ICT Market analysis and determination of dominance guidelines

1 Market analysis process

“Market analysis” means a review of the various existing markets for electronic communications services in a specific country, defined for the purposes of regulation.

In an effectively competitive market, it is the dynamic interplay of several service providers that determines market outcomes, not individual competitors. In a market characterized by dominance^[1], however, the dominant ICT operator or service provider will invariably make decisions that are to its commercial benefit, and which do not advance the economic welfare of customers.

Dominance describes the power that enables one or more operator or service provider to make decisions and to act independently of its competitors and customers in one specific market. Typically, this means the ability to raise prices or to reduce output without being concerned that competitors will gain material advantage through taking revenue and share, or that customers will exercise the choice in material numbers to go elsewhere.

In markets where one or more dominant suppliers have been identified, there is a justification for National Regulatory Authorities (NRAs) to act in advance of anti-competitive behaviour and to take ex-ante action to address or limit the potentially harmful effects on customers of the exercise of dominance. Sometimes the ex-ante intervention may be justified on the basis that waiting until after anti-competitive behaviour has become apparent may be too late, and there may be lasting damage to competition. This could occur if competitors are commercially destroyed and cannot continue in the market as a result of the exercise of dominance. On the other hand, NRAs need to recognize that their ex-ante intervention will distort and may affect adversely the development of the market. This may be particularly the case where markets are embryonic, and the patterns of demand have yet to be established.

Generally, the market analysis process involves the following tasks:

• Define the markets for electronic communications services, to be considered in the analysis;
• Once the markets are defined, decide which of these markets are appropriate for the exercise of ex-ante regulation, the so-called “relevant markets”;
• In each relevant market, identify whether there are any players that have significant market power (SMP);
• Finally, determine what are the obligations to be imposed on operators with a dominant position that are most appropriate to prevent them from engaging in anti-competitive behaviour.

2 Market definition

If the legislation in force does not specify how the scope of each market should be defined, the market analysis follows what are considered the best international practices in the process of defining and identifying which markets are relevant for ex-ante regulation.

One of the best practices for regulatory market analysis was established by the European Union (EU) as part of its package of regulatory reforms introduced in 2002. The European Union’s approach to regulatory market analysis has been implemented in many parts of the world and is widely accepted as an international best practice^[2].

The EU approach describes an initial two-step process: first, the scope of the market is established, then for each market an analysis of their relevance for ex-ante regulation needs to be ascertained.

2.1 The scope of the market

The scope of the market addresses two main dimensions^[3]: the relevant product dimension (which is normally a service in the context of electronic communications) and the relevant geographic dimension of each product market. The aim of this two-dimensional approach is to be able to identify economic markets in which conditions are homogeneous. In other words, the products on the market and the geography on which the market is defined have similar competitive restrictions in terms of demand and supply.

2.2 Product markets

The scope of the market is established based on an analysis of the substitutability of a wide range of products or services, both in terms of demand and supply.

The definition of product markets^[4] starts with the identification of a narrowly defined focal product or service, for example voice calls on national mobile networks (the most narrowly defined product that exists on the market under analysis). The market for the provision of this service is then expanded to all demand and supply side substitutes that a hypothetical monopolist would need to control before he could profitably raise prices by a small, but significant, and non-transitory amount. This is the so-called hypothetical monopolist test (HMT)^[5].

Other candidate products will be included in the same market depending on the extent to which they can effectively substitute for the focal product, either in terms of supply or demand.

The HMT test considers a hypothetical monopolist and asks whether a small but significant (understood as a 5 to 10% increase) non-transitory (at least 1 year in duration) increase in the price of the focal product is profitable. This will depend on the number of customers who shift their demand to a substitute service and/or the extent to which alternative suppliers are attracted to this market. If the small, non-transitory but significant increase in price (SSNIP) is profitable, then we are seeing evidence of the absence of suitable substitutes, and therefore of the limits of an individualized market. If the increase is not profitable, the definition of the service needs to be expanded to include the replacement service or services. The analysis continues until no more substitutes are identified, a moment from which it is possible to define the scope of the market.

A market, as defined for the purposes of market regulation, includes all products or services that are sufficiently substitutable, not only in terms of the intrinsic characteristics of those products, their prices or their intended use, but also in terms of the conditions of competition and/or the structure of supply and demand for the product in question. This process leads to a definition of the market’s boundaries.

The methodological approach followed in defining the market’s scope also considers a prospective view of the markets, that is, their potential evolution over a reasonable period of time (2 to 3 years). Demand-side substitution must meet the competitive constraints imposed by emerging services, and when assessing supply substitution, the likelihood of potential competitors entering the market within a reasonable time must be taken into account. Consequently, potential competition must be addressed in the definition of the market (and not later in the assessment of market power^[6]) whenever financial capacity and profitability motivate potential competitors to enter a given market. The assessment of restrictions imposed by emerging services such as voice over internet that are substitutes for traditional telephony should also be considered in order to carry out a consistent analysis of the market and to apply ex-ante regulation with precision.

2.3 Geographical markets

The geographical dimension defines a market in terms of the common location where the needs of consumers co-exist with the products/services designed to meet those needs. Geographical considerations are important to determine the limits of substitutability of supply and demand. Traditionally, the value and nature of goods and services would significantly determine how far customers could go to purchase goods and services and how far companies could go to supply or deliver them. The geographic dimension of markets is undergoing a profound change with the development of electronic commerce and payment systems, particularly those accessed via the public Internet. However, within the scope of telecommunications regulation, there is still a general propensity to define markets as national, unless there are demonstrable regional variations in supply or demand.

In accordance with best practices, in the electronic communications sector, the definition of the geographic scope of the market is generally determined with reference to the area covered by a network and the existence of legal and other regulatory instruments such as the licence terms. Based on these definitions, as previously mentioned, unless there are factors that demonstrate the opposite, each identified market is considered to be national. This perspective is probably also supported by the fact that existing operators and service providers operate at a national level and do not differentiate their services in terms of price and availability between different geographical regions.

2.4 Customer markets

The proposed approach is also aiming to consider whether different customer segments, typically business and residential customers, have sufficient degrees of homogeneity to be included in the same economic market. Sometimes, depending on the circumstances, the competitive constraints between these two segments vary substantially. On the demand side, there may be large differences between the requirements of residential and business customers or differences in the elasticity of demand (that is, the willingness to pay for the same product is substantially different). On the supply side, differences may mean, for example, that one customer segment has more competitors offering its services than the other segment. Therefore, residential and business end users can constitute separate markets.

To what extent a market should be considered relevant for ex-ante regulation is discussed in the following section.

