BEREC REPORT ON IMPACT OF FIXED-MOBILE ... - berec - Europa

BoR (11) 54
as well as other characteristics such as the way of bundling of services, price
discrimination, etc.
3.2. Substitution
Substitution represents the essence of the criteria used in order to establish the
adequate boundaries of the market at stake. It refers to the products which are
regarded by the end consumers as interchangeable, the main point being that one
product exerts competitive pressure on another (or several others). If this is the case,
the relevant market should cover all the substitutable products or services.
Substitution can take place both from the demand-side and the supply-side. In both
demand and supply side substitution it is important to consider the current sources of
competition in the market and also the potential sources of competition that may affect
the market in a near future (potential substitution), to the extent that they may be
sufficiently immediate to act as a pricing discipline on the relevant focal products.
Where such potential substitution is not sufficiently immediate to be included within the
relevant market boundaries, it may be more appropriately assessed in any subsequent
SMP analysis.
Product A is considered a substitute for product B if demand for product A increases in
response to an increase in the price of B (all other things equal) – in this case the two
goods exhibit positive cross price elasticity of demand.
On the other hand, two products are complements if an increase in the price of one
leads to a fall in demand for the other (all other things equal), implying a negative cross
elasticity of demand.
Useful information in identifying demand-side and supply-side substitutes
An analysis of the product characteristics and its intended use allows us, as a first step,
to limit the field of investigation of possible substitutes. However, product
characteristics and intended use are insufficient alone to show whether two products
are effective demand substitutes. Functional interchangeability or similarity in
characteristics may not, in themselves, provide sufficient criteria because the
responsiveness of customers to relative price changes may be determined by other
considerations as well. Conversely, differences in product characteristics are not in
themselves sufficient to exclude demand-side substitutability, since this will depend to
a large extent on how customers value different characteristics.
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