Editor’s Note: This Note draws on the European Commission’s Guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services, and the Commission’s website.
The European Commission published guidelines for regulating electronic communications networks and services in 2002. These guidelines establish a new framework for. They specify that market definition and assessment of significant market power should be determined by the same method applied by competition law.
Under the European Commission’s framework for regulating electronic communications networks and services, National Regulatory Authorities should only intervene in a market where there is no effective competition. Where firms have significant market power in a market, National Regulatory Authorities are required to regulate in proportion to the degree of market power.
The Commission set out its approach to defining markets, and assessing whether firms have significant market power in those markets, in its Guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services.
This note discusses the Commission’s approach to defining markets and assessing market power.
Market Definition
The Commission uses the ‘hypothetical monopoly test’ to determine an appropriate market definition. A market is defined as the narrowest possible product sphere in which a hypothetical monopolist could profitably sustain a small but significant increase in price (in the range of 5% to 10%).
The following steps describe the Commission’s market analysis procedure:
- Tentatively define the product market by determining whether two products belong in the same market.
- Tentatively define the geographic market in terms of competitors’ market shares, prices, and price differentials.
- Conduct a more detailed analysis of demand-side and supply-side substitutability.
– Determine whether customers can switch to an alternate product in response to a small (5-10 percent) increase in price.
– Determine whether suppliers can readily switch to providing the alternate product in the relevant market.
- Further investigate the conditions in which competing firms operate. This may entail exploring the recent past activities of those firms, consumer behavior and preferences (through demand elasticities and other studies), regulatory or market barriers to entry, market segmentation and the viability of efficient price discrimination.
- Use consultations with firms and consumers and on-the-spot inspections to further inform and refine the market definition analysis.
Assessment of Significant Market Power
Under the Commission Guidelines, a firm has significant market power if, either individually or jointly with other firms, it has a position that allows it to behave in a way that is appreciably independent of its competitors and customers. The Guidelines identify a range of factors to consider in determining whether a firm has significant market power:
- Market share. Substantial market share is generally needed for a firm to have market power. Though possible, it would be very unusual for a firm with a market share below 25% to have significant market power. The courts have usually found that firms with market shares of 50% or more have a dominant position,
- Potential competitors that could enter the market. If barriers to entry are low, the possibility of entry may prevent a firm increasing its price despite having a high market share. If barriers to entry are high, the firm is more likely to have the ability to substantially increase its prices,
- Control of essential infrastructure that cannot be easily duplicated. If a firm controls essential network infrastructure such as the main local telephone exchange, it may be able to impede competition
- Absence of customer buying power. If a firm has many small customers it is less likely to have the ability to negotiate than if the firm has a several large customers
- Economies of scale. An established firm may be able to achieve substantially lower per-unit costs than a competitor could, which may act as a barrier to entry
- Economies of scope. An established firm may be able to manufacture several products at once, and achieve lower costs than a competitor
- A highly developed distribution and sales network. A well-established firm may have exclusivity agreements with distributors, making it difficult for competitors to enter the market.