CELEX: E1998C0046
Language: en
Date: 1998-03-04 00:00:00
Title: 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 Economic Area (EEA), and on agreements of minor importance which do not fall under Article 53(1) of the EEA Agreement

L 200/46         EN                    Official Journal of the European Communities                    16. 7. 98
                                       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 Economic
         Area (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 European
         Community (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 relevant
         product and geographic market and in assessing whether an agreement has an appreciable effect
         on 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.
 ---pagebreak--- 16. 7. 98         EN               Official Journal of the European Communities                          L 200/47
          HAS ADOPTED THIS DECISION:
          1.   The following notices which are annexed to this Decision as Annexes I and II:
           notice of the EFTA Surveillance Authority on the definition of the relevant market for the
              purpose of competition law within the European Economic Area (EEA),
           notice 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
 ---pagebreak--- L 200/48                   EN                    Official Journal of the European Communities                                            16. 7. 98
                                                                         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 Authority
                      and 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 competition
                      rules throughout the European Economic Area, the EFTA Surveillance Authority adopts the present notice
                      exercising the power conferred upon it by Article 5(2)(b) of the Surveillance and Court Agreement. It
                      intends to follow the principles and rules laid down in this notice when applying the relevant EEA
                      competition rules to a particular case.
                             I. INTRODUCTION                                  ‘market' to refer to the area where it sells its products or to refer
                                                                              broadly to the industry or sector where it belongs.
1. The purpose of this notice is to provide guidance as to how
the EFTA Surveillance Authority applies the concept of relevant
product and geographic market in its ongoing enforcement of the               4. The definition of the relevant market in both its product and
competition rules of the EEA Agreement, in particular the                     geographic dimensions often has a decisive influence on the
application of the provisions of Chapter II of Protocol 4 to the              assessment of a competition case. By rendering public the pro-
Surveillance and Court Agreement (2) and of point 1 of Annex                  cedures the EFTA Surveillance Authority follows when consid-
XIV to the EEA Agreement together with Chapter XIII of                        ering market definition and by indicating the criteria and
Protocol 4 to the Surveillance and Court Agreement (3), and their             evidence on which it relies to reach a decision, the EFTA Surveil-
equivalents in other sectoral applications such as transport, and             lance Authority expects to increase the transparency of its policy
coal and steel (4).                                                           and decision-making in the area of competition policy.
2. Market definition is a tool to identify and define the bound-
aries of competition between firms. It serves to establish the                5. Increased transparency will also result in companies and
framework within which competition policy is applied by the                   their advisors being able to anticipate better the possibility that
EFTA Surveillance Authority. The main purpose of market def-                  the EFTA Surveillance Authority may raise competition concerns
inition is to identify in a systematic way the competitive                    in an individual case. Companies could, therefore, take such a
constraints that the undertakings involved (5) face. The objective            possibility into account in their own internal decision-making
of defining a market in both its product and geographic dimen-                when contemplating for instance, acquisitions, the creation of
sion is to identify those actual competitors of the undertakings              joint ventures or the establishment of certain agreements. It is
involved that are capable of constraining those undertakings’                 also intended that companies should be in a better position to
behaviour and of preventing them from behaving independently                  understand what sort of information the Authority considers rel-
of effective competitive pressure. It is from this perspective that           evant for the purposes of market definition.
the market definition makes it possible, inter alia, to calculate
market shares that would convey meaningful information
regarding market power for the purposes of assessing dominance
or for the purposes of applying Article 53 of the EEA Agreement.              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 of
3. It follows from the above, that the concept of ‘relevant                   Justice or the Court of First Instance of the European Commu-
market' is different from other concepts of market often used in              nities.
other contexts. For instance, companies often use the term
(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 of
    concentrations).                                                                    II. DEFINITION OF RELEVANT MARKET
(4) The focus of assessment in State aid cases is the aid recipient and
    the industry/sector concerned rather than identification of competitive
    constraints faced by the aid recipient. When consideration of market
    power and therefore of the relevant market are raised in any par-         Definition of relevant product and relevant geographic
    ticular case, elements of the approach outlined here might serve as a
    basis for the assessment of State aid cases.
                                                                              market
(5) For the purposes of this notice, the undertakings involved will be, in
    the case of a concentration, the parties to the concentration. In in-
    vestigations under Articles 54 of the EEA Agreement, they will be
    the undertaking being investigated or the complainants. For investiga-    7. Certain Acts relating to Articles 53 and 54 of the EEA
    tions under Article 53, they will be the parties to the agreement.        Agreement, in particular the provisions in section 6 of Form A/B
 ---pagebreak--- 16. 7. 98                EN                   Official Journal of the European Communities                                         L 200/49
with respect to Chapter II of Protocol 4 to the Surveillance and         Article 53 of the EEA Agreement, in particular, in determining
Court Agreement (1), as well as the provisions in section 6 of           whether an appreciable restriction of competition exists or in
Form CO with respect to point 1 of Annex XIV to the EEA                  establishing if the condition under Article 53(3)(b) for an exemp-
Agreement and Chapter XIII of Protocol 4 to the Surveillance             tion from the application of Article 53(1) is met.
and Court Agreement (2) have laid down the following definitions.
