HAPTER 2. A LEVEL PLAYING FIELD EFFECTIVE COMPETITION
CHAPTER 2. A LEVEL PLAYING FIELD: REGULATING FOREFFECTIVE COMPETITIONCHAPTER 2. A LEVEL PLAYING FIELD: REGULATING FOR EFFECTIVE COMPETITION .272.1. Introduction . 272.2. Competitive Markets . 272.2.1. Benefits of Competition .272.2.2. Forms of Competition.282.3. Sector Regulation and Competition Law . 302.3.1. Competition Policy .302.3.2. Regulation.302.3.3. Ex Ante and Ex Post Regulation.312.3.4. The role of competition authorities and regulators .312.3.5. Regulatory Forbearance .312.4. Competition Analysis . 322.4.1. Markets and Market Definition .322.4.2. Market Power .352.4.3. Barriers to Entry .372.4.4. Essential Facilities .382.4.5. Common Forms of Anti-Competitive Conduct .382.4.6. Remedies for Anti-Competitive Conduct .432.5. Control of Mergers and Acquisitions . 482.5.1. Horizontal Mergers .482.5.2. Vertical Mergers .492.5.3. Joint Ventures .502.6. Regulating Prices . 502.6.1. Why Regulate Prices? .502.6.2. Measuring Costs .522.6.3. Methods of Price Regulation .542.6.4. Benchmarking Prices .57Telecommunications Regulation Handbook25
26Telecommunications Regulation Handbook
CHAPTER 2. A LEVEL PLAYING FIELD: REGULATING FOREFFECTIVE COMPETITION2.1. IntroductionChapter 2 examines the benefits of a competitivecommunications market and the implementation ofregulation for a level playing field. It considersaspects of sector regulation and competition law,market failure, and ex ante vs. ex post regulation.Different kinds of anti-competitive conduct, such asabuse of dominant market power, are considered aswell as possible remedies. Attention is also paid tothe control of mergers and acquisitions and theresponsibilities of competition authorities andregulators. The role of price regulation, costconcepts and pricing methods are also examined.2.2. Competitive Markets2.2.1. Benefits of CompetitionCompetition policy and economic regulation arebased on the premise that the ―public interest‖ or―social good‖ is best served when markets workefficiently. This generally occurs in a competitiveenvironment.Telecommunications Regulation HandbookCompetition is the most efficient and equitablemechanism available for organizing, operating, anddisciplining economic markets. Competitive marketsdistribute resources efficiently and fairly without anyneed for a single centralized controlling authority.Competition maximizes benefits to society by: Ensuring that resources, products, and servicesare allocated to the person or persons who valuethem the most (allocative efficiency) Forcing market participants to use scarceresources as productively as possible (productiveefficiency) Encouraging market participants to innovate,and to invest in new technologies at the besttime (dynamic efficiency).There are numerous examples internationally of thebenefits of competition in the ICT sector (see Figure2.1 and Chapter 1).27
A Level Playing FieldMillionsFigure 2.1 Growth in Competition and Number of Subscriptions, 1995- 20094500100%No subscriptions400090%Competition in 9950Source: ITU World Telecommunication/ICT Indicators database.2.2.2. Forms of CompetitionThere are many different forms of competition.Many people think about competition in terms ofthe textbook model of perfect competition. Perfectcompetition is an ideal model of a competitivemarket, but is unlikely to occur in practice.Markets that are not perfectly competitive can stilldeliver significant benefits for buyers and sellers. Auseful standard for analyzing real world markets isworkable or effective competition. The concept ofcontestability is also useful for analyzing markets inwhich there are few players but market power isconstrained by the potential for entry.Perfect CompetitionThe textbook case of perfect competition is an idealmodel of a competitive market. Perfect competitionrarely (if ever) occurs in practice. It is more an idealthan a market reality, and is therefore of limited usein analyzing the performance of real world markets.Perfect competition requires a number ofconditions: No single consumer or firm must buy or sellanything more than an insignificant proportionof the available market volume of that product; All buyers and sellers must enjoy the freedom toenter or exit the market at will and withoutincurring additional costs; There must be no economies of scale.Economies of scale arise where the average costof production falls as the volume of productionincreases. Where economies of scale exist it ismore efficient for a single firm to produce agiven volume than for two or more firms thatbetween them produce the same total volume,as the larger firm; There must be no economies of scope.Economies of scope arise when differentproducts have significant shared fixed costs, sothat a single firm can produce them using acommon facility. Where economies of scopeexist it is cheaper (and more efficient) toproduce different products out of a commonplant or facility than to produce them separately; There must be no externalities. An externality isan unintended side effect (either beneficial oradverse) of an ordinary economic activity thatarises outside the market or price system so thatits impact is not reflected in market prices andcosts; The product concerned must be―homogeneous‖ – that is to say, the productmust have identical attributes and qualityregardless of who buys or sells it; There must be a large number of buyers andsellers for that product; Buyers must be homogeneous and perfectlyinformed;There must be no regulation of the market orfranchise obligations; and There must be no restrictions on capital.28Telecommunications Regulation Handbook
