definition of the relevant market in both its product and
geographic dimensions allows the identification of the suppliersand the customers/consumers active on that market. On thatbasis, a total market size and market shares for each supplier canbe calculated on the basis of their sales of the relevant products inthe relevant area. In practice, the total market size and marketshares are often available from market sources, i. e. companies’estimates, studies commissioned from industry consultants and/ortrade associations. When this is not the case, or when availableestimates are not reliable, the EFTA Surveillance Authority willusually ask each supplier in the relevant market to provide itsown sales in order to calculate total market size and marketshares.
54. If sales are usually the reference to calculate market shares,
there are nevertheless other indications that, depending on thespecific products or industry in question, can offer useful in-formation such as, in particular, capacity, the number of playersin bidding markets units of fleet as in aerospace, or the reservesheld in the case of sectors such as mining.
55. As a rule of thumb, both volume sales and value sales
provide useful information. In cases of differentiated products,sales in value and their associated market share will usually beconsidered to reflect better the relative position and strength of
each supplier.
V. ADDITIONAL CONSIDERATIONS
56. There are certain areas where the application of the princi-
ples above has to be undertaken with care. This is the case whenconsidering primary and secondary markets, in particular, whenthe behaviour of undertakings at a point in time has to beanalysed pursuant to Article 54 of the EEA Agreement. Themethod of defining markets in these cases is the same, i.e.assessing the responses of customers based on their purchasingdecisions to relative price changes, but taking into accountconstraints on substitution imposed by conditions in theconnected markets. A narrow definition of market for secondaryproducts, for instance, spare parts, may result when compatibilitywith the primary product is important. Problems of findingcompatible secondary products together with the existence ofhigh prices and a long lifetime of the primary products mayrender relative price increases of secondary products profitable. Adifferent market definition may result if significant substitutionbetween secondary products is possible or if the characteristics ofthe primary products make quick and direct consumer responsesto relative price increases of the secondary products feasible.
57. In certain cases, the existence of chains of substitution might
lead to the definition of a relevant market where products or areasat the extreme of the market are not directly substitutable. Anexample might be provided by the geographic dimension of aproduct with significant transport costs. In such cases, deliveriesfrom a given plant are limited to a certain area around each plantby the impact of transport costs. In principle, such area couldconstitute the relevant geographic market. However, if thedistribution of plants is such that there are considerable overlapsbetween the areas around different plants, it is possible that thepricing of those products will be constrained by a chain substitu-tion effect, and lead to the definition of a broader geographicmarket. The same reasoning may apply if product B is a demandsubstitute for products A and C. Even if products A and C are notdirect demand substitutes, they might be found to be in the samerelevant product market since their respective pricing might beconstrained by substitution to B.
58. From a practical perspective, the concept of chains of substi-
tution has to be corroborated by actual evidence, for instancerelated to price interdependence at the extremes of the chains ofsubstitution, in order to lead to an extension of the relevantmarket in an individual case. Price levels on extreme ends of thechains would have to be of the same magnitude as well.
EN Official Journal of the European Communities 16. 7. 98 L 200/55
ANNEX II
NOTICE OF THE EFTA SURVEILLANCE AUTHORITY ON AGREEMENTS OF MINOR
IMPORTANCE WHICH DO NOT FALL UNDER ARTICLE 53(1) OF THE EEA AGREEMENT
A. The present notice is issued pursuant to the rules of the Agreement on the European Economic Area (EEA
Agreement) and the Agreement between the EFTA States on the establishment of a Surveillance Authorityand a Court of Justice (Surveillance and Court Agreement).
B. The European Commission has issued a notice on agreements of minor importance which do not fall
under Article 85(1) of the Treaty establishing the European Community (
1). This non-binding act contains
principles and rules which the European Commission follows in the field of competition.
C. The EFTA Surveillance Authority considers the above-mentioned act to be EEA relevant. In order to
maintain equal conditions of competition and to ensure a uniform application of the EEA competitionrules throughout the European Economic Area, the EFTA Surveillance Authority adopts the present noticeexercising the power conferred to it in Article 5(2)(b) of the Surveillance and Court Agreement. It intendsto follow the principles and rules laid down in this notice when applying the relevant EEA competitionrules to a particular case.
D. The present Notice replaces the Authority’s Notice adopted as Annex IX to the Authority’s Decision of 12
January 1994, as amended by Decision of 15 May 1996 (
2).
