E-COMMUNICATIONS LAW COURSE
FALL 2012
PART 2 SIGNIFICANT MARKET POWER
JENS CHRISTIAN GJESTI
1.
OVERVIEW SESSION 2: SIGNIFICANT MARKET POWER

What is Significant Market Power (SMP)

SMP as regulatory tool

Definition of relevant markets

Framework Directive art. 14, 15 and 16

Commission recommendation on relevant product and service markets (2007) (OJ L344/65
28.12.07)

Market analysis and designation of SMP

Guidelines on market analysis and designation of SMP (2002) (OJ C165 11.07.2002 p 6)

Consequences of SMP - remedies

Recital 5 (Better Regulation Directive) states that the overall aim of the EU regulation in
electronic communications is to “progressively reduce ex-ante sector specific rules as
competition in the markets develops and, ultimately, for electronic communications to be
governed by competition law only".

“It is essential that ex-ante regulatory obligations only be imposed where there is no
effective and sustainable competition.” Recital 27 Consolidated Framework Directive.

Since 2003 the number of relevant markets where the Commission considers regulation to
be necessary has been reduced from 18 to 7 (although some states still regulate more than
7 markets).

Lectures focus on certain markets such as access to fixed networks and termination.
2.
WHAT IS SIGNIFICANT MARKET POWER – SMP?

Concept of SMP is redefined and is based on the concept of dominant position developed in
general competition law. See Framework Directive Recital 25.

A dominant position indicates that an undertaking "enjoys a position of economic strength
affording it the power to behave to an appreciable extent independently of its competitors,
customers and ultimately consumers" (article 14 (2) of the FD, Hoffman La Roche)

A dominant undertaking has market power – the ability to profitably raise prises over a
period of time without being restrained

The concept of SMP is based on competition law methodology. “In determining whether an
undertaking has significant market power in a specific market, national regulatory authorities
should act in accordance with Community law and take into the utmost account the
Commission guidelines.” (Framework Directive Recital 28)

In practical terms: Ex ante regulation will be applied to former monopolists and/or those
operators who control essential facilities (Guidelines recital 20).

SMP is equal to dominance but dominance is not equal to SMP. This means that the
competition authorities (EU and national) are not bound by NRAs decisions.
3.
SMP AS A REGULATORY TOOL

SMP is a criteria that must be fulfilled in order for National Regulatory Authorities (NRA) to
apply regulatory remedies. SMP therefore represents the threshold for sector specific market
regulation.

See Framework Directive recital 27.

Ex-ante regulation shall only be applied in certain circumstances: i.e. on operators with SMP
(see art. 16 of Framework Directive and art. 8 of Access Directive)
JUR 5640 E-communications Law Course – Part 2

NRA cannot impose obligations on undertakings without SMP, but there are certain
exceptions. Certain obligations (lighter) may be imposed on all undertakings (se Access
Directive art. 4 and 5 and USO chapter IV.) This includes the obligation to interconnect
networks owned by smaller operators that do not have SMP.

SMP must be defined ex ante(Framework Directive art 16 (4))
o thresholds for definitions of SMP
o NRA also indicates elements that may be used for assessing appropriate obligations
Important terminology:

o “ex ante” means imposing regulation to prevent anti-competitive behaviour before it takes
place. The regulator takes a forward looking approach and defines regulatory obligations in
order to prevent future distortion of competition.
o “ex post” means the traditional regulation of historical events. i.e. when the question of
whether an undertaking has a dominant position and if this dominant position has been
abused. (Dominance itself is not prohibited under general competition rule).
4.
VERTICAL INTEGRATION MODEL IN
Operations
Network
operator
Infrastructure
Wholesale/access
markets
Billing
Access to network
Telephone service
Retail markets
End-users
4.1
Internal and external relations
Figur 1 Traditional vertical discrimination
In the traditional vertical situation there are no links between the dominant firm and competitor 1
and competitor 2. Normally, the dominant firm have fewer incentives to discriminate between
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JUR 5640 E-communications Law Course – Part 2
competitor 1 and 2 (except if it could raise profits i.e. by separating geographical markets between
competitor 1 and 2)
Figur 2 Vertically integrated operators - vertical discrimination
In the situation depicted in figure 2 the dominant firm is a supplier in the upstream market to
competitor 1, competitor 2 and competitor 3, but competitor 3 is an integrated part of the
dominant firm (either integrated or a wholly owned subsidiary). The dominant firm therefore has
incentives to treat its own subsidiary more favourably since this would give it preferential
conditions compared to competitor 1 and 2. If prices are 10% lower to the subsidiary, this would
raise profits in subsidiary and/or make it possible to reduce retail prices. This also creates
possibilities to cross-subsidise between upstream- and downstream operations in the dominant
firm. If wholesale prices are kept high, profits are reduced in the downstream operations and in
competitor 1 and 2, while they remain high in the upstream operations of the dominant firm.
5.
THREE STEP PROCEDURE FOR DEFINING SMP
1. Defining the relevant markets
2. Market analysis and Designation of Significant market power
2 A: Analyse the markets
2 B: Determining operators with SMP
3. Determining effective, but proportionate obligations for the SMP operator;
NRAs shall ensure that undertakings are not in a position to abuse their market power to
restrict, to distort competition, or to leverage such market power to adjacent markets (see
Guidelines recital 16)
6.
6.1
STEP 1: DEFINING THE RELEVANT MARKETS
Market definition procedure

Framework Directive Art 15 describes the methodology for defining SMP

Principles for market definition.
o Framework Directive Art 15 and Recommendation of Relevant markets identifies the
markets that the Commission has identified as relevant for regulatory intervention (i.e. that
competition problems are excepted to occur)
o Commission recommendation on relevant product and service markets OJ 2007L344/65
1
28.12.07 (hereinafter "the Recommendation")

EU Commission has determined the product and service markets (see below).
o 2007 Recommendation defines 7 markets (2003 Recommendation described 18 markets)

NRAs will determine the geographical markets (See Framework Directive Art 15)
o Market definition shall be done in accordance with the principles of competition law
1
http://eur-lex.europa.eu/LexUriServ/site/en/oj/2007/l_344/l_34420071228en00650069.pdf. Replacing the former Commission Recommendation
OJ 2003L114/44 08.05.03
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6.2
Article 15 of the Framework Directive:
“1.
After public consultation and consultation with national regulatory authorities [and taking the
utmost account of the opinion of BEREC] the Commission shall [in accordance with the
advisory procedure referred to in Article 22(2)] adopt a recommendation on relevant Product
and Service markets (“the Recommendation”). The Recommendation shall identify […] those
product and service markets within the electronic communications sector, the characteristics
of which may be such as to justify the imposition of regulatory obligations set out in the
Specific Directives, without prejudice to markets that may be defined in specific cases under
competition law. The Commission shall define markets in accordance with the principles of
competition law. The Commission shall regularly review the recommendation.
2.
The Commission shall publish, at the latest on the date of entry into force of this Directive,
guidelines for market analysis and the assessment of significant market power (hereinafter
“the guidelines”) which shall be in accordance with the principles of competition law.
3.
National regulatory authorities shall, taking the utmost account of the recommendation and
the guidelines, define relevant markets appropriate to national circumstances, in particular
relevant geographic markets within their territory, in accordance with the principles of
competition law. National regulatory authorities shall follow the procedures referred to in
Articles 6 and 7 before defining the markets that differ from those defined in the
recommendation.
4.
After consultation with national regulatory authorities the Commission may,[taking the
utmost account of the opinion of BEREC], adopt a Decision identifying transnational markets,
acting in accordance with the regulatory procedure with scrutiny referred to in Article 22(3)”
[Our underlining]
6.3

6.4
6.4.1
Prospective (ex-ante) assessment
Market definition procedure is prospective rather than behavioural and is based on
assessment of barriers to entry that are expected to last.
Product (Service) markets and Geographical markets
Product markets

The main criteria for defining the relevant product/service markets are linked to
substitutability tests:

Demand side substitution (i.e. Ramsey pricing): Will consumers substitute other services for
the relevant service given a significant non-transitory increase in price (SSNIP)? A price
increase of 5 – 10 % is considered significant. The key question is if there will be a shift in
demand that will render a significant price increase unprofitable.