3 Markets susceptible to ex-ante regulation

Once the markets have been defined, a second step in the process is to decide which of these markets are appropriate for the exercise of ex-ante regulation, that is, which of them are eligible to be “relevant markets”. A market’s susceptibility to ex-ante regulation has to be confirmed using some kind of test based on predefined criteria. If the legislation in force is not specific in this matter, the methodology proposed to determine whether a given market is relevant follows what are considered to be international best practices, that is, using the so-called three criteria test (3CT) or a variant thereof.

The 3CT refers to the three criteria that, in European Union legislation, must be observed for a market to be susceptible to ex-ante regulation. The criteria are:

• Whether there are strong and permanent barriers to entry in the market under analysis;
• To what extent the telecommunication/ICT market under consideration would naturally tend, in the short or medium term, to a level of competition sufficient to protect the interests of customers, even without regulatory intervention; and
• To what extent an ex-post intervention, in the absence of ex-ante remedies in the same telecommunication/ICT market, would be sufficient to address the problems arising from a dominant position in that market.

These criteria have to be applied together. If barriers to entry are not long-lasting, and if there is recent evidence of increased competition or if competition is likely to increase in the short and medium term, and if there is any reason to believe that ex-post intervention by the NRA can be effective – then there is good reason for the NRA to refrain from intervening and determining ex-ante remedies for dominant operators. Alternatively, the NRA may choose to monitor the market’s evolution to see if it develops towards greater competitiveness.

The European Commission (EC) summarizes and explains the criteria as follows ^[7]:

“The first criterion is that a market is subject to high and non-transitory entry barriers. The presence of high and non-transitory entry barriers, although a necessary condition, is not of itself a sufficient condition to warrant inclusion of a given defined market. Given the dynamic character of electronic communications markets, possibilities for the market to tend towards a competitive outcome, in spite of high and non-transitory barriers to entry, need also to be taken into consideration.

The second criterion, therefore, is whether a market has characteristics such that it will not tend over time towards effective competition. This criterion is a dynamic one and takes into account a number of structural and behavioural aspects which on balance indicate whether or not, over the time period considered, the market has characteristics which may be such as to justify the imposition of regulatory obligations.

The third criterion considers the insufficiency of competition law by itself to deal with the market failure (without ex-ante regulation), taking account of the particular characteristics of the electronic communications sector.”

Only if the regulator considers that a market meets the first criterion, as set above, will it be necessary to evaluate the market in relation to the second criterion. This analysis should examine the structural characteristics of the relevant market and consider whether these characteristics are likely to allow the market to become or remain effectively competitive for a prospective period of 2 to 3 years. This period is generally considered appropriate, given the rapidly changing nature of the electronic communications sector.

Regarding the barriers to entry, the European Commission Recommendation^[8] explains that there are two types which are relevant: structural barriers and legal or regulatory barriers. The Recommendation defines them as follows:

“Structural barriers to entry result from original cost or demand conditions that create asymmetric conditions between incumbents and new entrants impeding or preventing market entry of the latter. For instance, high structural barriers may be found to exist when the market is characterized by absolute cost advantages, substantial economies of scale and/or economies of scope, capacity constraints and high sunk costs. To date, such barriers can still be identified with respect to the widespread deployment and/or provision of local access networks to fixed locations. A related structural barrier can also exist where the provision of service requires a network component that cannot be technically duplicated or only duplicated at a cost that makes it uneconomic for competitors.

Legal or regulatory barriers are not based on economic conditions, but result from legislative, administrative or other state measures that have a direct effect on the conditions of entry and/or the positioning of operators on the relevant market. An example of a legal or regulatory barrier preventing entry into a market is a limit on the number of undertakings that have access to spectrum for the provision of underlying services. Other examples of legal or regulatory barriers are price controls or other price-related measures imposed on undertakings, which affect not only entry but also the positioning of undertakings on the market. Legal or regulatory barriers, which can be removed within the relevant time horizon, should not normally be deemed to constitute an economic barrier to entry, such as to fulfil the first criterion.”

In June 2008, the ERG^[9] published a report^[10] providing guidance on the application of the three criteria test. In this report, the ERG addresses several issues concerning their practical application. One of the issues covered by this report is what sort of indicators might be of relevance for applying each of the three criteria. With regard to the first criterion, the report suggests the following indicators:

• existence of sunk costs;
• control of infrastructure not easily duplicated;
• technological advantages or superiority;
• easy or privileged access to capital or financial resources;
• economies of scale and economies of scope;
• vertical integration;
• barriers to develop distribution and sales network, and
• products or service diversification”.

Concerning the second criterion, possible indicators include:

• Market shares;
• Prices trends and pricing behaviour;
• Control of infrastructure not easily duplicated;
• Product/services diversification (e.g. bundled products or services)
• Barriers to expansion;
• Potential competition.

4 Determination of dominance

In order to identify whether there is an operator (or operators) which enjoys a dominant position there is a need to understand the level of competition in each relevant market. According to best practice, a comprehensive assessment of the competition level needs to consider at least three aspects:

• The existing level of competition at the time of the analysis,
• Potential competition, and
• Countervailing buyer power.

4.1 Market shares

In assessing existing competition in a market, the analysis needs to consider the number of firms competing in that market and their market shares. Measures of concentration can also be calculated (they are a function of market shares and number of competing firms).

The number of firms in a market gives a first indication of the level of competition. For example, if there is only one firm in the market there is, by definition, no competition. Still, this shouldn’t lead to the immediate conclusion of dominance as potential competition can materialize in a short period of time, considering the extent to which there are or are not barriers to entry or expansion in that particular market.

There is also a need to look into the relative size of firms within a market. Many electronic communications markets are oligopolistic so there are usually not many firms in each market, often only two or three. However, there is a significant difference between a market with two or three firms of equal size, compared with a market where the same number of firms have largely different market shares. Therefore, it may be recommended to look at measures of concentration such as the Herfindahl-Hirschman Index of market concentration^[11] (HHI).

The guidelines and decisions of the European Commission in relation to market definition and the determination of dominance have proved to be extremely useful for national regulatory and competition authorities to carry out their competition level assessments. In particular, the guidelines on market analysis and the assessment of significant market power^[12] explain the role of market shares as a proxy for dominance:

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

Besides the importance of market shares, the points below clarify and give orientation about other important aspects:

• They point out the fact that a low market share doesn’t eliminate the possibility of dominance
• They define a threshold above which there would likely be concerns regarding a potential existence of dominance: equal or above 40% market share
• They consider that large market shares, above 50%, are usually a sign of dominance
• They highlight the importance of past market shares fluctuation (say over the last 3 to 5 years): stable market shares may confirm a situation of dominance but for example a continuous decrease of the market leader share may indicate that such a market is quickly becoming competitive.