‘I
1. The EFTA Surveillance Authority considers it important to
facilitate cooperation between undertakings where such coopera-tion is economically desirable without presenting difficulties fromthe point of view of competition policy. To this end, it publishedthe “Notice concerning agreements, decisions and concertedpractices in the field of cooperation between enterprises” (
3)
listing a number of agreements which by their nature cannot beregarded as being in restraint of competition. Furthermore, in the“Notice concerning its assessment of certain subcontractingagreements” (
4), the EFTA Surveillance Authority considered that
that type of contract, which offers all undertakings opportunitiesfor development, does not automatically fall within the scope ofArticle 53(1) of the EEA Agreement. The “Notice concerning theassessment of cooperative joint ventures pursuant to Article 53 ofthe EEA Agreement” (
5) describes in detail the conditions under
which the agreements in question do not fall under the prohibi-tion of restrictive agreements. By issuing this notice, the EFTASurveillance Authority is taking a further step towards definingthe scope of Article 53(1) in order to facilitate cooperationbetween undertakings.
2. Article 53(1) EEA prohibits agreements which may affect
trade between the Contracting Parties to the EEA Agreement andwhich have as their object or effect the prevention, restriction ordistortion of competition within the territory covered by the EEAAgreement. The Court of Justice of the European Communitieshas clarified that the corresponding Article 85(1) of the Treatyestablishing the European Community is not applicable wherethe impact of the agreement on intra-Community trade or oncompetition is not appreciable. This principle should also beapplied to the interpretation of Article 53(1) EEA, so that thisprovision is not applicable where the impact on trade betweenContracting Parties to the EEA Agreement or on competition is
not appreciable. Agreements which are not capable of signif-icantly affecting trade between the Contracting Parties are notcaught by Article 53. They should therefore be examined on thebasis, and within the framework, of national legislation alone.This is also the case for agreements whose actual or potentialeffect remains limited to the territory of only one ContractingParty or of one or more third countries. Likewise, agreementswhich do not have as their object or their effect an appreciablerestriction of competition are not caught by the prohibitioncontained in Article 53(1).
3. In this notice the EFTA Surveillance Authority, by setting
quantitative criteria and by explaining their application, has givena sufficiently concrete meaning to the term “appreciable” forundertakings to be able to judge for themselves whether theiragreements do not fall within the prohibition under Article 53(1)EEA by virtue of their minor importance. The quantitative defini-tion of appreciability, however, serves only as a guideline: inindividual cases even agreements between undertakings whichexceed the threshold set out below may still have only a negli-gible effect on trade between the Contracting Parties or oncompetition within the area covered by the EEA Agreement, andare therefore not caught by Article 53(1). This notice does notcontain an exhaustive description of restrictions which falloutside Article 53(1). It is generally recognised that even agree-ments which are not of minor importance can escape the pro-hibition on agreements, on account of their exclusively favourableimpact on competition.
4. The benchmarks provided by the EFTA Surveillance
Authority in this notice should eliminate the need to have thelegal status of agreements covered by it established through indi-vidual EFTA Surveillance Authority decisions; notification forthis purpose will no longer be necessary for such agreements.However, if it is doubtful whether, in an individual case, an
(1)OJ C 372, 9. 12. 1997, p. 13.
(2)OJ L 153, 18. 6. 1994, p. 32, and OJ C 281, 26. 9. 1996, p. 20.
(3)OJ L 153, 18. 6. 1994, p. 25.
(4)OJ L 153, 18. 6. 1994, p. 30.
(5)OJ L 186, 21. 7. 1994, p. 58.
EN Official Journal of the European Communities 16. 7. 98 L 200/56
agreement is likely to affect trade between the Contracting Parties
to the EEA Agreement or to restrict competition to any signif-icant extent, undertakings are free to apply for negative clearanceor to notify the agreement pursuant to Chapter II (
1), Chapter
VI (2), Chapter IX (3) and Chapter XI (4) of Protocol 4 to the
Surveillance and Court Agreement.
5. In cases covered by this notice, and subject to points 11 and
20, the EFTA Surveillance Authority will not institute anyproceedings either upon application or on its own initiative.Where undertakings have failed to notify an agreement fallingwithin the scope of Article 53(1) because they assumed in goodfaith that the agreement was covered by this notice, the EFTASurveillance Authority will not consider imposing fines.
6. This notice is likewise applicable to decisions by associations
of undertakings and to concerted practices.
7. This notice is without prejudice to any interpretation that
may be given by other competent authorities and in particular bythe national courts, the EFTA Court, the Court of Justice or theCourt of First Instance of the European Communities.
8. This notice is without prejudice to the application of
national competition laws.
II
9. The EFTA Surveillance Authority holds the view that agree-
ments between undertakings engaged in the production ordistribution of goods or in the provision of services do not fallunder the prohibition in Article 53(1) if the aggregate marketshares held by all of the participating undertakings do not exceed,on any of the relevant markets:
(a) the 5 % threshold, where the agreement is made between
undertakings operating at the same level of production or ofmarketing (“horizontal” agreement);
(b) the 10 % threshold, where the agreement is made between
undertakings operating at different economic levels (“vertical”agreement).