‘Relevant product markets' are defined as follows:
                                                                         12. The criteria to define the relevant market are applied gener-
‘A relevant product market comprises all those products and/or           ally for the analysis of certain behaviours in the market and for
services which are regarded as interchangeable or substitutable by       the analysis of structural changes in the supply of products. This
the consumer, by reason of the products’ characteristics, their          methodology, though, might lead to different results depending
prices and their intended use.'                                          on the nature of the competition issue being examined. For
                                                                         instance, the scope of the geographic market might be different
                                                                         when analysing a concentration, where the analysis is essentially
8.    ‘Relevant geographic markets' are defined as follows:              prospective, from an analysis of past behaviour. The different
                                                                         time horizon considered in each case might lead to the result that
                                                                         different geographic markets are defined for the same products
‘The relevant geographic market comprises the area in which the          depending on whether the EFTA Surveillance Authority is exam-
undertakings concerned are involved in the supply and demand             ining a change in the structure of supply, such as a concentration
of products or services, in which the conditions of competition          or a cooperative joint venture, or issues relating to certain past
are sufficiently homogenous and which can be distinguished               behaviour.
from neighbouring areas because the conditions of competition
are appreciably different in those areas.'
                                                                         Basic principles for market definition
9. The relevant market within which to assess a given
competition issue is therefore established by the combination of
the product and geographic markets. The EFTA Surveillance
Authority interprets the definitions at paragraphs 7 and 8 (which        Competitive constraints
reflect the jurisprudence of the Court of Justice and the Court of
First Instance of the European Communities as well as its own
decision-making practice) according to the orientations defined
in this notice.                                                          13. Firms are subject to three main sources of competitive
                                                                         constraints: demand substitutability, supply substitutability and
                                                                         potential competition. From an economic point of view, for the
                                                                         definition of the relevant market, demand substitution constitutes
Concept of relevant market and objectives of EEA                         the most immediate and effective disciplinary force on the
competition policy                                                       suppliers of a given product, in particular in relation to their
                                                                         pricing decisions. A firm or a group of firms cannot have a
                                                                         significant impact on the prevailing conditions of sale, such as
10. The concept of relevant market is closely related to the             prices, if its customers are in a position to switch easily to
objectives pursued under EEA competition policy. For example,            available substitute products or to suppliers located elsewhere.
under the EEA merger control, the objective in controlling struc-        Basically, the exercise of market definition consists in identifying
tural changes in the supply of a product/service is to prevent the       the effective alternative sources of supply for the customers of the
creation or reinforcement of a dominant position as a result of          undertakings involved, both in terms of products/services and
which effective competition would be significantly impeded in a          geographic location of suppliers.
substantial part of the territory covered by the EEA Agreement.
Under the EEA competition rules, a dominant position is such
that a firm or group of firms would be in a position to behave to
an appreciable extent independently of its competitors, customers        14. The competitive constraints arising from supply side substi-
and ultimately of its consumers (3). Such a position would usually       tutibility other than those described in paragraphs 20 to 23 and
arise when a firm or group of firms would account for a large            from potential competition are in general less immediate and in
share of the supply in any given market, provided that other             any case require an analysis of additional factors. As a result such
factors analysed in the assessment (such as entry barriers, capacity     constraints are taken into account at the assessment stage of
of reaction of customers, etc.) point in the same direction.             competition analysis.
11. The same approach is followed by the EFTA Surveillance
Authority in its application of Article 54 of the EEA Agreement          Demand substitution
to firms that enjoy a single or collective dominant position.
Under Chapter II of Protocol 4 to the Surveillance and Court
Agreement (4) the EFTA Surveillance Authority has the power to
investigate and bring to an end abuses of such a dominant posi-          15. The assessment of demand substitution entails a determina-
tion, which must also be defined by reference to the relevant            tion of the range of products which are viewed as substitutes by
market. Markets may also need to be defined in the application of        the consumer. One way of determining this can be viewed as a
                                                                         speculative experiment, postulating a hypothetical small, lasting
                                                                         change in relative prices and evaluating the likely reactions of
(1) See footnote 2 of the Decision.                                      customers to that increase. The exercise of market definition
(2) See footnote 3 of the Decision.
(3) Definition given by the EC Court of Justice in its judgement of 13   focuses on prices for operational and practical purposes, and more
    February 1979 in Case 85/76 Hoffmann-La Roche [1979] ECR, p.         precisely on demand substitution arising from small, permanent
    461, and confirmed in subsequent judgements.                         changes in relative prices. This concept can provide clear indica-
(4) See footnote 2 of the Decision.                                      tions as to the evidence that is relevant to define markets.
 ---pagebreak--- L 200/50                 EN                    Official Journal of the European Communities                                               16. 7. 98
16. Conceptually, this approach implies that starting from the            production to the relevant products and market them in the short
type of products that the undertakings involved sell and the area         term (1) without incurring significant additional costs or risks in
in which they sell them, additional products and areas will be            response to small and permanent changes in relative prices.
included in or excluded from the market definition, depending             When these conditions are met, the additional production that is
on whether competition from these other products and areas                put on the market will have a disciplinary effect on the competi-
affect or restrain sufficiently the pricing of the parties’ products in   tive behaviour of the companies involved. Such an impact in
the short term.                                                           terms of effectiveness and immediacy is equivalent to the demand
                                                                          substitution effect.