A Level Playing FieldEffective CompetitionEffective competition occurs in economic marketswhen four major market conditions are present: Buyers have access to alternative sellers for theproducts they desire (or for reasonablesubstitutes) at prices they are willing to pay, Sellers have access to buyers for their productswithout undue hindrance or restraint from otherfirms, interest groups, government agencies, orexisting laws or regulations, The market price of a product is determined bythe interaction of consumers and firms. Nosingle consumer or firm (or group of consumersor firms) can determine, or unduly influence, thelevel of the price, andDifferences in prices charged by different firms(and paid by different consumers) reflect onlydifferences in cost or product quality/attributes.In effectively competitive markets, consumers areprotected to some degree from exploitative pricesthat firms, acting unilaterally or as a collusive bloc,could charge. Likewise, firms are protected frommanipulation by large individual consumers (orgroups of consumers) and from disruption orinterference from other firms.Competition occurs on the basis of both price andthe quality or features of the product. Products areoften differentiated, that is they are not identicalacross firms. One form of a product is usually areasonable substitute for another form of thatproduct. This is often referred to as ―functionalequivalence‖. Sellers may also offer productcombinations or bundles that appeal to specificconsumers or consumer segments.Effective competition can occur even in marketswith relatively few firms that differ substantially insize, market share, and tenure. However, for suchmarkets to be competitive, it is important that thereare no barriers to entry and exit.Market ContestabilityHigh firm concentrations in a given market may nottranslate to market power. Even in markets whereonly one or a few firms can efficiently operate (forexample due to economies of scale), it is possible forcompetition to work.A market is said to be contestable when barriers toentry and exit are so low that the threat of potentialTelecommunications Regulation Handbookentry prevents the incumbent from exercisingmarket power.In perfectly contestable markets there are no barriersto entry or exit. With free entry into and exit fromthe market, the threat of potential entry willconstrain the behavior of incumbent firms. Shouldan incumbent firm increase prices above the normallevel of profits, then new firms will enter the marketand force prices down again.Contestability requires that there are no sunk costsfor market entry. That is, should an entrant fail, itcan recover its fixed costs (for example by sellingassets or reusing them elsewhere).Sustainable CompetitionCompetition is a desirable goal not for its own sake,but because of the benefits it can bring to a marketand its users. These benefits derive from thepressure competition places on firms to be efficient,innovative and customer focused in order to thriveand survive. They include lower prices, higherproductivity, more service choices, and greaterconnectivity.The overall aim of competition policy is to achievesustainable competition, where competition occurson a ―level playing field‖ and consumers andoperators are not subject to anti-competitivepractices.The telecommunications marketplace is increasinglyvolatile. In many developed countries the industryhas experienced ups and downs of financing anddevelopment during the last 10 years. This hasresulted in spurts of growth in facilities and servicesdeployment, followed by reductions in serviceoperators and consumer choices and a slowingdown of connectivity expansion. This has in turnslowed down the financing of some viablecommunications projects in developing countries.Against this background, the regulators‘ task offostering the transition to sustainable competition isa complex one. Regulators may be tempted tomicromanage the market to ensure that competition(or a particular form of competition) takes place.Alternatively, they may decide prematurely that themarket is fully competitive. Neither of these paths islikely to result in sustainable competition.Regulators are faced with a complex balancingexercise. Individual regulatory decisions need tobalance:29
A Level Playing Field The long term objective of ongoing, sustainablecompetition, The resolution of immediate short-termconcerns, and Conformance with the regulatory and legislativeprovisions under which regulators operate.2.3. Sector Regulation andCompetition LawIn practice, many markets do not exhibit all theconditions necessary for workable or effectivecompetition. Market failures occur in many forms.The two forms that are most associated with theneed for regulation are: Monopoly, including natural monopoly; and Externalities.When market failures arise, it is necessary toconsider whether the problem is likely to correctitself. If market failures will not correct themselves,then there may be a need for additional tools tofoster effective competition or to prevent sociallyundesirable outcomes.This section introduces two broad approaches topromoting competition in the ICT sector, namelycompetition policy and regulation. Competitionpolicy and regulation are not mutually exclusive.Many countries