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On approval methodological guidelines of market analysis

Unofficial translation

Order № 30/09-3

of the Chairman of LEPL Competition Agency

On approval methodological guidelines of market analysis

Tbilisi 30 September, 2014

Pursued to the Article 171 (4), Article 5 (2) and Article 34 (61) of the Georgian Law on competition, I

Order:

Article 1

“Methodological guidelines of market analysis” shall be approved.

Article 2

The order shall become effective after October 1, 2014.

Chairman of the Agency Giorgi Barabadze

Methodological guidelines of market analysis

First Chapter

General provisions

Article 1. Objective of the methodological guidelines of market analysis and scope of application

  1. Methodological guidelines of market analysis (hereinafter referred as "guidelines") have been designed by the Georgian Law on “Competition” (hereinafter referred as the" Law ").
  2. The aim of the guidelines is assessment of methodological provision and the use of the issues regulated by the competition legislation in the following cases:

a) With the purpose to evaluate competitive environment on product market;

b) In the process of assessing the structure of the relevant market, the degree of concentration, share of economic agent in a dominant position, determination of group dominance and market power;

c) In the process of discussing cases related to infringement of competition legislation;

d) In the process of discussing concentration cases under notification or the concentration cases under violation of the law;

e) In the process of monitoring conducted by the LEPL Competition Agency (hereinafter referred as the “agency”) and directed to competitive policy, conducting study and analysis of social-economic outcomes on product market;

f) In the process of discussing the protection of the competition or received or receivable regulations in the commodity market and also received or receivable decisions of the economic agents' assistance (subsidies) by the administrative organs or judicial acts and/or in other cases established by the Law, which require analysis of competitive environment in goods/services markets, and the assessment of the situation or action of economic agents.

Article 2. Terms used

  1. For the purpose of this guideline the terms used in the guideline have following meaning:

a) Effective competition - optimal combination of market structure and market behavior of economic agents, when the market efficiency is equal to the highest possible index;

b) Important part of the markets goods and service market - In accordance with the definition of Local Government Code, at least one municipality bounded geographic market;

c) Horizontal Concentration – The concentration of economic agents (competing economic agents) operating in the same relevant market;

d) Non-horizontal Concentration - The concentration of economic agents operating in different relevant markets, which can be vertical or conglomerate;

e) Conglomerate Concentration - The merger of such economic agents, which are neither in vertical nor in horizontal approach with each other;

f) Vertical Concentration - The merger of such economic agents, which operate at different levels of the supply chain;

g) Consumer – person, who buys the product/service with the purposes of consumption or production;

h) Product – everything that can satisfy the need or/and necessity and is proposed on market with the purpose of purchasing, usage, recruiting attaention or comsumption, including material objects, service, persons, places, organization and ideas;

i) Relevant market analysis - Cases prescribed by the Law, determination of the relevant goods market by the competition authority, determination and assessment of the goods market structure, the level of concentration, dominant position, group dominance and anti-competitive actions;

j) Relevant market monitoring – Analysis/evaluation of the relevant commodity market by the agency, determination of the market structure, market concentration, market power, market barriers and/or the valuation of other conditions prescribed by the Law with the evaluation individual mark/parameters.

k) Herfindahl Hirschman Index (HHI) – Market concentration Index, which is the squaring sum of shares of each economic agent on the relevant market.

  1. The other terms in this guideline are used within the meaning of the Law.

Article 3. Principles of relevant market analysis

1. In the process of the market analysis the agency’s activities are based on principle of objectiveness and consequential of objective circumstances which are revealed on particular market.

2. The agency relies on the principle of inquisition during the working process and due to circumstances of particular case investigates the segments of the market and the details, which may not be requested by the interested party via relevant application, or is not directly related to the given conditions.

3. In the process of investigation multidimensional investigation principle is ensured, which means the usage of more than one method during the investigation to avoid incomplete or/and unilateral evaltuation.

4. Principle of functional analogy – In the process of investigation and analysis of competetivnes of different markets’ relevant segmets by the agency, functionally analogous criterions and analytical factors shall be used homogenously in homogenous cases.

5. Pursued to necessity, effectiveness and equality principles, the agency undertakes the obligation, during the research to conduct only the activities that are directed and are necessary to achieve reseach objective and simultenously scales and characteristic of which fits to the objective.