Therefore, market shares and changes over time need to be considered in order to provide a clear picture of the relevant market dynamics. As noted in the guidelines, “very large market shares — in excess of 50% — are in themselves, save in exceptional circumstances, evidence of the existence of a dominant position”

The guidelines also establish that the relationship between market shares and dominance is not precise in practice: a market share of 25% is an initial indicator of dominance, requiring further evidence for confirmation, and a market share above 50% is presumptive of dominance. However, even where there is a presumption of dominance, other factors may establish evidence that the presumable dominant operator does not have the ability to control the prices in the market.

4.2 Other factors

A second step in the process of finding dominance requires the consideration of other factors in conjunction with market share. In this respect the Commission guidelines list a number of factors that can be used:

“It is important to stress that the existence of a dominant position cannot be established on the sole basis of large market shares. As mentioned above, the existence of high market shares simply means that the operator concerned might be in a dominant position. Therefore, NRAs should undertake a thorough and overall analysis of the economic characteristics of the relevant market before coming to a conclusion as to the existence of significant market power. In that regard, the following criteria can also be used to measure the power of an undertaking to behave to an appreciable extent independently of its competitors, customers and consumers. These criteria include amongst others:

• • overall size of the undertaking,
  • control of infrastructure not easily duplicated,
  • technological advantages or superiority,
  • absence of or low countervailing buying power,
  • easy or privileged access to capital markets/financial resources,
  • product/services diversification (e.g. bundled products or services),
  • economies of scale,
  • economies of scope,
  • vertical integration,
  • a highly developed distribution and sales network,
  • absence of potential competition,
  • barriers to expansion.

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

Some of these criteria are the same and have the same meaning as the ones used in defining a market as relevant for ex-ante regulation. However, when assessing if a certain market is susceptible to ex-ante regulation the analysis is focussed on the market as a whole, whereas in a dominance assessment the findings relate to individual participants in the market.

An explanation should also be given in regard to “countervailing buyer power”. It has been argued by some operators in the context of market analysis processes, that even in the wholesale termination markets where the operator has 100% market share, it should not be considered dominant because of the existence of countervailing buyer power of its customers. So, for example, a fixed network operator buying a mobile voice termination services at the wholesale level would have an ability to influence the supplier of that service by threatening to increase the price of (or not to provide access to) wholesale leased capacity that is an essential component of the mobile network. The extent to which this constraint can be exercised by a customer (hence the strength of countervailing buyer power) will depend on a number of factors such as:

• the size and commercial significance to its suppliers;
• the presence of alternative suppliers;
• the ability to use its horizontal business areas which are in turn suppliers;
• the possibility of turning to alternative suppliers and low switching costs;
• the extent to which it can impose costs on suppliers for example financial costs by delaying payments or postponing purchases.

4.3 How to measure market share

Market shares measurement is also of importance. The Commission guidelines on market analysis and the assessment of significant market power^[13] explain how to go about measuring market shares in different types of markets, highlighting the importance of revenues as a preferred measure:

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

Market shares are mostly used at national level — by both competition authorities and courts — as a relevant proxy, but the assessment very often include other factors, such as competitor’s shares and evolution, control over essential facilities, barriers to entry, and limitations imposed by regulation.

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

5 Obligations/remedies

The final step of the market analysis process is the choice of obligations/remedies to be imposed on operators identified as having dominance. In an approach based on market analysis, remedies should be specifically addressed to competition problems that would likely exist in the absence of ex-ante regulation. In the event that a market is considered not to be effectively competitive, the NRA must choose, from a range of regulatory remedies defined by law, which are best suited to solve one or more of the specific problems in each market.

This section of the document is structured in four steps, which aim to follow the logic of an NRA’s approach to the definition of obligations.

• First, it describes the possible competition problems that arise when dominance exists. It describes the nature of the problems, their underlying causes and respective economic justification. It also briefly describes the harm these problems create, in terms of their direct effects on consumers or their effects on competition in the relevant markets.
• Secondly, it describes what kind of obligations/remedies are available to address the competition problems identified.
• Thirdly, it considers whether obligations/remedies should be imposed at the wholesale or the retail level.
• The final part integrates the work of the previous sections and proposes a set of principles that NRAs should use when determining obligations/remedies for dominant suppliers.

5.1 Competition issues/problems

Competition problems or “anti-competitive behaviour” refer to any practice of a company which enjoys a dominant position that aims to expel competitors from the market (or prevent them from entering the market) or “exploit” consumers. The markets considered relevant for ex-ante regulation have characteristics that can give rise to anti-competitive behaviour or other forms of abuse by dominant actors. This does not mean that this abuse currently occurs or has necessarily been observed. The structure of the various identified markets can give rise to this abuse and dominant market participants have the incentive to engage in such behaviour to promote their own interests at the expense of, ultimately, the consumers. As the imposition of obligations in the set of ex-ante regulatory measures does not imply the occurrence of an abuse of market power, the problems identified must be considered as possible competition problems that may arise in certain circumstances that are specific to each market.

The lack of effective competition and the existence of dominance in the electronic communications markets are, in most cases, caused by structural and legal / regulatory barriers to entry. The European Regulators Group (ERG) common position^[14] systematizes the potential competition problems relevant to four situations that are the most common in the electronic communications markets. The four situations are described as follows:

• Vertical leveraging – This is where an upstream operator attempts to transfer its market power to a downstream market. An undertaking operating in both a wholesale and a vertically related retail market (i.e. that operator is vertically integrated) and that is designated a dominant provider in the wholesale market, has an incentive to behave in this way. Examples of anti-competitive behavior range from refusal to deal, to withholding of information, to quality discrimination, to price discrimination, and even predatory pricing.
• Horizontal leveraging – An undertaking operating on two (not vertically related) markets, that has been designated dominant in one of them may try to transfer its market power from the market where it has SMP to an adjacent market. Examples include bundling or tying and cross-subsidization.
• Single market dominance (retail or wholesale) – Competition problems may also exist within the boundaries of one market even if the undertaking is present in more than one wholesale or retail market. Here the problems range from various kinds of entry deterrence to exploitative pricing, and to productive inefficiencies such as inadequate investment and low quality.
• Termination – This corresponds to a two-way access situation in which two or several networks negotiate wholesale interconnection agreements and set their own prices on the retail market where they may or may not be in competition with one another. Here, typical problems may take the form of excessive or discriminatory access pricing or a refusal to deal. Tacit collusion, although rare, may occur when similarly sized interconnected networks compete in the same retail market.

Based on the experiences of European NRAs, the common position identified the standard competition problems for each market situation listed in the table below. The competition problems identified were based on the study of working groups, on the contributions received during an ERG consultation and on the literature dealing with competition and regulation problems in the electronic communications markets. Subsequently, the ERG/BEREC working groups used the structure represented above to address the appropriate remedies for each of the relevant markets where they identified the existence of operators that individually or jointly enjoyed a position of dominance.