Supply side substitution (quick responses from competitors): Are supplier of other services in
a position to switch their production in order to “compete” immediately or in the short term
without incurring significant additional costs?

Assessment of potential competition (more time for competitors to respond)
6.4.2

6.5
Geographical markets
Geographical markets are determined based on (i) Areas covered by a network and (ii)
Existence of legal/regulatory instruments. In addition the actual offerings of a particular
service will be considered.
Key principles from the Recommendation

Purpose: identify markets in which ex ante regulations may be warranted (Recommendation
recital 2) in accordance with competition law (Recommendation recital 3).

The markets identified in the Recommendation have been selected based on forward looking
assessment of retail and wholesale markets (Recommendation recital 4) and by applying the
so-called three criteria test. NRAs must make an independent assessment of their national
markets.
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JUR 5640 E-communications Law Course – Part 2
6.5.1
Three criteria test – cumulative (Recommendation recital 5)
1. The identified markets have high and non-transitory entry barriers
o Structural barriers (cost, demand conditions, economies of scale/scope, network
components that cannot be duplicated or duplication is uneconomic) (Recommendation
recital 9)
o legal/regulatory barriers (Recommendation recital 10)
o expected to persist over a foreseeable period (Recommendation recital 11)
2. The market does not tend towards effective competition
3. Competition law is sufficient to address market failures (Recommendation recital 13)
6.5.2
Effective competition? = no operator has significant market power (Recommendation
recital 18)
“The fact that this Recommendation identifies those product and service markets in which ex
ante regulation may be warranted does not mean that regulation is always warranted or that
these markets will be subject to the imposition of regulatory obligations set out in the
specific Directives. In particular, regulation cannot be imposed or must be withdrawn if there
is effective competition on these markets in the absence of regulation, that is to say, if no
operator has significant market power within the meaning of Article 14 of Directive
2002/21/EC. Regulatory obligations must be appropriate and be based on the nature of the
problem identified, proportionate and justified in the light of the objectives laid down in
Directive 2002/21/EC, in particular maximising benefits for users, ensuring no distortion or
restriction of competition, encouraging efficient investment in infrastructure and promoting
innovation, and encouraging efficient use and management of radio frequencies and
numbering resources.”
6.5.3
NRA may vary from Recommendation

No regulation of markets listed in this Recommendation is possible if NRA determines that
the three criteria are not satisfied for the particular market.

Regulation of markets not on the list is possible: NRA must apply the three-criteria test to
the market concerned.

For the previous 18 markets (2003 Recommendation) NRA have the power to apply the
three-criteria test in order to assess whether, on the basis of national circumstances, a
market is still susceptible to ex ante regulation.

NRA may identify other markets, provided that:

the markets analysis is notified to EU-Commission (Art 7 of Framework Directive)

markets are defined on the basis of competition principles laid down in the Commission
Notice on the definition of relevant market for the purposes of Community competition law

market definition is consistent with the Commission Guidelines on market analysis and the
assessment of significant market power