In the case of a mixed horizontal/vertical agreement or where it is
difficult to classify the agreement as either horizontal or vertical,the 5 % threshold is applicable.
10. The EFTA Surveillance Authority also holds the view that
the said agreements do not fall under the prohibition of Article53(1) if the market shares given at paragraph 9 are exceeded by nomore than one tenth during two successive financial years.
11. With regard to:
(a) horizontal agreements which have as their object:
¾to fix prices or to limit production or sales,
or
¾to share markets or sources of supply;
(b) vertical agreements which have as their object:
¾to fix resale prices,or
¾to confer territorial protection on the participating under-
takings or third undertakings;
the applicability of Article 53(1) cannot be ruled out even where
the aggregate market shares held by all of the participating under-takings remain below the thresholds mentioned in paragraphs 9and 10.
The EFTA Surveillance Authority considers, however, that in the
first instance it is for the authorities and courts of the ContractingParties to take action on any agreements envisaged above in (a)and (b). Accordingly, it will only intervene in such cases when itconsiders that the interests protected by the EEA Agreement sodemand, and in particular if the agreements impair the properfunctioning of the internal market as extended to the EFTAStates by the Agreement.
12. For the purposes of this notice, “participating undertakings”
are:
(a) undertakings being parties to the agreement;(b) undertakings in which a party to the agreement, directly or
indirectly,
¾owns more than half of the capital or business assets, or
¾has the power to exercise more than half of the voting
rights, or
¾has the power to appoint more than half of the members
of the supervisory board, board of management or bodieslegally representing the undertakings, or
¾has the right to manage the undertaking’s business;
(c) undertakings which directly or indirectly have over a party to
the agreement the rights or powers listed in (b);
(d) undertakings over which an undertaking referred to in (c) has,
directly or indirectly, the rights or powers listed in (b).
Undertakings over which several undertakings as referred to in (a)
to (d) jointly have, directly or indirectly, the rights or powers setout in (b) shall also be considered to be participating undertak-ings.
13. In order to calculate the market share, it is necessary to
determine the relevant market; for this, the relevant productmarket and the relevant geographic market must be defined.
14. The relevant product market comprises any products or
services which are regarded as interchangeable or substitutable bythe consumer, by reason of their characteristics, prices andintended use.
15. The relevant geographic market comprises the area in which
the participating undertakings are involved in the supply of rele-vant products or services, in which the conditions of competitionare sufficiently homogeneous, and which can be distinguishedfrom neighbouring geographic areas because, in particular, condi-tions of competition are appreciably different in those areas.
16. When applying paragraphs 14 and 15, reference should be
had to the notice on the definition of the relevant market underEEA competition law (
5). (1)Corresponds to Council Regulation (EEC) No 17/62.
(2)Corresponds to Council Regulation (EEC) No 1017/68.
(3)Corresponds to Council Regulation (EEC) No 4056/86.
(4)Corresponds to Council Regulation (EEC) No 3975/87. (5)Not yet published in the Official Journal.
EN Official Journal of the European Communities 16. 7. 98 L 200/57
17. In case of doubt as to the delimitation of the relevant
geographic market, undertakings may take the view that theagreement has no appreciable effect on trade between theContracting Parties to the EEA Agreement or on competitionwhen the market share thresholds indicated in paragraphs 9 and10 are not exceeded in any State within the territory covered bythe EEA Agreement. This view, however, does not preclude theapplication of national competition law to the agreements inquestion.
18. Chapter II of this notice shall not apply where in a relevant
market competition is restricted by the cumulative effects ofparallel networks of similar agreements established by severalmanufacturers or dealers.
III
19. Agreements between small and medium-sized undertakings,
as defined in the EFTA Surveillance Authority Decision No112/96/COL of 11 September 1996 (
1) are rarely capable of signif-
icantly affecting trade between the Contracting Parties tothe EEA Agreement and competition within the EEA. Conse-
quently, as a general rule, they are not caught by the prohibitionin Article 53(1). In cases where such agreements exceptionallymeet the conditions for the application of that provision, theywill not be of sufficient EEA interest to justify any intervention.This is why the EFTA Surveillance Authority will not instituteany proceedings, either upon request or on its own initiative, toapply the provisions of Article 53(1) to such agreements, even ifthe thresholds set out in paragraphs 9 and 10 above are exceeded.
20. The EFTA Surveillance Authority nevertheless reserves the
right to intervene in such agreements:
(a) where they significantly impede competition in a substantial
part of the relevant market;
(b) where, in the relevant market, competition is restricted by the
cumulative effect of parallel networks of similar agreementsmade between several producers or dealers.'
(1)OJ L 42, 13. 2. 1997, p. 33.