use a mix of both. However, care isrequired to ensure that sector regulation andcompetition laws and policies are developed andapplied consistently.This section discusses the following topics: Competition policy Regulation Ex ante and ex post regulation Advantages and disadvantages of ex ante versusex post regulationRegulatory forbearance 2.3.1. Competition PolicyCompetition policy provides a set of tools topromote sustainable competition and to preserve amarket environment in which such competition canflourish. Competition policy may be implementedthrough general competition laws or throughcompetition enhancing rules in specific sectors. Inaddition, it must be weighed against other policy30objectives, such as consumer protection and thedevelopment of a viable telecommunicationsindustry.In the ICT sector, such rules might include: General prohibitions on anti-competitivebehavior and mergers or acquisitions that wouldreduce competition (as in the case of HongKong SAR, China), or Specific rules designed to encouragecompetition in the sectors, such asinterconnection requirements or unbundlingpolicies.Competition laws (or ―antitrust laws‖, as they arecalled in the U.S.) aim to promote efficientcompetition by penalizing or undoing conduct thatreduces competition in a market. Competition lawsgenerally include provisions to: Prevent competing firms from banding together(―colluding‖) to increase prices or reducequantities of goods and services, or to excludeother firms from a market, Prevent firms with a dominant position, or―significant market power‖, from using theirmarket power to exclude competitors from themarket, or otherwise reduce competition, Stop mergers or acquisitions that would reducecompetition.With the exception of provisions for mergers andacquisitions, competition laws are generally ex postregulation. They give the competition authority orthe courts powers to respond to anti-competitivebehavior once it has occurred.2.3.2. RegulationRegulation is useful where the market along wouldproduce undesirable or socially unacceptableoutcomes.Regulation attempts to prevent socially undesirableoutcomes and to direct market activity towarddesired outcomes. For example, ICT regulation iswidely used to promote prices that reflect efficientcosts and promote universal access to basic services.However, regulation has potentially high costs. Theregulatory process is inherently time consuming toadminister and requires considerable expenditure ofresources. In addition, regulation can haveunintended consequences which may be detrimentalTelecommunications Regulation Handbook
A Level Playing Fieldto customers and the ―public interest‖. No matterhow capable and well intentioned regulators are,they will never be able to produce outcomes asefficient as a well-functioning market.Accordingly, regulation should only focus on thoseparts of the ICT sector where there is a clear needfor regulation (that is, where effective competition isnot feasible) and should only be a temporarymeasure. Over time, regulators should aim toestablish or restore the conditions that provide foreffective competition on a sustained basis. Thisentails, for example, removing or reducing barriersto entry and exit. It also involves enabling themarket itself to prevent the incumbent from abusingits market power, for example, through the entry ofadditional competitors (see Box 2.1).2.3.3. Ex Ante and Ex Post RegulationPractitioners commonly distinguish between ―ex anteregulation‖ and ―ex post regulation.‖ Variouscountries have adopted competition policies thatrely, to varying degrees, on mixing elements of thesetwo approaches.Ex Ante RegulationEx ante regulation is anticipatory intervention. Exante regulation uses government-specified controlsto: Prevent socially undesirable actions or outcomesin markets, or Direct market activity towards socially desirableends.Ex ante regulation is mainly concerned with marketstructure, i.e. the number of firms and level ofmarket concentration, entry conditions, and thedegree of product differentiation.Ex ante regulation often takes the form of sectorspecific regulation.Ex Post RegulationEx post regulation addresses specific allegations ofanti-competitive behavior or market abuse. Ex postregulation aims to redress proven misconductthrough a range of enforcement options includingfines, injunctions, or bans.Ex post regulation is mainly concerned with marketconduct — the behavior of a firm with respect toboth its competitors and its customers.Telecommunications Regulation HandbookEx post regulation often takes the form ofcompetition laws.2.3.4. The role of competition authoritiesand regulatorsProvisions governing mergers and acquisition aregenerally included in competition or antitr
Telecommunications Regulation Handbook 27 CHAPTER 2. A LEVEL PLAYING FIELD: REGULATING FOR EFFECTIVE COMPETITION 2.1. Introduction Chapter 2 examines the benefits of a competitive communications market and the implementation of regulation for a level playing field. It considers aspects of sector regulation and competition law,
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C HAPTER 10 Analyzing Images 218 . C HAPTER 1 2 Analyzing a Short Story 275 CHAPTER 1 3 Analyzing and Synthesizing Ideas 304 CHAPTER 14 Investigating Cause and Consequence 337 WRITING TO PERSUADE CHAPTER 1 5 Writing a Classical Argument 372 CHAPTER 16 Making an Evaluation 417
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