                                                                          21. These situations typically arise when companies market a
17. The question to be answered is whether the parties’                   wide range of qualitites or grades of one product; even if for a
customers would switch to readily available substitutes or to             given final customer or group, of consumers, the different quali-
suppliers located elsewhere in response to a hypothetical, small          ties are not substituable, the different qualities will be grouped
(in the 5 to 10 % range) but permanent relative price increase in         into one product market, provided that most of the suppliers are
the products and areas being considered. If substitution were             able to offer and sell the various qualities immediately and
enough to make the price increase unprofitable because of the             without the significant increases in costs described above. In such
resulting loss of sales, additional substitutes and areas would be        cases, the relevant product market will encompass all products
included in the relevant market. This would be done until the set         that are substituable in demand and supply, and the current sales
of products and geographic areas is such that small, permanent            of those products will be aggregated so as to give the total value
increases in relative prices would be profitable. The equivalent          or volume of the market. The same reasoning may lead to group
analysis is applicable in cases concerning the concentration of           different geographic areas.
buying power, where the stating point would then be the supplier
and the price test serves to identify the alternative distribution
channels or outlets for the supplier’s products. In the application       22. A practical example of the approach to supply side substitu-
of these principles, careful account should be taken of certain           ability when defining product markets is to be found in the case
particular situations as described under paragraphs 56 and 58.            of paper. Paper is usually supplied in a range of different quali-
                                                                          ties, from standard writing paper to high quality papers to be used
                                                                          for 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 on
                                                                          lower quality papers. However, paper plants are prepared to
18. A practical example of this test can be provided by its               manufacture the different qualities, and production can be
application to a merger of, for instance, soft drink bottlers. An         adjusted with negligible costs and in a short time-frame. In the
issue to examine in such a case would be to decide whether                absence of particular difficulties in distribution, paper manufac-
different flavours of soft drinks belong to the same market. In           turers are therefore able to compete for orders of the various
practice, the question to address would be whether consumers of           qualities, in particular if orders are passed with a sufficient lead
flavour A switched to other flavours when confronted with a               time to allow for modifying production plans. Under such
permanent price increase of 5 to 10 % for flavour A. If a suffi-          circumstances, the EFTA Surveillance Authority would not define
cient number of consumers switched to say, flavour B, to such an          a separate market for each quality of paper and its respective
extent that the price increase for flavour A was not profitable due       usage. The various qualities of paper are included in the relevant
to the resulting loss of sales, then the market would comprise at         market, and their sales added up to estimate total market value
least flavours A and B. The process would have to be extended in          and volume.
addition to other available flavours until a set of products is
identified for which a price rise would not induce a sufficient
substitution in demand.
                                                                          23. When supply side substitutability entails the need to adjust
                                                                          significantly existing tangible and intangible assets, additional
                                                                          investments, strategic decisions or time delays, it will not be
                                                                          considered at the stage of market definition. Examples of where
                                                                          supply side substitution is not likely to lead the EFTA Surveil-
19. Generally, and in particular for the analysis of merger cases,        lance Authority to enlarge the definition of the market may be
the price to take into account will be the prevailing market price.       found in the area of consumer products, for instance with respect
This might not be the case where the prevailing price has been            to branded beverages. Although bottling plants may in principle
determined in the absence of sufficient competition. In particular        bottle different beverages, there are costs and lead times involved
for investigation of abuses of dominant positions, the fact that the      (in terms of advertising, product testing and distribution) before
prevailing price might already have been substantially increased          the products can actually be sold. In these cases, the effects of
will be taken into account.                                               supply side substitutability and other forms of potential
                                                                          competition would then be examined at a later stage.
                                                                          Potential competition
Supply substitution
                                                                          24. The third source of competitive constraint, potential
                                                                          competition, is not taken into account when defining markets.
                                                                          since the conditions under which potential competition will
                                                                          actually represent an effective competitive constraint depend on
20. Supply-side substitutability may also be taken into account           the analysis of specific factors and circumstances related to the
when defining markets in those situations in which its effects are
equivalent to those of demand substitution in terms of effective-         (1) That is, the period which does not imply a significant adjustment of
ness and immediacy. This means that suppliers are able to switch              existing tangible and intangible assets (see paragraph 23).
 ---pagebreak--- 16. 7. 98               EN                   Official Journal of the European Communities                                         L 200/51
conditions of entry. If required, this analysis is only carried out at  EEA levels. This initial view is used basically as a working
a subsequent stage, in general once the position of the companies       hypothesis to focus the Authority’s enquiries for the purposes of
involved in the relevant market has already been ascertained, and       arriving at a precise geographic market definition.