Article 4. Stages of relevant market analysis

  1. During the market analysis the agency goes through the stages of relevant market identification and evaluation of competitive environment on market.
  2. On the both stages of relevant market analysis the agency uses the parameters defined by these guidelines.

Article 5. Parameters of market analysis

  1. Relevant market identification shall be ensured by using following parameters:

a) Product boundaries of product/service market;

b) Geographic (territorial) boundaries of market;

c) Time frames (particular period) of product/service market.

  1. On defined relevant market based on parameters foreseen in paragraph first of this article, during evaluation of competitive environment on relevant market the agency considers following parameters:

a) Subjects acting on relevant market;

b) Relevant market volume and allocation of shares on economic agents;

c) Concentration level of relevant market;

d) Entry barriers on relevant market;

e) Market power of economic agents;

f) Additional parameters, which are necessarily to be considered by the agency.

  1. Based on discussion of parameters defined in paragraphs 1 and 2 of the given article, special report is elaborated on final evaluation of relevant market and competitive environment on market.

Article 6. Relevant informational sources for market analysis

The agency is entitled to obtain necessary information for market analysis from any identified source, with protecting principle of legality of obtaining the information.

Second Chapter

Identification of relevant market

Article 7. Product boundaries of relevant market

  1. In product boundaries of relevant market is involved every product or service, which may be considered as substitutable for the characteristics of this product/service, prices and objectives of their usage, Productive, territorial boundaries of the goods is established by consideration of the level of inter - substitutability.
  2. During the determination of product boundaries of relevant market the substitutability criterions defined in paragraph first of the given article shall be discussed from the perspective of consumers as well as suppliers/producers. This approach is used for assessing the relevant market as for determination of the market structure, market power and anti-competitive actions.

Article 8. Definition of product boundaries from consumer’s perspective

  1. During the definition of product boundaries from the consumer’s perspective the criterion for substitutability are product characteristics defining consumer’s choice.
  2. Product characteristics defining consumer’s choice are consuming qualities, novelty level, conditions of product usage (exploitation) by a consumer, realization conditions, level of comparative prices, also any such characteristic, that was relevant in the process of defining consumer’s choice.
  3. Product characteristics defining consumer’s choice is defined through sociological survey questioning, expert conclusions, special interviews, sociological observation on consumers behavior, experiments or by using other methods, which gives opportunity to define these characteristics and simultenously do not contravene to the legislation and the principles of market analysis defined by these guidelines.
  4. Substitutability criterion may be determined by the cross elasticity index of prices, which means changes on demand challenged by changes of product prices and is determined by means of a comparative evaluation.

Article 9. Definition of product boundaries from producer/supplier’s perspective

  1. Criterion of substitutability in the process of defining product markets from producer/supplier’s perspective is the quality of simplicity of switching from one product’s production to another. In this process active as well as free production powers shall be considered.
  2. Product substitutability criterion from producer/supplier’s perspctive may be defined by mean of monitoring/observation, expert conclusions, experiments or on-spot inspection. Also by using other sources, which do not contravene to Georgian legislation and principles defined in these guidelines.

Article 10. Geographic boundaries of relevant market

Geographic boundaries of product/service market is the territory, on which selected groups buy or have economic, technical or other kind of opportunities to buy given product/service.

Article 11. Definition of geographic boundaries of relevant market

  1. During the definition of geographic boundaries of relevant market the agency considers:

a) Opportunity of supply and demand of the goods, free movement/transportation on the territories of the relevant market geographic boundaries;

b) Opportunity to transfer/move product on the territories of geographic boundaries of relevant market (incuding specifications of natural-climate, social-econommic and political conditions; peculiarities of demand and consumers’ behavior, particularity of business rules and habits);

c) Particularities and paculiarities of the territories belonging to relevant geographic market.

  1. If in the process of defining homogeneity of prices is revealed, that product/service price received from one or another territory, exceeds the average weighed price of the same product by 10% on the available product for consumers within the marked boundaries product market, than such territories shall not be considered as homogenous.
  2. despite the conditions defined in paragraph 2 of the given article if according to reseaches Is determined, that consumers consider product realized in one region as the substitute of the product realized in another region, than these regions shall be discussed as united geographic market for the given product.
  3. In market conditions of natural monopolies in the economically regulated spheres, product/service market’s geographic boundaries are defined by considering the allocation of technological infrastructure (networks) allocation and by considering purchasers’ availability on infrastructure /to switch to networks/ opportunity.