the three criteria test is met
6.6
The relevant markets identified for ex-ante regulation
Retail level
1. Access to the public telephone network at a fixed location for residential and nonresidential customers.
Wholesale level
2. Call origination on the public telephone network provided at a fixed location.
For the purposes of this Recommendation, call origination is taken to include call
conveyance, delineated in such a way as to be consistent, in a national context,
with the delineated boundaries for the market for call transit and for call
termination on the public telephone network provided at a fixed location.
3. Call termination on individual public telephone networks provided at a fixed location.
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JUR 5640 E-communications Law Course – Part 2
For the purposes of this Recommendation, call termination is taken to include call
conveyance, delineated in such a way as to be consistent, in a national context,
with the delineated boundaries for the market for call origination and the market for
call transit on the public telephone network provided at a fixed location.
4. Wholesale (physical) network infrastructure access (including shared or fully unbundled
access) at a fixed location.
5. Wholesale broadband access.
This market comprises non-physical or virtual network access including ‘bit-stream’
access at a fixed location. This market is situated downstream from the physical
access covered by market 4 listed above, in that wholesale broadband access can
be constructed using this input combined with other elements.
6. Wholesale terminating segments of leased lines, irrespective of the technology used to
provide leased or dedicated capacity.
7. Voice call termination on individual mobile networks.
Call origination on the
public telephone network
provided at fixed
locations
Call termination on
individual public telephone
networks provided at fixed
locations
Wholesale broadband
access
Wholesale (physical) network
infrastructure access (including
shared or fully unbundled access) at
a fixed location
Voice call
termination on
individual mobile
networks
Wholesale terminating segments of
leased lines (irrespective of technology)
wholesale level
Access to the public telephone network at fixed locations
for residential and non-residential customers (Art 17 USO)
Retail level
7.
STEP 2 A: MARKET ANALYSIS

The legal instruments are the Framework Directive Art. 16 and the Guidelines

NRA shall determine whether a relevant market is effectively competitive (art 16 (2))

Step 2 B and 3 depends on the state of the market

The main question: Is the relevant market effectively competitive?
7.1

STEP 2 A: Outcome depends on competition
If the market IS effectively competitive:
o NRA shall not impose or maintain
obligations (Framework Directive art. 16
(3))
o NRA shall withdraw existing obligations
after an appropriate period

If a market is NOT effectively competitive
o NRA’s shall identify undertakings with SMP
o Art. 14 applies + Guidelines
o Impose obligations
Notes from Lecture. © Per-Kaare Svendsen, 2012
“Where a national regulatory authority concludes that
the market is effectively competitive, it shall not
impose or maintain any of the specific regulatory
obligations referred to in paragraph 2 of this Article. In
cases where sector specific regulatory obligations
already exist, it shall withdraw such obligations placed
on undertakings in that relevant market. An
appropriate period of notice shall be given to parties
affected by such a withdrawal of obligations.”
(Framework Directive Art 16 (3))
“Where a national regulatory authority determines that
a relevant market is not effectively competitive, it shall
identify undertakings which individually or jointly have
a significant market power on that market in
accordance with Article 14 and the national regulatory
authority shall on
such
undertakings
impose
appropriate specific regulatory obligations referred to
in paragraph 2 of this Article or maintain or amend
such
obligations
where
they
already
exist.”
(Framework Directive Art 16 (4)(
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7.2

NRA shall at least impose one obligation

May impose several obligations

Maintain or amend existing obligations
When is the market competitive?

When no operator enjoys a
(Recommendation recital 18).

i.e. when no operator has significant market power.
7.3
single
or
joint
dominance
Forward looking

Structural evaluation

Based on the existing market conditions

Is the market prospectively competitive?

Is any lack of competition durable?

Expected market developments over a reasonable period

Specific characteristics (new licenses, new entrants etc.)

Expected timing for the next review (2 - 3 years)

Take past data into account

the
relevant
market
Principles for assessing a relevant market

7.4
on
STEP 2 B: Defining SMP (dominance)
Definition of SMP in Framework Directive art. 14
o the same as definition of “Dominant Position”
o Dominant Position developed in case law
o Case law: European Court of Justice (ECJ) and Court of First Instance (CFI) cases
concerning art. 101 (formerly 81) and 102 (formerly 82) of the Treaty (Framework
Directive preamble recital 20 and Guidelines recital 62)

NRA must ensure that they apply the definition consistently with ECJ and CFI case law but
use different methodology:
o Different sets of assumptions and expectations
o Lack of evidence of past behaviour
o Prospective instead of retrospective approach

Existence of SMP does not mean that there is no competition (Guidelines recital 72), but may
indicate that competition may not be effective.
o Main test:

Does an undertaking have the power to raise prices by restricting output without
incurring significant loss of sales or revenues (Guidelines recital 73)

Does such behaviour have an “appreciable effect on competition“.