when such position is indicative of concerns from a competition
point of view.                                                          29. The reasons behind any particular configuration of prices
                                                                        and market shares need to be explored. Companies might enjoy
                                                                        high market shares in their domestic markets just because of the
                                                                        weight of the past, and conversely, a homogenous presence of
                                                                        companies throughout the EEA might be consistent with
                                                                        national or regional geographic markets. The initial working
                                                                        hypothesis will therefore be checked against an analysis of
III. EVIDENCE RELIED UPON TO DEFINE RELEVANT                            demand characteristics (importance of national or local prefer-
                               MARKETS                                  ences, current patterns of purchases of customers, product differ-
                                                                        entiation/brands, etc.) in order to establish whether companies in
                                                                        different areas do indeed constitute a real alternative source of
The process of defining the relevant market in practice                 supply for consumers. The theoretical experiment is again based
                                                                        on substitution arising from changes in relative prices, and the
                                                                        question to answer is again whether the customers of the parties
                                                                        would switch their orders to companies located elsewhere in the
Product dimension                                                       short 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 do
25. There is a range of evidence permitting an assessment of the        not face impediments in developing their sales on competitive
extent to which substitution would take place. In individual cases,     terms throuhgout the whole geographic market. This analysis will
certain types of evidence will be determined, depending very            include an examination of requirements for a local presence in
much on the characteristics and specificity of the industry and         order to sell in that area, the conditions of access to distribution
products or services that are being examined. The same type of          channels, costs associated with setting up a distribution network,
evidence may be of no importance in other cases. In most cases, a       and the presence or absence of regulatory barriers arising from
decision will have to be based on the consideration of a number         public procurement, price regulations, quotas and tariffs limiting
of criteria and different items of evidence. The EFTA Surveillance      trade or production, technical standards, monopolies, freedom of
Authority follows an open approach to empirical evidence, aimed         establishment, requirements for administrative authorisations,
at making an effective use of all available information which may       packaging regulations, etc. In short, the EFTA Surveillance
be relevant in individual cases. The Authority does not follow a        Authority will identify possible regulations, etc. In short, the
rigid hierarchy of different sources of information or types of         EFTA Surveillance Authority will identify possible obstacles and
evidence.                                                               barriers isolating companies, located in a given area from the
                                                                        competitive pressure of companies located outside that area, so as
                                                                        to determine the precise degree of market interpenetration at
                                                                        national, European or global level.
26. The process of defining relevant markets may be summar-
ised as follows: on the basis of the preliminary information avail-     31. The actual pattern and evolution of trade flow offers useful
able or information submitted by the undertakings involved, the         supplementary indications as to the economic importance of each
EFTA Surveillance Authority will usually be in a position to            demand or supply factor mentioned above, and the extent to
broadly establish the possible relevant markets within which, for       which they may or may not constitute actual barriers creating
instance, a concentration or a restriction of competition has to be     different geographic markets. The analysis of trade flow will
assessed. In general, and for all practical purposes when handling      generally address the question of transport costs and the extent to
individual cases, the question will usually be to decide on a few       which these may hinder trade between different areas, having
alternative possible relevant markets. For instance, with respect to    regard to plant location, costs of production and relative price
the product market, the issue will often be to establish whether        levels.
product A and product B belong or do not belong to the same
product market. It is often the case that the inclusion of product      Market integration in the European Economic Area
B would be enough to remove any competition concerns.
                                                                        32. Finally, the EFTA Surveillance Authority also takes into
                                                                        account the continuing process of market integration in the EEA
27. In such situations it is not necessary to consider whether the      when defining geographic markets. Within the scope of the EEA
market includes additional products, or to reach a definitive           Agreement (1), the measures adopted and implemented to remove
conclusion on the precise product market. If under the conceiv-         barriers to trade and further integrate the EEA markets cannot be
able alternative market definitions the operation in question does      ignored when assessing the effects on competition of, for example
not raise competition concerns, the question of market definition       a concentration or a structural joint venture. A situation where
will be left open, reducing thereby the burden on companies to          national markets have been artificially isolated from each other
supply information.                                                     because of the existence of legislative barriers that have now been
                                                                        removed, will generally lead to a cautious assessment of past
                                                                        evidence regarding prices, market shares or trade patterns. A
                                                                        process of market integration that would, in the short term, lead
Geographical dimension                                                  to wider geographic markets may therefore be taken into consid-
                                                                        eration when defining the geographic market for the purposes of
                                                                        assessing concentrations and joint ventures.
28. The EFTA Surveillance Authority’s approach to geographic
market definition might be summarised as follows: it will take a        (1) It should be noted that the EEA Agreement is limited in
                                                                            scope compared to the EC Treaty. For instance, the absence
preliminary view of the scope of the geographic market on the               of a customs union and limited application to certain
basis of broad indications regarding the distribution of market             products may affect the assessment of market integration
shares of the parties and their competitors, as well as a prelim-           between the EFTA States and between the EFTA States and
inary analysis of pricing and price differences at national and             the Community.
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The process of gathering evidence                                        37. The type of evidence the EFTA Surveillance Authority
                                                                         considers relevant to assess whether two products are demand
                                                                         substitutes can be categorised as follows:
33. When a precise market definition is deemed necessary, the            38. E v i d e n c e o f s u b s t i t u t i o n i n t h e r e c e n t p a s t
EFTA Surveillance Authority will often contact the main
customers and the main companies in the industry to enquire
into their views about the boundaries of product and geographic          In certain cases, it is possible to analyse evidence relating to
markets, and to obtain the necessary factual evidence to reach a         recent past events or shocks in the market that offer actual
conclusion. The Authority might also contact the relevant profes-        examples of substitution between two products. When available,
sional associations, and companies active in upstream markets, so        this sort of information will normally be fundamental for market
as to be able to define, insofar as necessary, separate product and      definition. If there have been changes in relative prices in the
geographic markets, for different levels of production or distribu-      past (all else being equal), the reactions in terms of quantities
tion of the products/services in question. It might also request         demanded will be determinant in establishing substitutability.
additional information from the undertakings involved.                   Launches of new products in the past can also offer useful in-
                                                                         formation, when it is possible to precisely analyse which products
                                                                         have lost sales to the new product.
