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Market Definition in the Telecoms Industry. Prof. Jordi Gual IESE Business School Barcelona-Madrid Brussels, 16 September 2002. Outline. The economics of relevant antitrust markets Defining markets in telecoms: conventional issues What is different about telecoms? Concluding remarks.

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Market Definition in the Telecoms Industry

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Market definition in the telecoms industry l.jpg

Market Definition in the Telecoms Industry

Prof. Jordi Gual

IESE Business School

Barcelona-Madrid

Brussels, 16 September 2002


Outline l.jpg

Outline

  • The economics of relevant antitrust markets

  • Defining markets in telecoms: conventional issues

  • What is different about telecoms?

  • Concluding remarks

Prof. Jordi Gual, IESE Business School


The economics of relevant antitrust markets l.jpg

The economics of relevant antitrust markets

  • The hypothetical monopoly principle

  • The hypothetical monopoly principle when fixed costs are important

Prof. Jordi Gual, IESE Business School


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The hypothetical monopoly principle (I): definition

  • The set of services whose provision, if in the hands of a single entity, could profitably be restricted

  • Also known as the small but significant (5 or 10%) non-transitory increase in price test (the SSNIP test)

  • Why is it reasonable?

    • Position of individual firms computed relative to an aggregate which gives full control

    • Gradual addition of substitutes

    • Relative to the competitive benchmark

Prof. Jordi Gual, IESE Business School


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The hypothetical monopoly principle (II): the mark-up

  • A monopolist would raise price p by:

    where e is the elasticity of demand and mc marginal cost

  • Several firms acting jointly will face a residualdemand: how demand falls when firms coordinate price increases, taking into account the reaction of excluded products

  • The price increase that these firms can achieve depends on the elasticity of the residualdemand

Prof. Jordi Gual, IESE Business School


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The hypothetical monopoly principle (III): measurement

  • The elasticity of residualdemand depends on:

    • the extent to which the excluded are products good substitutes

    • and how aggressive their producers are

  • In the absence of quantitative information:

    • demand substitutability

    • supply substitutability

Prof. Jordi Gual, IESE Business School


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The hypothetical monopoly principle with fixed costs

  • With fixed costs may not be sustainable for the industry

  • If the fixed costs are technically based: compute the average mark-up which covers industry fixed costs

  • If the fixed costs are strategic (continuing “sunk” investments in R&D and brand)

    • the static mark-up does not capture dynamic efficiency

    • substitutability is driven by relative product performance and not price

Prof. Jordi Gual, IESE Business School


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Outline

  • The economics of relevant antitrust markets

  • Defining markets in telecoms: conventional issues

  • What is different about telecoms?

  • Concluding remarks

Prof. Jordi Gual, IESE Business School


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Defining markets in telecoms: conventional issues (I)

  • Product/Service markets

  • Fixed/Mobile

  • Mass/Business

  • Geographic definition

Prof. Jordi Gual, IESE Business School


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Defining markets in telecoms: conventional issues (II)

  • In theory, based on the hypothetical monopoly test

  • In practice, focus on demand substitutability and similarity of competitive conditions

  • Need to recognize explicitly supply substitutability

Prof. Jordi Gual, IESE Business School


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Outline

  • The economics of relevant antitrust markets

  • Defining markets in telecoms: conventional issues

  • What is different about telecoms?

  • Concluding remarks

Prof. Jordi Gual, IESE Business School


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What is different about telecoms?

  • Wholesale/retail

  • Networks

  • Bottlenecks

  • Bundles

    • The case of mobile call termination

  • Product/service innovation

Prof. Jordi Gual, IESE Business School


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Bundles of telecom services

  • Varying degrees of complementarity in demand and scope economies in supply

  • The hypothetical monopoly principle does not work:

    • Strong complementarities => low own-price elasticity for individual services => narrow markets

    • Enlarging the product set may lower market power

    • When enlarging the product set, prices should not be kept constant

  • Stand-alone services make sense when: low complementarity and independent supply

Prof. Jordi Gual, IESE Business School


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The case of mobile termination: the regulatory approach

  • Insufficient incentives for price competition

    • due to CPP

    • no offsetting factors

    • observed high margins

  • Market delineation: call termination in each network due to low demand and supply substitutability

  • Introduction of regulation

Prof. Jordi Gual, IESE Business School


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The case of mobile termination: the antitrust approach

  • Determine the relevant market

    • Examine the nature of demand relationships without considering competitive conditions

    • Examine the alternative sources of supply

  • Assess the degree of competition in the previously defined markets

  • Impose regulation in the relevant markets if competition is insufficient

Prof. Jordi Gual, IESE Business School


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Product/service innovation

  • In parts of the industry, fixed costs are sunk and related to strategic competition in service or product innovation

  • A broader concept of substitutability is needed:

    • between technologies that can satisfy similar consumer demands

    • between suppliers that own assets which could lead to the alternative technologies

Prof. Jordi Gual, IESE Business School


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Outline

  • The economics of relevant antitrust markets

  • Defining markets in telecoms: conventional issues

  • What is different about telecoms?

  • Concluding remarks

Prof. Jordi Gual, IESE Business School


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Concluding remarks

  • Need to pay more attention to supply substitutability

  • Systems of services as relevant units of market analysis

  • Need to redefine the competitive benchmark in the presence of fixed costs

  • Absence of competition in an individual service should not determine market definition

Prof. Jordi Gual, IESE Business School


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