Article 12 Time frame of relevant market

  1. In case of coincidence of comparable product/service’s product and geographic boundaries, criterion for the differentiation is a time frame.
  2. Time frame for relevant market is the period, during which market is functioning in conditions of particular product and geographic boundaries.
  3. Relevant market is considered to be identified in case together with product market its geographic extention area and time is also defined, during which the market is functioning.
  4. Markets having homogenous product and geographic boundaries functioning on the different seasons, are different markets.
  5. Seasons are any substitutional time periods, substitution cycle of which does not exceed two years and is repeated minimum twice.

Article 13. Determination of time frames for relevant market

  1. Determination of time frames for relevant market is ensured via observation of the market or on the basis of official, obtained or submitted material, according to the expediency of the monitoring and investigation.
  2. Determination of time frames is also possible to be implemented by mean of expert conclusion, interviewing market subjects or other relevant methodic.

Third Chapter

Evaluation of competitive environment on market

Article 14. Subjects on relevant market and their divulgence

  1. Subjects acting on relevant market are suppliers and consumers;
  2. To reveal subjects on relevant market means the identification of their groups;
  3. Identification of consumers’ groups means the identification of every such consumer on relevant market, from which each can get researched product or service from any supplier, which acts on market.
  4. Identification of suppliers’ group means to identify each suplier, which acts on relevant market and can supply product/service to consumers existing on the same market;
  5. To reveal subjects on relevant market is ensured by mean of statistical data, survey questionings or conducted observation on market or by other means.

Article 15. Definition of relevant market volume

  1. Market volume is the supplied product/service realization volume in particular time period.
  2. Relevant market volume is defined via product/service realization sum of the economic agents on the given market. Herewith, it is forbidden to register one and the same product/service repeatedly.
  3. The relevant goods market volume in the country can be defined by considering the values of the goods produced in the country, exported from the country and imported and is calculated by the following method:

Vm = Vp+Vim –Vex , where

Vm – Is a market volume;

Vp – Volume of product/service goods produced in Geographical boundaries of the relevant market, which does not contain economic agent’s reserve and that volume of the produced product/service, which is used for the needs of own producing.

Vim – volume of import/transportation on the territory of given product market;

Vex –volume export/transportation outside the boundaries of given product market territory.

  1. During the definition of market volume shall be considered: revenues, entered and delivered the goods, on-place production volumes, production capacities, resources reserves, trade turnover volume, financial and non-financial assets and other specific indicators of economic agent.

Article 16. Defining market share of economic agent acting on relevant market

  1. Share of economic agent (seller) on relevant market is calculated as the correlation of sold (supplied) production volume of economic agent on the market reflected in percent to the volume indicator of the given market.
  2. In the process of defining share of economic agent it is also possible to consider potential suppliers, which by adding minor technical re-equipment or physical capital can supply of goods or services.
  3. If market analysis is conducted because of the fact of infringing competition legislation, than share is calculated by actually developed market structure (without considering potential suppliers).
  4. In case of assessment of market power, within the long term period existence of profitability higher than reasonable or suspicious pricing, in case of necessity of the goods market barriers assessment, assessment of market will be conducted on the basis of the admission of potential economic agent, goods production and acceptable realization or by assessment of reasonable costs and expertise.
  5. Production and sales pricing factors will be carried out by additional experts, based on extensive discussion, the academic literature in economics and the best experience of practices used in the assessment.

Article 17. Definition of market volume and share of economic agents on financial markets

  1. In commodity markets of a variety business activities, during the evaluation of competitive environment, if necessary, as by the law of the country, as well as by the best practical experience of evaluation, the Agency, as the administrative authority determining competitive environment in commodity markets or anti-competitive actions, participates within the competence in accordance with Articles 30 and 31 of the Law.
  2. Definition of financial market’s volume and share of economic agent acting on this market is ensured by the same principle, which is used on product/service market.
  3. On the credit resources market, market volume is defined as the sum of the assets of commercial banks acting on relevant market. Assessment of the services provided by the banking sector is defined by specificity of the types of services.
  4. On insurance service market its volume is defined as the sum of incomes (insurance premium) of all insurance companies, which exist on relevant market.
  5. On the credit resources market the share of commercial banks on market can be defined, as the correlation of the bank’s assets volume to the market volume.
  6. On insurance service market share of insurance company is defined as the correlation of the volume of its insurance incomes to market volume.