34. Where appropriate, the EFTA Surveillance Authority will              39. There are a number of q u a n t i t a t i v e t e s t s that have
address written requests for information to the market players           specifically been designed for the purpose of delineating markets.
mentioned above. These requests will usually include questions           These tests consist of various econometric and statistical
relating to the perceptions of companies about reactions to hypo-        approaches: estimates of elasticities and cross-price elasticities (1)
thetical price increases and their views on the boundaries of the        for the demand of a product, tests based on similarity of price
relevant market. They will also include requests to provide the          movements over time, the analysis of causality between price
factual information the Authority deems necessary to reach a             series and similarity of price levels and/or their convergence. The
conclusion on the extent of the relevant market. The Authority           EFTA Surveillance Authority will take into account the available
might also discuss with marketing directors or other officers of         quantitative evidence capable of withstanding rigorous scrutiny
those companies to gain a better understanding on how nego-              for the purposes of establishing patterns of substitution in the
tiations between suppliers and customers take place and to under-        past.
stand better issues relating to the definiton of the relevant market.
Where appropriate, it might also carry out visits or inspections to
the premises of the parties, their customers and/or their competi-
tors, in order to undertand better how products are manufactured
                                                                         40. V i e w s o f c u s t o m e r s a n d c o m p e t i t o r s
and sold.
                                                                         The EFTA Surveillance Authority may contact the main
                                                                         customers and competitors of the companies involved in its
                                                                         enquiries, to gather their views on the boundaries of the product
                                                                         market as well as most of the factual information it requires to
35. The type of evidence relevant to reach a conclusion as to the        reach a conclusion on the scope of the market. Reasoned answers
product market can be categorised as follows:                            of customers and competitors as to what would happen if relative
                                                                         prices 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 by
                                                                         factual evidence.
Evidence to define markets  product dimension
                                                                         41. C o n s u m e r p r e f e r e n c e s
                                                                         In cases of consumer goods, it might be difficult for the EFTA
36. An analysis of the product characteristics and its intended          Surveillance Authority to gather the direct views of end
use allows the EFTA Surveillance Authority, as a first step, to          consumers about substitute products. Marketing studies that
limit the field of investigation of possible substitutes. However,       companies have commissioned in the past and that are used by
product characteristics and intended use are insufficient to             companies in their own decision making as to pricing of their
conclude whether two products are demand substitutes. Func-              products and/or marketing actions, may provide useful informa-
tional interchangeability or similarity in characteristics may not       tion for the Authority’s delineation of the relevant market.
provide in themselves sufficient criteria, because the responsive-       Consumer surveys on usage patterns and attitudes, data from
ness of customers to relative price changes may be determined by         consumer’s purchasing patterns, the views expressed by retailers
other considerations as well. For example, there may be different        and more generally, market research studies submitted by the
competitive constraints in the original equipment market for car
components and in spare parts, thereby leading to a separate
                                                                         (1) Own price elasticity of demand for product X is at measure of the
delineation of two relevant markets. Conversely, differences in              responsiveness of demand for X to a percentage change in its own
product characteristics are not in themselves sufficient to exclude          price. Cross-price elasticity between products X and Y is the re-
demand substitutatibility, since this will depend to a large extent          sponsiveness of demand for product X to a percentage change in the
on how customers value different characteristics.                            price of product Y.
 ---pagebreak--- 16. 7. 98                   EN                        Official Journal of the European Communities                                                         L 200/53
parties and their competitors will be taken into account to estab-               definition might be used in geographic market definition, bearing
lish whether an economically significant proportion of consumers                 in mind that international comparisons of prices might be more
consider two products as substitutable, also taking into account                 complex due to a number of factors such as exchange rate move-
the importance of brands for the products in question. The                       ments, taxation and product differentiation.
methodology followed in consumer surveys carried out ad hoc by
the undertakings involved or their competitors for the purposes
of a merger procedure or a procedure pursuant to Chapter II of
Protocol 4 to the Surveillance and Court Agreement (1) will                      46. B a s i c d e m a n d c h a r a c t e r i s t i c s
usually be scrutinised with utmost care. Unlike pre-existing
studies, they have not been prepared in the normal course of
business for the adoption of business decisions.
                                                                                 The nature of demand for the relevant product may in itself
                                                                                 determine the scope of the geographical market. Factors such as
                                                                                 national preferences or preferences for national brands, language,
                                                                                 culture and life style, and the need for a local presence have a
42. B a r r i e r s a n d c o s t s a s s o c i a t e d  with     switching      strong potential to limit the geographic scope of competition.
demand to potential substitutes
There are a number of barriers and costs that might prevent the                  47. V i e w s o f c u s t o m e r s a n d c o m p e t i t o r s
EFTA Surveillance Authority from considering two prima facie
demand substitutes as belonging to one single product market. It
is not possible to provide an exhaustive list of all the possible
barriers to substitution and of switching costs. These barriers or               Where appropriate, the EFTA Surveillance Authority will contact
obstacles might have a wide range of origins, and in its decisions,              the main customers and competitors of the parties in its en-
the authority may be confronted with regulatory barriers or other                quiries, to gather their views on the boundaries of the geographic
forms of State intervention, constraints arising in downstream                   market, as well as most of the factual information it requires to
markets, need to incur specific capital investment or loss in                    reach a conclusion on the scope of the market, when they are
current output in order to switch to alternative inputs, the loca-               sufficiently backed by factual evidence.
tion of customers, specific investment in production process,
learning and human capital investment, retooling costs or other
investments, uncertainty about quality and reputation of
unknown suppliers, and others.                                                   48. C u r r e n t g e o g r a p h i c p a t t e r n o f p u r c h a s e s
                                                                                 An examination of the customers’ current geographic pattern of
43. D i f f e r e n t c a t e g o r i e s of    customers        and   price     purchases provides useful evidence as to the possible scope of the
discrimination                                                                   geographic market. When customers purchase from companies
                                                                                 located anywhere in the EEA on similar terms, or they procure
                                                                                 their supplies through effective tendering procedures in which
The extent of the product market might be narrowed in the                        companies from anywhere in the EEA submit bids, the
presence of distinct groups of customers. A distinct group of                    geographic market will usually be considered to be EEA-wide.