Market situation and potential competition problems

Therefore, most of the competition problems identified are based on the experience of national regulatory authorities and reflect a detailed knowledge of the competition^[15] problems common to electronic communications markets.

5.2 Available obligations/remedies

Ex-ante obligations should address market failures and the sources of potential damage identified in each relevant market. They must follow these principles:

• The principle of suitability and proportionality establishes that the means used to achieve a particular purpose must not exceed what is strictly necessary to achieve that purpose. In order to determine whether a proposed measure is compatible with the principle of proportionality, the action to be taken must have a legitimate objective and the means employed to achieve it must be both those which are strictly necessary and least costly, i.e. they must be the minimum necessary to achieve the goal.
• The principle of effectiveness states that obligations must be designed to solve the identified problem efficiently and target specific issues, to avoid unnecessary regulatory burdens for operators.

In accordance with these principles, regulatory decisions are analyzed and justified from the point of view of adequacy, proportionality and effectiveness, taking into account their impact on:

• the market structure, namely in terms of the number of companies installed, their relative size and costs, and the consequent change in the nature of competition and market power;
• the behaviour of companies, namely in terms of restrictions imposed on the freedom to choose production, distribution and marketing policies (including tariff policy), and the impact of these changes on the market structure, the nature of competition and market power;
• efficiency, meeting the long-term needs of consumers, innovation and other market outcomes;
• the regulatory cost on companies. Taking into account the size of the company, the imposed regulation may generate costs that will force the company to leave the market.

If one or more operators have been designated as dominant, generally the NRA must impose one or more of the available remedies to control the possible abuse of that dominance as well as ensuring that entry by smaller or new entrants is possible. Remedies may be applied separately or in combination, as the circumstances of the relevant market and of the nature and source of dominance requires. This section seeks to describe a set of predefined remedies that are available for use by all regulatory authorities and how remedies interact and may be mutually dependent.

As a starting point for this purpose, ERG systematized the most common obligations/remedies for ex-ante regulation, that might apply in either or both of the wholesale and retail markets.

The different types of wholesale obligations are, in ascending order of rigour:

• A transparency obligation requiring publication of specified information (accounting information, technical specification, network characteristics, prices etc.); it normally is a measure related to the right of access and/or interconnection which is imposed by means of the publication of reference interconnection offers (RIOs) and reference unbundling offers (RUOs) which require the official publication of prices and other important terms of supply;
• A non-discrimination obligation, that is to apply equivalent conditions in equivalent circumstances, and not to discriminate in favour of the regulated firm’s own subsidiaries or partners;
• An accounting separation obligation to make transparent the internal transfer prices to the regulated firm’s own downstream operation in order to ensure compliance with a non-discrimination obligation or to prevent unfair cross-subsidies;
• An access obligation that consists of obligations to meet reasonable requests for access or interconnection or use specific network elements. These may include a range of obligations, including an obligation to negotiate in good faith over terms and conditions of providing access; and/or
• A price control and cost accounting obligation which can require operators to set cost-oriented access charges, or the imposition of a price control on the regulated firm.

These remedies may be imposed individually but more commonly they will be applied in conjunction to address identified competition problems. In addition, NRAs may impose remedies outside this list.

How remedies interact and may be mutually dependent and the practical issues regarding implementation are market-specific and may vary substantially. There is no static recipe for any given situation and certainly no unique linking of competition problems and obligations in order to solve market failures. The appropriate obligation/remedy will at all times be dictated by the specific problems identified in any given market.

The remedies available for wholesale (in ascending order of severity) are described in more detail in the tables below. One should bear in mind that a specific competition problem is usually tackled by more than one remedy, and that the same remedy may be applied to resolve multiple competition problems^[16]. The combination of suitable remedies depends on the market conditions under analysis.

Wholesale markets, available remedies for vertical leveraging

Wholesale markets, available remedies for horizontal leveraging

Wholesale markets, available remedies for single dominance

Wholesale markets, available remedies for termination

If as a result of a market analysis the NRA determines that a given retail market is not effectively competitive and concludes that obligations imposed at wholesale level would not sort out the potential competition problems identified, it may impose appropriate regulatory obligations on undertakings identified as enjoying a position of dominance on a given retail market based on the nature of the problem identified. The obligations imposed may include requirements that the identified undertakings do not charge excessive prices, inhibit market entry or restrict competition by setting predatory prices, show undue preference to specific end‑users or unreasonably bundle services. Regulatory authorities may apply to such undertakings appropriate retail price cap measures, measures to control individual tariffs, measures to orient tariffs towards costs or prices on comparable markets and carrier selection and pre-selection, in order to protect end‑user interests whilst promoting effective competition. Availability of a minimum set of leased lines as an obligation was designed specifically to leased lines retail markets. The most common remedies available for retail markets are described in more detail in the table below.

Retail markets, available remedies

5.3 Wholesale or retail remedies?

In establishing remedies an important decision is whether an intervention is required at the wholesale level or at the retail level (or both). The European Commission’s Explanatory Note of 2007, states^[17]:

“In principle, lack of effective competition may occur at the retail level or the wholesale level or both. That means that NRAs may need to examine the overall degree of market power of undertakings and the impact on effective competition. The identification of a retail market (as part of the value chain) for the purposes of ex-ante market analysis does not imply, where there is a finding of a lack of effective competition by a NRA, that regulatory remedies would be applied to a retail market. Regulatory controls on retail services can only be imposed where relevant wholesale measures would fail to achieve the objective of ensuring effective competition at retail level.”

The Universal Service Directive also states:

“However, regulatory controls on retail services should only be imposed where national regulatory authorities consider that relevant wholesale measures or measures regarding carrier selection or pre-selection would fail to achieve the objective of ensuring effective competition and public interest.”

NRAs must make a number of carefully balanced decisions before regulating at either the wholesale or retail level or both, if it is to increase economic and social welfare. This is because:

• Measures to protect consumers may require NRAs to impose price controls on the sector;
• The trade-off between competition and productive efficiency has to be assessed;
• A choice between measures to promote infrastructure-based competition must be balanced against measures that promote service-based competition (such as mobile virtual network operators (MVNOs) or fixed services resellers);
• The impact on incentives for investment in infrastructure by both incumbents and entrants has to be taken into account as well.

All these factors can influence at what level an NRA should (or not) intervene in the value chain (wholesale or retail). Another concern should be the cost of regulating the ICT sector in countries with limited resources. The costs of developing and enforcing regulation do not reduce much despite the smaller size of the market being regulated, while the benefits are in general proportionate to the size of the market (i.e. the bigger the market the more significant the benefits). Given the relationship between costs and benefits to market size it is possible that regulatory approaches and remedies which are appropriate in countries where NRAs are well resourced and better equipped to intervene in the markets, may lead to economic losses in much smaller jurisdictions or weaker economies.