What is the likelihood of potential competition (Guidelines recital 74)

There are several alternative findings that a regulator may reach:

One undertaking has SMP in one market

Several undertakings have SMP in one market (single or joint dominance)

One undertaking has SMP in several markets (leveraging)
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7.5
Framework Directive Art. 14 Undertakings with SMP
1.
Where the Specific Directives require national regulatory authorities to determine whether
operators have significant market power in accordance with the procedure referred to in
Article 16, paragraphs 2 and 3 of this Article shall apply.
2.
An undertaking shall be deemed to have significant market power if, either individually or
jointly with others, it enjoys a position equivalent to dominance, that is to say a position
of economic strength affording it the power to behave to an appreciable extent
independently of competitors, customers and ultimately consumers.
In particular, national regulatory authorities shall, when assessing whether two or more
undertakings are in a joint dominant position in a market, act in accordance with
Community law and take into the utmost account the Guidelines on market analysis and
the assessment of significant market power published by the Commission pursuant to
Article 15. Criteria to be used in making such an assessment are set out in Annex II.
3.
7.6

Where an undertaking has significant market power on a specific market, it may also be
deemed to have significant market power on a closely related market, where the links
between the two markets are such as to allow the market power held in one market to be
leveraged into the other market, thereby strengthening the market power of the
undertaking.
Step 2B: Criterias for SMP
(Guidelines recital 75-82)
If market shares remain stable over time, the rule of thumb is that
o Under 25% - no dominance
o Between 25 and 40 – dominance in exceptional cases
o Between 40 and 50% - dominance in rare cases
o Over 50% - presumption for dominance (that may be rebuked by other factors)

How is market share measured? The normal way of measuring market share is to look at the
o Revenue (e.g. aggregate revenues from termination of calls in a network and each
operators share of these revenues)
o Volume (e.g. aggregate number of call minutes in a network and each operators share of
minutes)
o Confer Guidelines recital 75-77

7.7
High market shares do not in themselves indicate SMP. NRA must therefore analyse the
economic characteristics of the markets. Several criteria must be assessed (See Guidelines
recital 78)
Step 2B Criteria to be assessed (Guidelines recital 78)

What is the overall size of the undertaking?

How concentrated is the market? (number of players, Herfindahl-Hirschman index )

How high are the barriers to entry?

Does the undertaking have control of infrastructure not easily duplicated? Example: If an
operator owns the local loop (i.e. copper cables to every household) or own a nationwide
mobile network.

Does the undertaking have technological advantages or superiority, compared to other
competitors? Example: If an operator has a large research and development department
and owns intellectual property rights in or to the services, if an operator has a superior
human capital (i.e. skilled workforce)
2
2
The HHI is calculated by summing the squares of the individual market shares of all the firms in the market. The HHI ranges from close to zero (in
an atomistic market) to 10 000 (in the case of a pure monopoly).
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
Does the market show that there is absence of or low countervailing buying power from
buyers of the relevant products/services? Example: If relatively large customers exist and
these customers are able to demand lower prices by threatening to move to a competitor.

Does the undertaking have easy or privileged access to capital markets/financial resources?
Example: If a company has excellent credit rating and therefore the ability to borrow
money, if the owners have vast financial ability, if the company has large reserve funds, or
high cash flow

Does the undertaking have several product/services (i.e. that several diverse products and
services are offered) that enable the undertaking to bundle products or services together in a
manner that competitors cannot? Example: Ownership of access lines and provision of fixed
voice telephony service and mobile telephony service which enables offering both access and
telephony in a bundled offer.