customers for the relevant product may constitute a narrower,
distinct market when such a group could be subject to price
discrimination. This will usually be the case when two conditions
are met: (a) it is possible to identify clearly which group an                   49. Trade flows/pattern of shipments
individual customer belongs to at the moment of selling the
relevant products to him; and (b) trade among customers or
arbitrage by third parties should not be feasible.                               When the number of customers is so large that it is not possible
                                                                                 to obtain through them a clear picture of geographic purchasing
                                                                                 patterns, information on trade flows might be used alternatively,
                                                                                 provided that the trade statistics are available with a sufficient
Evidence to define markets  geographic dimension                                degree of detail for the relevant products. Trade flows, and above
                                                                                 all, the rationale behind trade flows provide useful insights and
                                                                                 information for the purpose of establishing the scope of the
                                                                                 geographic market but are not in themselves conclusive.
44. The type of evidence the EFTA Surveillance Authority
considers relevant to reach a conclusion as to the geographic
market can be categorised as follows:
                                                                                 50. B a r r i e r s a n d s w i t c h i n g c o s t s a s s o c i a t e d t o d i v e r t
                                                                                 orders to companies located in other areas
45. P a s t e v i d e n c e o f d i v e r s i o n o f o r d e r s t o o t h e r
areas                                                                            The absence of cross-border purchases or trade flows, for instance,
                                                                                 does not necessarily mean that the market is at most national in
                                                                                 scope. Still, barriers isolating the national market have to be
                                                                                 identified before it is concluded that the relevant geographic
In certain cases, evidence on changes in prices between different                market in such a case is national. Perhaps the clearest obstacle for
areas and consequent reactions by customers might be available.                  a customer to divert its orders to other areas is the impact of
Generally, the same quantitative tests used for product market                   transport costs and transport restrictions arising from legislation
                                                                                 or from the nature of the relevant products. The impact of trans-
(1) See footnote 2 of this Decision.                                             port costs will usually limit the scope of the geographical market
 ---pagebreak--- L 200/54                EN                    Official Journal of the European Communities                                          16. 7. 98
for bulky, low-value products, bearing in mind that a transport          considered to reflect better the relative position and strength of
disadvantage might also be compensated by a comparative advan-           each supplier.
tage in other costs (labour costs or raw materials). Access to
distribution in a given area, regulatory barriers still existing in                   V. ADDITIONAL CONSIDERATIONS
certain sectors, quotas and custom tariffs might also constitute
barriers isolating a geographic area from the competitive pressure       56. There are certain areas where the application of the princi-
of companies located outside that area. Significant switching costs      ples above has to be undertaken with care. This is the case when
in procuring supplies from companies located in other countries          considering primary and secondary markets, in particular, when
constitute additional sources of such barriers.                          the behaviour of undertakings at a point in time has to be
                                                                         analysed pursuant to Article 54 of the EEA Agreement. The
51. On the basis of the evidence gathered, the EFTA Surveil-             method of defining markets in these cases is the same, i.e.
lance Authority will then define a geographic market that could          assessing the responses of customers based on their purchasing
range from a local dimension to a global one.                            decisions to relative price changes, but taking into account
                                                                         constraints on substitution imposed by conditions in the
52. The paragraphs above describe the different factors which            connected markets. A narrow definition of market for secondary
might be relevant to define markets. This does not imply that in         products, for instance, spare parts, may result when compatibility
each individual case it will be necessary to obtain evidence on          with the primary product is important. Problems of finding
and assess each of these factors. Often in practice the evidence         compatible secondary products together with the existence of
provided by a subset of these factors will be sufficient to reach a      high prices and a long lifetime of the primary products may
conclusion.                                                              render relative price increases of secondary products profitable. A
                                                                         different market definition may result if significant substitution
                                                                         between secondary products is possible or if the characteristics of
          IV. CALCULATION OF MARKET SHARES                               the primary products make quick and direct consumer responses
                                                                         to relative price increases of the secondary products feasible.
53. The definition of the relevant market in both its product and        57. In certain cases, the existence of chains of substitution might
geographic dimensions allows the identification of the suppliers         lead to the definition of a relevant market where products or areas
and the customers/consumers active on that market. On that               at the extreme of the market are not directly substitutable. An
basis, a total market size and market shares for each supplier can       example might be provided by the geographic dimension of a
be calculated on the basis of their sales of the relevant products in    product with significant transport costs. In such cases, deliveries
the relevant area. In practice, the total market size and market         from a given plant are limited to a certain area around each plant
shares are often available from market sources, i. e. companies’         by the impact of transport costs. In principle, such area could
estimates, studies commissioned from industry consultants and/or         constitute the relevant geographic market. However, if the
trade associations. When this is not the case, or when available         distribution of plants is such that there are considerable overlaps
estimates are not reliable, the EFTA Surveillance Authority will         between the areas around different plants, it is possible that the
usually ask each supplier in the relevant market to provide its          pricing of those products will be constrained by a chain substitu-
own sales in order to calculate total market size and market             tion effect, and lead to the definition of a broader geographic
shares.                                                                  market. The same reasoning may apply if product B is a demand
                                                                         substitute for products A and C. Even if products A and C are not
54. If sales are usually the reference to calculate market shares,       direct demand substitutes, they might be found to be in the same
there are nevertheless other indications that, depending on the          relevant product market since their respective pricing might be
specific products or industry in question, can offer useful in-          constrained by substitution to B.