International best practice recommends that wholesale and retail markets should be treated collectively based on identified links between them. Remedies in upstream (wholesale) markets may not always be cost-effective, so that preference may need to be given to action at the downstream (retail) level. On the other hand, if effective action is taken upstream then may be no need for regulation of downstream markets, for example if barriers to entry are sufficiently lowered to make markets prospectively competitive.

5.4 Principles for determining remedies

A number of principles to be applied in setting obligations, according to international best practices, can be defined. The NRA may apply the following principles to remedies as far as the circumstances of dominance and the relevant market will permit:

• The NRA will first consider appropriate remedies for dominance in wholesale markets. Only if those remedies are considered to be ineffective or disproportionate to the scale of the identified market problem, will it consider applying remedies to dominance in related retail markets.
• The NRA will impose the least intrusive remedy that will in its judgement be sufficient to address the market failure from dominance in the relevant market and to protect competition and consumer interests associated with that market.
• The NRA will shape remedies and determine the intensity of application to ensure that the remedy is appropriate, reasonable and proportionate to the risk of harm from the dominance found to exist in the relevant market.
• As a general principle the remedies applied to dominant licensees that are found to be jointly dominant in a market should be the same.
• As a general principle the remedies applied to dominant licensees in similar markets (such as the market for call termination in which each network constitutes a separate market) should be similar, taking account of the burden that the obligation represents for each dominant licensee.

Where it has determined that a licensee is dominant in a relevant market the NRA should assess the nature of the potential harm that the position of dominance might entail for competition and for consumer interests. In making this assessment the NRA will consider:

• The types of harm that could reasonably be associated with dominance in the circumstances of the relevant market;
• The specific orders or remedies that would directly address the harm that might result; and
• How the orders and remedies might best be shaped to be the least intrusive as possible while still being effective in reducing the risk of harm to an acceptable level.

Where a remedy is capable of being shaped or varied in intensity the NRA will consider how best to shape and specify the remedy having regard to:

• The potential harm from the dominance revealed on analysis;
• The likelihood of the dominance being reduced or neutralized by impending market development; and
• The risk of the remedy inadvertently reducing genuine competition in the relevant market.

6 Joint dominance

In joint dominance two or more firms can sustain prices above (and output below) the competitive level through adopting a coherent system of co-ordinated behaviour without having to explicitly set the rules such as is the case in cartels. This would be a form of tacit collusion, which is more likely to occur under certain market conditions including those which are listed below.

If the circumstances give rise to a market structure with a high risk of joint dominance (for example, only two or three players with high market shares) and the analysis leads to a conclusion that there isn’t effective competition, but neither is individually dominant, joint dominance must also be considered and analyzed for ex-ante intervention, or not, by the NRA.

There is no determinative factor or set of factors to establish joint dominance but the question to be answered is whether, taking all relevant factors into account, there is a substantial risk that the market conditions will encourage ‘co-operation’ rather than competition in relation to the achievement of some objectives. Many factors are potentially overlapping and reinforce each other, for example:

• Very high combined market share: this tends to show that the parties only need to deal with each other – other competitors are small and weak (or even non-existent)
• Similarity of market share: to show that a common purpose is feasible or even likely.
• Similar cost structures: for example, that both companies are of sufficient scale to exhaust the available economies of scale.
• Transparency: if operators cannot observe competitor behaviour, coordination and sanctions for changing from a co-operative position become very difficult.
• Lack of spare capacity: if one or more operators has substantial spare capacity (such as a new entrant with a new network) this militates against joint dominance.
• Lack of credible sanctions: if an operator can deviate from an understanding without sanctions, it will do so whenever that is the most profitable course of conduct.
• Lack of non-cost advantages: the advantage usually has to be something that others cannot readily acquire (e.g. a ‘first to market’ advantage might be compelling in some circumstances)
• High barriers to market entry: because the prospect of new entrants may deter cooperation.
• Mature market with little scope for expansion: traditionally considered ripe for co-operation because of greater risks of mutually disadvantageous competition – and unlikely to attract new entrants.
• No “spoilers” in the market: a spoiler is a small operator that has the will, incentive and resources to upset any collaborative approach by larger operators.

It should be noted that joint dominance is consistent with some level of competition (i.e. competition on brand advertising but not on price; competition on promotional offers but not on on-going prices) and that joint dominance is not collusion, which is a behavioural issue (and an offence) rather than a matter of market structure.

A finding of collective dominance requires a complex analysis and cannot be based solely on superficial evidence such as occasional price reductions by competitors in the same market in the context of competitive responses, or past behaviour of collusion. Instead, such a finding requires a more robust confirmation that a number of conditions are met and will continue to be met over the review period (2 to 3 years), thus pointing to a high risk of future co-ordination.

As is the case for individual dominance, if the national law has not established the criteria to be taken into account in an analysis of joint dominance, it would be appropriate to use criteria that are used in other jurisdictions and are considered good economic regulatory practices. When considering the possibility of joint dominance, the following criteria may be included:

1. Transparency in the market, sufficient to give visibility to competitors of each other’s behaviour and facilitate the development of common policies that lead to collaboration and cooperation, and not competition between them.
2. A small number of competitors, which will facilitate co-operation and collaboration. Generally, the greater the number of competitors, the more difficult it will be to establish and sustain a common goal.
3. Market characteristics that encourage collaboration or co-operation, and not competition, such as: similar cost structures, without offering a cost advantage to any competitor; low market growth, including market saturation, suggesting that competing at lower prices will not be compensated by attracting new customers; and little technological change resulting in stable cost levels, stable cost differences, low levels of product and service innovation and more or less established demand patterns.
4. Other factors, which can also apply in relation to individual dominance and which can also facilitate or prevent collective dominance in a market, such as: control of infrastructure that is not easily duplicated, mainly associated with the refusal of access to third party operators; technological advantages or superiority, not available to third party competitors; absence or low purchasing power, which would otherwise interrupt cooperation agreements between suppliers; a highly developed distribution and sales network, especially if it is not available or is replicable by third parties; ease of market entry; absence of potential competition; barriers to operator switching; excessive prices and profitability, including the history of price competition in the relevant market; network effects; lack of active competition for factors other than price.
5. The existence of retaliations that can be imposed on an operator that deviates from the common objective and that is sufficient to dissuade him from making such a deviation.

A detailed assessment of the markets is needed to determine whether their circumstances are likely to facilitate joint dominance. The factors set out in (a), (b), (c) and (e) generally, but not always, facilitate joint dominance. The factors in (d) will need to be considered individually to determine their impact, but generally the impact would be the same as for individual dominance.