Article 18. Concentration level on relevant market

  1. Concentration level of relevant market is market correlative quantitative indicator, which shows correlations of shares of economic agents on market and their allocation density on market
  2. Concentration level of relevant market is calculated by using Herfindahl-Hirschman Index (HHI) (Annex №1).
  3. For determining of group dominance on the goods market with the Herfindahl-Hirschman Index (HHI) is used also Linda Index (Annex №2).
  4. If necessary, other Indexes, which are widely used in practice, can be used for the assessment of the goods market.
  5. Based on Herpindal-Hirshmanis Index (HHI) goods markets will be evaluated with concentration levels - with low concentrated, normally concentrated and high concentrated commodity markets:

a) Low concentrated - HHI<1250;

b) Normally concentrated - 1250<HHI<2250;

c) High concentrated – HHI>2250.

Article 19. Conformity assessment of the concentration to the competitive environment in accordance with Article 11 of the Law

  1. Concentration without substantial distortion of effective competition at goods or services market of Georgia of any significant part thereof, resulting in gaining or strengthening of dominating position is suitable for normal competitive environment.
  2. Concentration substantially distorting effective competition at goods or services market of Georgia of any significant part thereof, resulting in gaining or strengthening of dominating position shall be prohibited.
  3. In order to determine whether the concentration is limiting effective competition or not, the agency assesses the market impact, as the result of market structure and market behavior of economic agents, based on the following indicators:

a) Lack of pricing;

b) The amount of profit;

c) The quality of the products;

d) Reducing the costs of producing and selling.

Article 20. Criterions for evaluation of horizontal concentration

  1. If the economic agents have a joint market share that not exceed 25%, as a result of the concentration on the territory or on the important part of Georgia, the concentration does not significantly restrict the effective competition.
  2. If as a result of concentration all economic agents, operating in the same market manufacturer of the same goods/services), Herfindahl Hirschman Index (HHI) does not exceed 1250, this concentration does not cause to significant restriction of effective competition.
  3. If as a result of concentration all economic agents, operating in the same market manufacturer of the same goods/services), Herfindahl Hirschman Index (HHI) is between 1250 and 2250 and its change does not exceed 250, Herfindahl Hirschman Index (HHI) is more than 2250 and its change is less than 150, then this concentration does not cause to a substantial restriction of effective competition, except if:

a) In the concentration participates a potential competitor or economic agent owning the small part of market share, which entered the market shortly before the merger;

b) The innovative potential at the moment of the merger in the given market of economic agents operating in the concentration are not reflected;

c) There is a cross-participation between participating entities of the market, which means owning each-other’s shares and exchange of management personnel;

d) The market share of one of the economic agent which are subject to concentration is at least 50%;

e) There are the repeated agreed actions and mutual promotion signs between participants of the market;

f) In the concentration operates economic agent, which considering its position in the market structure, likely prevented or will prevent in the future the implementation of coordinated actions among other market subjects, or increase the quality of such actions;

g) Any other given on the market, whose existence despite of market structure and economic agents’ shares indicates that the concentration may cause the significant restriction of an effective concentration.

Article 21. Criterions for evaluation of non-horizontal concentration

If the economic agent, which has been created by non-horizontal concentration, will not receive more than 30% of the market share in each relevant market on which it operates, and in each such market Herfindahl Hirschman Index (HHI) is less than 2000, this concentration does not significantly restrict effective competition, except if:

a) It is expected a significant increase of the share of the economic agents which are subject to concentration because of market power or of the innovative potential;

b) There is a cross-participation between participants of the market, which means owning each-other’s shares and exchange of management personnel;

c) There are the repeated agreed actions and mutual promotion signs between participants of the market;

d) In the concentration operates economic agent, which considering its position in the market structure, likely prevented or will prevent in the future the implementation of coordinated actions among other market subjects, or increase the quality of such actions.