formation such as, in particular, capacity, the number of players
in bidding markets units of fleet as in aerospace, or the reserves       58. From a practical perspective, the concept of chains of substi-
held in the case of sectors such as mining.                              tution has to be corroborated by actual evidence, for instance
                                                                         related to price interdependence at the extremes of the chains of
55. As a rule of thumb, both volume sales and value sales                substitution, in order to lead to an extension of the relevant
provide useful information. In cases of differentiated products,         market in an individual case. Price levels on extreme ends of the
sales in value and their associated market share will usually be         chains would have to be of the same magnitude as well.
 ---pagebreak--- 16. 7. 98                 EN                  Official Journal of the European Communities                                              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 Authority
                     and 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 competition
                     rules throughout the European Economic Area, the EFTA Surveillance Authority adopts the present notice
                     exercising the power conferred to it in Article 5(2)(b) of the Surveillance and Court Agreement. It intends
                     to follow the principles and rules laid down in this notice when applying the relevant EEA competition
                     rules 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                                       Contracting 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 not
                                                                              caught by Article 53. They should therefore be examined on the
                                                                              basis, and within the framework, of national legislation alone.
                                                                              This is also the case for agreements whose actual or potential
1. The EFTA Surveillance Authority considers it important to                  effect remains limited to the territory of only one Contracting
facilitate cooperation between undertakings where such coopera-               Party or of one or more third countries. Likewise, agreements
tion is economically desirable without presenting difficulties from           which do not have as their object or their effect an appreciable
the point of view of competition policy. To this end, it published            restriction of competition are not caught by the prohibition
the “Notice concerning agreements, decisions and concerted                    contained in Article 53(1).
practices in the field of cooperation between enterprises” (3)
listing a number of agreements which by their nature cannot be
regarded as being in restraint of competition. Furthermore, in the
“Notice concerning its assessment of certain subcontracting
agreements” (4), the EFTA Surveillance Authority considered that
that type of contract, which offers all undertakings opportunities
for development, does not automatically fall within the scope of
Article 53(1) of the EEA Agreement. The “Notice concerning the                3. In this notice the EFTA Surveillance Authority, by setting
assessment of cooperative joint ventures pursuant to Article 53 of            quantitative criteria and by explaining their application, has given
the EEA Agreement” (5) describes in detail the conditions under               a sufficiently concrete meaning to the term “appreciable” for
which the agreements in question do not fall under the prohibi-               undertakings to be able to judge for themselves whether their
tion of restrictive agreements. By issuing this notice, the EFTA              agreements do not fall within the prohibition under Article 53(1)
Surveillance Authority is taking a further step towards defining              EEA by virtue of their minor importance. The quantitative defini-
the scope of Article 53(1) in order to facilitate cooperation                 tion of appreciability, however, serves only as a guideline: in
between undertakings.                                                         individual cases even agreements between undertakings which
                                                                              exceed the threshold set out below may still have only a negli-
                                                                              gible effect on trade between the Contracting Parties or on
                                                                              competition within the area covered by the EEA Agreement, and
                                                                              are therefore not caught by Article 53(1). This notice does not
                                                                              contain an exhaustive description of restrictions which fall
2. Article 53(1) EEA prohibits agreements which may affect                    outside Article 53(1). It is generally recognised that even agree-
trade between the Contracting Parties to the EEA Agreement and                ments which are not of minor importance can escape the pro-
which have as their object or effect the prevention, restriction or           hibition on agreements, on account of their exclusively favourable
distortion of competition within the territory covered by the EEA             impact on competition.
Agreement. The Court of Justice of the European Communities
has clarified that the corresponding Article 85(1) of the Treaty
establishing the European Community is not applicable where
the impact of the agreement on intra-Community trade or on
competition is not appreciable. This principle should also be
applied to the interpretation of Article 53(1) EEA, so that this
provision is not applicable where the impact on trade between
                                                                              4. The benchmarks provided by the EFTA Surveillance
                                                                              Authority in this notice should eliminate the need to have the
(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.         legal status of agreements covered by it established through indi-
(3) OJ  L  153, 18. 6. 1994, p. 25.                                           vidual EFTA Surveillance Authority decisions; notification for
(4) OJ  L  153, 18. 6. 1994, p. 30.                                           this purpose will no longer be necessary for such agreements.
(5) OJ  L  186, 21. 7. 1994, p. 58.                                           However, if it is doubtful whether, in an individual case, an
 ---pagebreak--- L 200/56                 EN                  Official Journal of the European Communities                                            16. 7. 98
agreement is likely to affect trade between the Contracting Parties             or
to the EEA Agreement or to restrict competition to any signif-
                                                                             to confer territorial protection on the participating under-
icant extent, undertakings are free to apply for negative clearance
                                                                                takings or third undertakings;
or 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.                                       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 9
5. In cases covered by this notice, and subject to points 11 and        and 10.
20, the EFTA Surveillance Authority will not institute any
proceedings either upon application or on its own initiative.