7 Main competition issues

This section describes some of the main competition issues/problems that may be experienced in electronic communications markets.

• Refusal to deal/denial of access (vertical leveraging): refusal to deal can create harm and significantly affect the level of competition when a firm with SMP controls an input or inputs which are necessary for other players to be able to operate in downstream markets. This problem arises as a consequence of the activities of an SMP undertaking on a specific market, carried on in order to leverage its market power by refusing access to its network or refusing to deal with companies which operate (or wish to provide services) in adjacent retail markets and which compete with the SMP undertaking in these markets. Interconnection is a special case of access. Issues of refusal to deal are raised in relation to ownership of essential facilities. The concept of essential facilities has been applied in European law^[18] since the early nineties, and the first case that has been to the European Court of Justice (ECJ) on this point was Oscar Bronner^[19].That judgement defined an “essential facility”^[20] as a facility which must be either impossible or extremely difficult to duplicate owing to physical, geographical or legal constraints. Furthermore, for a facility or an asset to be judged to be essential, it must be demonstrated that it is totally uneconomic to duplicate the facility in the market in question, not simply that a given competitor would be unable to duplicate the facility. The EC has defined an “essential facility” as a “facility or infrastructure which is essential for reaching customers and/or enabling competitors to carry on their business, and which cannot be replicated by any reasonable means^[21]. In the electronic communications sector, as with other recently liberalized markets where former monopolists have retained ownership of infrastructure, certain bottleneck facilities may be considered to be essential facilities, most notably the local loop.
• Discriminatory use or withholding of information (vertical leveraging): this refers to a discriminatory practice where the SMP operator on the wholesale market provides its retail arm with information it does not provide to other downstream players which compete with its retail arm or refuses to supply other information which is necessary to take up the wholesale offer and/or to supply the retail service. An example here would be a vertically integrated fixed network operator refusing to provide its retail competitors with information about future changes in the network topology.
• Delaying tactics (vertical leveraging): a potential competition problem is delaying tactics, such as lengthy negotiations or unreasonably long delivery times. If it is not required as part of any access obligation that negotiations relating to access are to be held without undue delay, or that the delivery time requirement shall be the same as for external wholesale customers as for its own downstream business, a vertically integrated operator could have an incentive to employ different kinds of delaying tactics to delay access. Such a delay may potentially be a competition problem.
• Bundling/tying (vertical leveraging): tying is the practice of making the sale of one good conditional on the purchase of one or more other goods. In the case of two vertically related markets, an SMP undertaking on the wholesale market can condition the sale of a necessary input on the sale of other input and in this way can raise the costs of its downstream rivals. If the price of the wholesale bundle is larger than the retail price minus the retail costs of an efficient operator, tying corresponds to a margin squeeze practice.
• Undue requirements (vertical leveraging): undue requirements on access buyers may serve to keep these out of the market or to raise rivals’ costs or even restrict rivals’ sales and for example, may be requirements such as large bank guarantees, stringent sales requirements with a repayment obligation if the sales requirement is not met, or unnecessary information requirements such as information about the competitor’s customers.
• Quality discrimination (vertical leveraging): involves the possibility of ensuring improved quality of own downstream business rather than that of access buyers. Different fault repair times may be an example of quality discrimination. Another example would be an SMP operator who gives priority to its own traffic at network bottlenecks.
• Strategic design of product (vertical leveraging): the strategic design of product characteristics is another possibility for the vertically integrated operator holding SMP to put its downstream competitors at a disadvantage. Strategic design may include all types of specifications like design, compatibility norms and standards that can either raise rivals’ costs or restrict competitors’ sales. The SMP operator may, for example, use standards which are easy to meet for their own downstream business but not for alternative operators, which may have to make substantial additional investments to ensure compatibility or make access/ interconnection technically feasible.
• Undue use of information about competitors (vertical leveraging): competition problems arising from undue use of information about competitors which may occur when a dominant operator on the wholesale market provides access to a competitor on the retail market and obtains certain information about the customers of the retail competitor. The retail arm of the dominant operator then uses this information on its own advantage. For example, it can target its competitors’ customers with tailor-made offers and so can restrict its competitors’ sales and/or raise its rivals’ costs as competitors might have to increase their marketing efforts or offer better conditions to its customers in order to retain them.
• Price discrimination (vertical leveraging): price discrimination can be used by a vertically integrated undertaking with SMP on the wholesale market to raise its rivals’ costs downstream and induce a margin squeeze. This is achieved by charging a higher price (which usually is above costs) to downstream competitors than implicitly charged to the own retail arm, for instance, discrimination between transfer prices that internally charges the retail division and prices it charges to access seekers.
• Cross-subsidization (vertical leveraging): cross-subsidization is not anti-competitive behaviour in itself. Cross-subsidization involves two prices in two markets. If one price is excessive and the other price is predatory, it can be used to leverage market power and foreclose a related, potentially competitive market. This could be the case where the high price is charged in a wholesale market and the market where the predatory price is charged is a retail market and the dominant operator is vertically integrated. Then cross-subsidization will result in a margin squeeze and harm can be done to competition in the retail market.
• Predatory pricing (vertical leveraging): predatory pricing may occur where a dominant firm sells a good or service below costs of production, for a sustained period of time, with the intention of deterring entry, or putting a rival out of business. Predatory pricing also requires entry barriers to the particular market to be high, so that the future monopolistic prices charged to the consumer can be sustained long enough to recoup the short-term losses. According to economic analysis, predatory pricing has the following main characteristics in summary: (i) the price charged is below costs, (ii) competitors are either driven out of the market or excluded, and (iii) the undertaking is able to recoup its losses. Predation thus involves a trade-off for the predator between the short-run and the long-run. Consumers will benefit in the short run from lower prices but will suffer in the long run from the elimination of competitors. A vertically integrated undertaking with SMP in the upstream market supplying a necessary input to its retail competitors might engage in predatory pricing on the retail level to expose its downstream rivals to a margin squeeze, restrict their sales, and so drive them out of the market.
• Bundling/tying (horizontal leveraging): bundling/tying of an SMP product with a potentially competitive product in two horizontally related markets may reduce competitors demand or increase the costs of entry in the potentially competitive market and thus may lead to foreclosure^[22]. An example of anti-competitive bundling might be an operator with SMP on the retail market for access to the public telephone network at a fixed location, bundling the access product with a package of call minutes. As this is a bundle between an SMP product (access) and a potentially competitive product (call services), where the two products are positively correlated in demand, the bundle cannot be replicated by alternative operators, and thus competition concerns may arise.
• Cross-subsidization (horizontal leveraging): leveraging by cross-subsidization may also occur between two non-vertically related markets. The undertaking holding SMP in one particular market may attempt to drive its competitors out of a non-vertically related market by setting a price below costs in the potentially competitive market, while the losses are covered by profits from the SMP market. Thus, cross-subsidization may in this way lead to a restriction of competitors’ sales in the potentially competitive market.
• Strategic design of product to raise consumers switching costs (single market dominance): if only one market is involved, strategic design of a product by an SMP undertaking can aim to raising consumers’ switching costs, for example by requiring technical compatibility with complementary products produced by the SMP undertaking, and thus producing a lock-in effect (consumers are locked in to the SMP operator’s network/service).
• Contract terms to raise consumers switching costs (single market dominance): competitors and new entrants may have higher costs to persuade customers to switch if the contract terms are designed by a dominant service in such a way as to create barriers for an easy, cheap and quick swap between suppliers. Examples of this could include lengthy contract duration and excessive penalties in case of premature termination of the contract (often observed in the case of number portability).
• Exclusive dealing (single market dominance): this type of problem may arise when an exclusive vertical relationship between a dominant operator and another undertaking exists. One of two situations may occur: (a) the dominant operator on the wholesale market has an exclusive contract with a retailer, stating that the retailer is allowed to buy only from it; or (b) the dominant operator on the retail market has an exclusive contract with a wholesale company stating that this company is only allowed to sell its products to it. Exclusive vertical relationships can increase efficiency^[23], but they also can be used as an instrument to foreclose the SMP market. Exclusive dealing can thus lead to a restriction of competitors’ sales or can increase rival’s costs and in this way can foreclose the market in which the SMP operator is active.
• Over-investment in capacity (single market dominance): considering the presence of economies of scale in many telecommunication’s relevant markets, the SMP operator in a single market may deter entry in that market by investing in excess capacity. If the investments are sunk, it can choose to increase output (even beyond what is reasonably expected to be necessary) as an aggressive response to a potential entrant. The increased output is likely to drive prices down and entry may become unprofitable.
• Predatory pricing (single market dominance): as for vertical leveraging described above, predatory pricing may be used to sustain dominance in a particular market and can be defined as the practice where a dominant company lowers its price and thereby deliberately incurs losses or foregoes profits in the short run so as to enable it to eliminate or discipline one or more rivals or to prevent entry by one or more potential rivals. In this way it is likely to hinder the maintenance or the degree of competition still existing in the market or the growth of that competition.
• Excessive pricing (single market dominance): prices can be considered excessive if they allow a dominant player in a specific relevant market to sustain profits higher than it could expect to earn in a truly competitive market. Undertakings with market power will usually set their prices above costs, at a level which maximizes their profits, given consumer demand^[24]. As a consequence, consumer welfare^[25] may be harmed.
• Price discrimination (single market dominance): for economists, price discrimination occurs when a firm charges a different price to different customers for the sale of similar products with similar marginal costs. For a producer the objective of price discrimination is to extract as much consumer surplus (price) as possible.
• Lack of investment, excessive costs/inefficiency and low quality (single market dominance): it is commonly accepted that market competition drives existing players to continually try to reduce costs and improve quality and make the necessary investments to achieve these objectives. A dominant undertaking with no or insignificant actual and potential competition may fail to do so. This same reasoning has driven Governments in the past to privatize incumbents and open up markets to competition. The lack of competition may result in inefficiencies, inferior quality and lack of investment, results which have negative welfare effects (so called productive inefficiencies) when compared to a hypothetical competitive situation.
• Tacit collusion (termination): The setting of reciprocal high or low termination charges can be used as an instrument of tacit collusion between networks which are in competition on the retail market. This problem may occur in situations of mobile to mobile or fixed to fixed interconnection. This type of tacit collusion may not often be observed in practice, in particular if networks are of different size and have different cost structures. Mobile termination charges directly influence the incremental costs of the respective calls, so that they generally also affect the respective consumer retail prices. Since every mobile network operator can raise its rival’s call prices through high termination fees, a mutual price increase for termination services can result in a collusive equilibrium with high termination fees and accordingly higher mobile retail prices.
• Excessive pricing (termination): an excessive pricing problem is very likely to emerge in the case of fixed to mobile termination with regulated fixed networks and unregulated mobile networks. Each mobile operator has SMP on the market for call termination to its own network and may exploit its market power and charge an excessive price to a fixed network operator (and vice versa). Even if the profits from the SMP mobile termination market are transposed on the retail market and therefore there are no excessive profits, the pricing structure remains distorted and welfare will fall short of its possible maximum value.
• Price discrimination (termination): this problem pertains mainly to the situation where a mobile operator needs/wants to interconnect with another mobile operator in order to get its originated calls to reach subscribers in the other network. The dominant operator may foreclose the market by charging a high (above-cost) termination charge to other networks but implicitly charging a lower price to its own retail arm. This in turn leads to higher costs for off-net calls for other operators at the wholesale level and thus to higher prices for off-net calls at the retail level. This allows the dominant network operator to charge lower prices for on-net calls. Such a price structure creates network externalities (also referred to as tariff-mediated network externalities) and thus puts small networks with fewer subscribers at a disadvantage. The disadvantage is greater the higher the termination charge and thus the higher the difference is between the price of an on-net and an off-net call.
• Refusal to deal/denial to interconnect (termination): A refusal to deal / denial to interconnect is aimed at foreclosing the market to new entrants. This problem can arise in any form of interconnection. By foreclosing the market, the dominant player can do well without interconnecting with an entrant as long as that entrant is not able to build a large base of subscribers. Foreclosure of the market to that new entrant will likely lessen competition and harm social and economic welfare.