Economies of scale (i.e. large enough business to reduce marginal costs and obtain cost
synergies). Example: If the operator has an existing large customer base and is able to
produce services with a lower marginal cost.

Economies of scope (i.e. diversity of services or products). Example: If the operator has
several different products or services that can utilise the same underlying technology or
infrastructure this could result in lower marginal cost for the relevant service.

Vertical integration. Example: If the operator is owning the infrastructure that the service is
depending on. (as compared to a service provider that do not have a large network, but only
provide services on the other operators network.

A highly developed distribution and sales network. Example: If the undertaking has a well
established organisation or agents that distribute the services (i.e. sales outlets). Many
operators seek exclusive distribution agreements so that agents can only sell one service.

Absence of potential competition. Example: If it is not likely that new entrants will come
into the market and offer services in the event prices remain high.
7.8
2B: Findings and evaluation

Ease of market entry

Absence of barriers to entry may mean potential competition

Barriers are often high (due to large investments required, i.e. to build a mobile network).

Legal barriers (i.e. that an operator needs to obtain a license before offering services)

large investments and capacity (man power) required in order to provide services.

Essential facilities. Essential facilities are infrastructure that cannot easily be duplicated (i.e.
the costs are too high). Reflected in SMP-decisions in certain markets in the E-Com sector
and the Regulation on Local Loop shows that this is a relevant issue. Does the control of a
facility mean that the operator has significant market power. It is not necessary to establish
that the facility can be considered ”essential” or ”indispensable” under existing Competition
Rules case-law (Bronner, Night Services, etc).
7.9
Step 2B: Leveraging (Guidelines 3.1.1)

SMP in one market may be used to leverage market power into another closely related
market (adjacent market) where the operator does not have SMP (FD art. 14.)

Criteria used in the assessment:
o Horizontal links
o Close and associative links

Often found in vertically integrated markets (the case in the telecom sector)

If an operator has SMP on the upstream (wholesale or access) market the NRAs will normally
prevent a spill over to downstream markets (retail).

It is only when ex ante obligations on the SMP operator in the upstream market does not
result in effective competition in the retail markets (downstream) that art. 14 (3) may apply
(Guidelines recital 84)
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7.10

8.
Step 2B: Collective dominance
There are several indications that collective dominance exist. The regulator has to assess if
the market is characterised by :

mature market

high barriers to entry

stagnant or moderate growth on the
demand side

absence of excess capacity

low elasticity of demand

lack of countervailing buying power

homogeneous product

lack of potential competition

similar cost structures

various kind of informal or other links
between the undertakings concerned

similar market shares

retaliatory mechanisms

lack of technical innovation, mature
technology

lack
or
reduced
competition
scope
for
SUMMARY

NRAs must adhere to competition law principles

Relevant Product and Service markets have been revised – from 18 to 7 markets

Basic: Geographical markets

More flexible (dynamic instead of static)

Annual assessment necessary – focus on lifting regulation when competition is sufficient
8.1
Step 3: Consequences of SMP - Remedies

FD art. 16 (4): NRAs ”shall on such undertakings with SMP impose appropriate specific
regulatory obligations”

FD art 16 (2): Refers to USO D art. 16, 17, 18 or 19. Refers to Access Directive art 7 and 8

price
”impose, maintain, amend or withdraw obligations on undertakings”
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SMP
Retail markets
Access/
wholesale markets
USO D
Access and IC D
Art 16: maintain obligations on
retail tariffs, carrier selection,
leased lines
Art 7: maintain existing
obligations
Art 9: Obligation of transparency
Art 17: Regulatory control on
retail services
Art 10: Obligation of nondiscrimination
Art 18: Regulatory control on
the minimum set of leased lines
Art 11: Obligation of accounting
separation
Art 18: Carrier selection and
carrier pre-selection
Art 12: Obligation of access to
and use of specific network
facilities
Art 13: Price control and cost
accouting obligations

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