Article 22. Entry barriers for relevant goods market

  1. Entry barrier analysis on relevant market includes evaluation of market structure quality indicators, in frames of which the agency investigates:

a) Market entry, extending and market exit barriers’ existence/non-existence for potential competitors and simplicity/difficulty to overcome them;

b) Possible expenses and terms to overcome these barriers;

c) Actual opportunity of possible sellers to become participants of given market;

d) Opportunity of economic agents already existing on this market to extend scales of economic activities;

e) Entry possibility for international trade on market.

  1. As potential competitors (suppliers) can be deemed:

a) Economic agents having material-technical equipment, personnel and technologies for producing given product, but are not able to use (do not use) these opportunities for different reasons;

b) Economic agents who produce given product, but do not sell it on the territory of researched market;

c) New economic agents.

  1. In case of investigating criterions defined in paragraph first of this article the agency studies the possibility of existence of technical, financial, institutional barriers.
  2. In case of study financial-technical barriers are discussed:

a) Necessity of ensuring important primary capital investment;

b) Restriction of accessibility on financial resources for potential suppliers and high expenses for recruiting additional financies in comparison with other economic agents acting on market;

c) Losses for leaving the market in case of terminating economic activities, unremunerated investments among them;

d) High expenses for accessing resources and holding copyright, on adverts and receiving necessary information;

e) Transport restrictions;

f) For achieving economy of scale, necessity of economicaly justified minimal output volume on single product for high costs reduction;

g) Privillage of economic actors acting on market in comparison with market potential players by costs on one product, by demand level and forming long term contracts with purchasers;

h) Other barriers of financial-technical character.

  1. In the process of institutional barriers are discussed:

a) Complication of economic agents registration rules;

b) Decisions of state bodies related to export/import of product;

c) The impact of legal regulations, which are part of the goods/services market, necessity and the evaluation of reasonableness;

d) Resistances concerning allocation of land resources, buildings for production;

e) Quality of development market infrastructure;

f) Other barriers of institutional character.

Article 23. Evaluation of market power of economic agents

  1. One of the criterions to evaluate competitive environment on relevant market is business analysis of economic agents on this market relatively to their competitors;
  2. Agency on the mentioned stage of analyzing market competitiveness, examines the opportunity of economic agent to increase profit without significant loss of share by mean of increasing prices or reducing expenses/quality in long term period;
  3. In the process of calculation market power following approaches are used:

a) Structural, which means analysis of economic agent’s conditions on the relevant market;

b) Analytic, which means:

b.a) Evaluation of business efficiency level of economic agent;

b.b) Economic agent's level of profitability in the short and long term;

b.c) Evaluation of economic agents’ activities by using financial analysis and analogy methods.

b.d) A similar comparison of the competing economic agents’ activity.

4. During the evaluation of market power is also possible to be used the economic and financial indicators, which are widely used in practice.

Article 24. Final outcome of market analysis

As a result of the market analysis, the Agency shall work out relevant document.

Annex №1

Definition of Herfindhal-Hirschman market concentration Index

Herfindahl-Hirschman (HHI) market concentration Index is calculated as the squaring sum of shares of each acting supplier on market.

Enumeration of product suppliers on the market

Volume of product/service realization of each supplier (Vj)

Share of each supplier on total market volume (Dj=Vj/Vm)

Shares’ quadrates (Dj2)

. . . .

n

in total n

(∑nj=1Vj)

100%

HHI = D12 + D22 + . . . . + Dn2

Annex №2

Definition of inequality level among big suppliers on relevant market based on Linda index

Linda Index is calculated as:

L=1/K(K-1) ×∑nj=1Qj , where

K –number of huge suppliers (from 2 to n);

Qj - dependence among j supplier’s average share and k-j supplier’s average share;

K-j –number of leading suppliers among big suppliers

Qj = Aj/j×(Ak-Aj)/(K-j) , where

Aj – total market share, which comes on j supplier;

Ak - market share, which comes on k big supplier

In the process of defining oligopoly boundaries Linda Index is used in a given way: L for k = 2, k= 3, etc. is calculated, where Lk+1 > Lk, i.e. first infringement of intensity of L index will not be received. Boundary will be considered to be defined if Lk minimum number in comparison with Lk+1 meaning is achieved.