8 Relevant market definitions related to international telecommunication services and networks

The definition of relevant market could be also analyzed at regional and international level. In this sense, the ITU-T Study Group 3^[26] on Tariff and accounting principles and international telecommunication/ICT economic and policy issues, specifically the Question 10/3 on Competition policy and relevant market definitions related to the economic aspects of international telecommunication services and networks, is working on:

• The study of relevant market definitions, with a view to enabling Member States to identify where significant market power (SMP) exists (or other kinds of market dominance) at regional and international level;
• The determination of whether regulatory asymmetries may be needed, in special measures to help ensure transparency and equality in any relevant markets;
• The elaboration of the terms and definitions for recommendations or studies dealing with this question.

In this framework, the ITU-T Recommendation D.261 on Principles for market definition and identification of operators with significant market power (10/2016) proposes principles and guidelines to be considered by Member States in defining, identifying and assessing the degree of abuse of market power and dominance by international telecommunication service providers in the various markets for international telecommunication services and obligations on such service providers with significant market power (SMP). This recommendation explains that:

“with the increased variety of commercial offers by operators, spanning across all regions and countries, the need to ensure a level playing field in the provision of international telecommunication services becomes very pertinent. This calls for the identification of the relevant markets for international services where the possibility of abuse of significant power by dominant operators is likely to occur.