Where undertakings have failed to notify an agreement falling           The EFTA Surveillance Authority considers, however, that in the
within the scope of Article 53(1) because they assumed in good          first instance it is for the authorities and courts of the Contracting
faith that the agreement was covered by this notice, the EFTA           Parties to take action on any agreements envisaged above in (a)
Surveillance Authority will not consider imposing fines.                and (b). Accordingly, it will only intervene in such cases when it
                                                                        considers that the interests protected by the EEA Agreement so
                                                                        demand, and in particular if the agreements impair the proper
6. This notice is likewise applicable to decisions by associations      functioning of the internal market as extended to the EFTA
of undertakings and to concerted practices.                             States by the Agreement.
7. This notice is without prejudice to any interpretation that
may be given by other competent authorities and in particular by        12. For the purposes of this notice, “participating undertakings”
the national courts, the EFTA Court, the Court of Justice or the        are:
Court of First Instance of the European Communities.
                                                                        (a) undertakings being parties to the agreement;
8. This notice is without prejudice to the application of               (b) undertakings in which a party to the agreement, directly or
national competition laws.                                                  indirectly,
                                                                             owns more than half of the capital or business assets, or
                                   II                                        has the power to exercise more than half of the voting
                                                                                rights, or
9. The EFTA Surveillance Authority holds the view that agree-                has the power to appoint more than half of the members
ments between undertakings engaged in the production or                         of the supervisory board, board of management or bodies
distribution of goods or in the provision of services do not fall               legally representing the undertakings, or
under the prohibition in Article 53(1) if the aggregate market
shares held by all of the participating undertakings do not exceed,          has the right to manage the undertaking’s business;
on any of the relevant markets:
                                                                        (c) undertakings which directly or indirectly have over a party to
(a) the 5 % threshold, where the agreement is made between                  the agreement the rights or powers listed in (b);
    undertakings operating at the same level of production or of
    marketing (“horizontal” agreement);                                 (d) undertakings over which an undertaking referred to in (c) has,
                                                                            directly or indirectly, the rights or powers listed in (b).
(b) the 10 % threshold, where the agreement is made between
    undertakings operating at different economic levels (“vertical”
    agreement).                                                         Undertakings over which several undertakings as referred to in (a)
                                                                        to (d) jointly have, directly or indirectly, the rights or powers set
In the case of a mixed horizontal/vertical agreement or where it is     out in (b) shall also be considered to be participating undertak-
difficult to classify the agreement as either horizontal or vertical,   ings.
the 5 % threshold is applicable.
                                                                        13. In order to calculate the market share, it is necessary to
10. The EFTA Surveillance Authority also holds the view that            determine the relevant market; for this, the relevant product
the said agreements do not fall under the prohibition of Article        market and the relevant geographic market must be defined.
53(1) if the market shares given at paragraph 9 are exceeded by no
more than one tenth during two successive financial years.
                                                                        14. The relevant product market comprises any products or
                                                                        services which are regarded as interchangeable or substitutable by
11. With regard to:                                                     the consumer, by reason of their characteristics, prices and
                                                                        intended use.
(a) horizontal agreements which have as their object:
     to fix prices or to limit production or sales,                    15. The relevant geographic market comprises the area in which
                                                                        the participating undertakings are involved in the supply of rele-
        or                                                              vant products or services, in which the conditions of competition
     to share markets or sources of supply;                            are sufficiently homogeneous, and which can be distinguished
                                                                        from neighbouring geographic areas because, in particular, condi-
(b) vertical agreements which have as their object:                     tions of competition are appreciably different in those areas.
     to fix resale prices,
                                                                        16. When applying paragraphs 14 and 15, reference should be
                                                                        had to the notice on the definition of the relevant market under
(1) Corresponds  to Council Regulation (EEC) No 17/62.                  EEA competition law (5).
(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.
 ---pagebreak--- 16. 7. 98              EN                 Official Journal of the European Communities                                        L 200/57
17. In case of doubt as to the delimitation of the relevant          the EEA Agreement and competition within the EEA. Conse-
geographic market, undertakings may take the view that the           quently, as a general rule, they are not caught by the prohibition
agreement has no appreciable effect on trade between the             in Article 53(1). In cases where such agreements exceptionally
Contracting Parties to the EEA Agreement or on competition           meet the conditions for the application of that provision, they
when the market share thresholds indicated in paragraphs 9 and       will not be of sufficient EEA interest to justify any intervention.
10 are not exceeded in any State within the territory covered by     This is why the EFTA Surveillance Authority will not institute
the EEA Agreement. This view, however, does not preclude the         any proceedings, either upon request or on its own initiative, to
application of national competition law to the agreements in         apply the provisions of Article 53(1) to such agreements, even if
question.                                                            the thresholds set out in paragraphs 9 and 10 above are exceeded.
18. Chapter II of this notice shall not apply where in a relevant
market competition is restricted by the cumulative effects of        20. The EFTA Surveillance Authority nevertheless reserves the
parallel networks of similar agreements established by several       right to intervene in such agreements:
manufacturers or dealers.
                                                                     (a) where they significantly impede competition in a substantial
                                 III                                     part of the relevant market;
19. Agreements between small and medium-sized undertakings,
as defined in the EFTA Surveillance Authority Decision No            (b) where, in the relevant market, competition is restricted by the
112/96/COL of 11 September 1996 (1) are rarely capable of signif-        cumulative effect of parallel networks of similar agreements
icantly affecting trade between the Contracting Parties to               made between several producers or dealers.'
(1) OJ L 42, 13. 2. 1997, p. 33.