Member States and regulators continue to express concern about the possibility of abuse of market power and dominance in the provision of international telecommunications services. Market forces alone may not be effective enough to prevent abuse of market power and dominance in the provision of international telecommunication services. The issues at stake and their degree vary from region to region, and also within regions, in terms of levels of economic development, market structures and regulatory frameworks. As such, there is need for a harmonized approach at the international level to ensure the competitive provision of international services on a fair and non-discriminatory basis.

Along with the considerations above, it is fundamental that the Member States and NRAs ensure the greatest possible level of transparency and legal certainty. Regulation as regards the definition of relevant markets and identification of operators with SMP should be explicitly clear in its guiding principles.

It is recommended that the following principles at least should be considered:

i) The principle of minimum intervention: This guarantees that the regulatory authorities will intervene only at times when market conditions do not per se ensure effective and sustainable competition among the different competitors in the relevant market.

ii) The principle of proportionality: This means that the regulatory authorities undertake not to impose obligations entailing costs greater than the possible benefits of applying the ex-ante regulation.”

Endnotes

1. Also sometimes referred to as Significant Market Power (SMP). The two terms are synonymous. In practice, it describes the power that allows a service provider to make decisions and act independently from its competitors and customers. This usually means the ability to raise prices or reduce the level of production without worrying that competitors will gain a material advantage through higher revenues or market share, or that a significant number of customers will decide to purchase services from another supplier. ↑
2. Within the EU the 2002 regulatory framework has now been replaced by the European Electronic Communications Code (available here). However, the principles of regulatory market analysis have not changed and are more clearly expressed in the earlier framework documents which are quoted in this article. ↑
3. In practice, substitutability can be better analyzed in terms of three dimensions for defining the market for the purposes of a market analysis process: product/service, geography and customer. ↑
4. The approach identifies retail and wholesale segments by recognizing that wholesale markets are derived from retail markets. In the presence of two vertically connected markets, the EU Recommendation on relevant product and service markets indicates that the market definition process should start with the definition of a relevant retail market. This recommendation is based on the fact that the demand for the product or service upstream is a derived demand, that is, it is the demand for retail services that determines the demand for the wholesale product. Therefore, an analysis of dominance in an upstream market depends on competitive conditions in the related downstream market. ↑
5. The hypothetical monopolist test (HMT) is one way to define a relevant product market. Under this approach, a relevant product market is defined as the smallest group of products in which a sole profit-maximizing seller (a hypothetical monopolist) would impose and maintain a small but significant and non-transitory price increase (SSNIP) above competitive levels. Commonly, for the purposes of determining a SSNIP, an objective benchmark such as a 5% price increase for one year is used. In determining whether a SSNIP would be profitable, the hypothetical monopolist test uses demand elasticity, cross-elasticity and other evidence. See Commissioner of Competition v. Visa Canada Corp., 2013 CarswellNat 3285 (Competition Trib.), at paragraph 173 and Merger Enforcement Guidelines, Part 4, Competition Bureau, October 6, 2011. ↑
6. In doing so, this could exclude a certain market as not relevant for ex-ante regulation. ↑
7. Page 8 of the Explanatory Note accompanying the Commission Recommendation on Relevant Product and Service Markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services. ↑
8. The European Commission Recommendation of 17 December 2007 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services ↑
9. The ERG (European Regulators Group) is now known as BEREC (Body of European Regulators for Electronic Communications) ↑
10. ERG Report on Guidance on the application of the three criteria test. ↑
11. The Herfindahl-Hirschman Index is calculated by computing the sum of the squares of the individual market shares of each firm within a market. This allows to give more weight to firms with a higher market share. If, for example, there is only one firm in a particular market, that firm would have, by definition, 100% market share, and the Herfindahl-Hirschman Index (HHI) would simply be equal to 10,000, the maximum value of the index. If there are three firms each with a fair market share of 33% (one will have 34%) the HHI would be 3334. The closer a market is to a monopoly situation, the higher the HHI is and the lower its competition. ↑
12. Commission guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services, (OJ C165, 11.7.2002), page 10, available at: available here ↑
13. Commission guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services, (OJ C165, 11.7.2002), page 10, available at: available here ↑
14. ERG (2004), “ERG Common position on the approach to appropriate remedies in the new regulatory framework” available at: available here ↑
15. The list of competition problems is only considered as a guide and did not prevent a national regulatory authority from identifying other (potential) competition problems. ↑
16. Please see section 7 of this article for a more detailed description of the competition problems listed in the tables. ↑
17. European Commission, Explanatory Note: Accompanying document to the Commission Recommendation on Relevant Product and Service Markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services, 2007. ↑
18. In Europe, the concept of essential facilities has been applied to harbour facilities (Case C–179/90 Port of Genoa [1991]), airline computer reservation systems (London European-Sabena [1988] OJ L317/47) and found not to apply to a national home delivery service (London European-Sabena [1988] OJ L317/47). ↑
19. Case C-7/97 Oscar Bronner GmbH & Co v Mediaprint Zeitungs [1998]. ↑
20. For example, the European Commission (EC) defined an essential facility in a previous Communication as follows: “In the telecommunications sector, the concept of “essential infrastructures” will, in many cases, be relevant in determining the obligations of dominant telecommunications operators. The term essential infrastructure is used to describe infrastructures that are essential to reach customers and / or allow competitors to carry out their activities and that cannot be duplicated in a viable way.” In the electronic communications sector, as in other recently liberalized markets, where ex-monopolists have retained ownership of the infrastructure, certain network elements that constitute bottlenecks can be considered essential infrastructure, namely the local loop. ↑
21. Notice on the application of the Competition Rules to access agreements in the telecommunications sector [1998], OJ C265/3, para. 68. ↑
22. In general foreclosure refers to a dominant firm’s denial of proper access to an essential good it produces, with the intent of extending monopoly power from that segment of the market (the bottleneck segment) to an adjacent segment (the potentially competitive segment) ↑
23. Telecommunications network investments are characterized by considerable asset specificity. Once a transactor makes a relationship-specific investment, its transacting partner has the ability to take advantage of the specificity to appropriate some of the rents the transactor expects to earn on the investment in the future. This constitutes the holdup problem for which the Fisher Body – General Motors case is widely known (see for example Coase, Ronald H. (2006)), “The Conduct of Economics: The Example of Fisher Body and General Motors”, Journal of Economics & Management Strategy, 15, 255-278 available at available here ↑
24. Even a dominant undertaking is restrained in the way it can sets prices by the so-called demand curve. ↑
25. The two most common welfare notions in industrial economics are consumer surplus and total surplus, the latter being the sum of consumer and producer surplus. ↑
26. ITU-T Study Group 3 (available here) ↑