EFFECTIVE COMPETITION REVIEW
Statement on market definition and competition analysis. This statement sets out Oftel’s approach to market definition and competition analysis.
February 1998
Chapter 1: Introduction – Oftel’s aims
Chapter 2: Comments on Oftel’s methodology for competition analysis
Chapter 3: Assessing the development of competition
Any written comments on this Statement should be submitted to:
Jonathan Porter
Oftel
50 Ludgate Hill
LONDON
EC4M 7JJ
Fax: 0171 634 8948
or email: economists.oftel@gtnet.gov.uk
Introduction – Oftel’s aims
Oftel’s goal is to provide the best deal for customers in terms of quality, choice and value for money and it sees this being achieved through the promotion of competition both in services and in the provision of alternative infrastructure.
1.1 Oftel believes that promotion of competition at all levels in the supply chain of telecoms services will ultimately give the customer the best deal and a major feature of Oftel’s role is the management of change in the telecoms market from monopoly towards competition. As competition develops, it will also make continued detailed regulation of major parts of the telecoms industry unnecessary. Oftel sees a key element of its work as being to stimulate and encourage competition where feasible as a means of moving away from intrusive regulation. There is already a presumption in the current framework against the need to impose the full force of regulatory rules (eg detailed price controls) on new telecoms services as they emerge. In the longer run, Oftel expects that the telecoms industry in the UK will operate like many other private sector industries without the need for detailed regulation (except perhaps in the field of interconnection).
1.2 Oftel was primarily created to regulate BT as the incumbent monopoly operator. It is expected that as competition extends across telecoms markets Oftel’s role will change from one of being a company or industry specific regulator and move more towards that of a specialist competition authority for the telecoms industry in the UK.
Analytical framework
1.3 One of the principal functions of a competition authority is to deal with anti-competitive behaviour. In order to do this there is the need to develop a framework for analysing competition. From an economic perspective there is a need to base any analysis of competition in a market context which in turn entails defining the relevant economic product market(s) before proceeding to analyse the operation of competition within that market.
1.4 Since this work on market definition and competition analysis will lie at the heart of Oftel’s role as a competition authority, it is important that there is a common understanding and also acceptance of the approach that Oftel proposes to use in respect of market definition and the assessment of competition. The process of developing an appropriate economic framework began as part of the review of the Retail Price Control which was started in December 1995. Oftel has developed its analytical approach to competition issues in particular areas through industry workshops and other fora and through various guidelines which have been published (eg the guidelines that accompany the Fair Trading Condition). Oftel is also committed to keeping the development of competition across various telecoms markets under review. The consultation process carried out at the end of 1996/beginning of 1997 is part of this on-going work.
The consultation process
1.5 In a letter to operators, major users, consumer groups and advisory bodies within the telecommunications industry in December 1996, the Director General invited interested parties to comment on the following five issues:
1.6 This statement deals primarily with the first two elements and addresses some of the methodological issues Oftel faces in developing its framework for analysing competition in telecommunications markets. The third issue of the list, the monitoring of the development of competition, has been addressed by the establishment of an on-going programme by Oftel to publish a variety of information and market data at regular intervals during the year (eg Towards better telecoms for customers (June 1997), Buying telecoms services – could your business do better (November 1997) etc). In the context of enhanced services, Oftel has established a Service Providers Forum which is intended to provide a means for Oftel to exchange ideas and receive feedback on issues of particular concern to service providers. On the final issue on the list, ie restrictions and privileges, the information gathered from the consultation process has been incorporated within internal Oftel projects such as reviews of the licencing regime.
1.7 This statement comprises two main sections. The first section (Chapters 2B3) discusses some of the issues to do with Oftel’s competition analysis framework that were raised in the responses to the consultation process and attempts to clarify that analytical framework. The second section (Chapter 4) then takes forward the analytical framework and examines two specific issues which Oftel believes to be of interest to the telecoms industry:
1.8 Attached as a annex to this statement is a revised version of Oftel’s approach to market definition and the analysis of competition. This statement and the revised methodology should be read together. It is intended that the methodology will be reviewed and updated on a regular basis and in particular will aim to incorporate important developments in the field of competition analysis.
Comments on Oftel’s methodology for competition analysis
2.1 Firms often use the term ‘market’ to refer either to the area where it sells its products or more generally the sector to which it belongs. However, in the context of competition analysis, the term market, or more specifically the relevant market, is used with a specific economic meaning and combines both a description of the product(s) that make up the market and an assessment of the geographical dimension of the market.
Background
2.2 Licence enforcement work increasingly requires Oftel to take into account the market context within which a licence breach might have occurred. For instance, one of the elements of the Fair Trading Condition (FTC) which has now been included in most telecoms licences prohibits the abuse of a dominant position. As the guidelines to the FTC make clear, the concept of dominance needs to be assessed in relation to a specific market. This in turn requires the definition of the relevant market and an analysis of competition within that market.
2.3 Oftel has also moved to assessing whether discrimination or preference is undue by reference to its impact on competition in a market. Market definition and competition analysis will also be relevant to other aspects of Oftel’s licence enforcement activities (eg determining whether an operator should be considered to have become ‘well established’).
2.4 In terms of developing its framework for market definition and competition analysis Oftel is attempting to draw on the best practice of other competition authorities not only in the UK but also in the EU and the USA.
Initial consultation
2.5 In the Director General’s December letter Oftel restated the methodology that it proposed to use for analysing the extent of competition. This approach consisted of a standard two stage approach which is used by other competition authorities.
Market definition
2.6 The first stage of this approach involves the definition of the relevant product market by reference to the demand and supply conditions associated with a particular product, together with a consideration of the geographical scope of the market.
2.7 A consideration of the scope for demand-side substitution involves a consideration of the choices available to customers and in particular requires a certain understanding of the product in question eg how customers use the product, what factors are important to them, what alternatives are available to them etc. In parallel, the consideration of the scope for supply-side substitution considers the facilities necessary to produce a particular service – eg whether dedicated or specialised equipment is needed to produce a product, how the product reaches the final customers etc – and the technical and commercial feasibility for other firms to switch their production facilities in order to supply that product.
2.8 The geographical scope of the relevant market is the geographical area within demand-side and/or supply-side substitution can take place so that the conditions of competition within that area are broadly similar.
2.9 The consideration of the factors that are important for market definition is a useful discipline. It necessitates a careful consideration of the information that is required to build up a picture of the relevant product market and the way in which firms operate and compete within it.
Competition analysis
2.10 The second stage then involves assessing the extent of competition within that market taking into account a range of structural and behavioural factors. These factors include (but are not limited to) changes in the patterns of market shares over time; the recent history of entry into (and exit from) the market; and barriers to entry. The aim is to build up a picture of how competition operates within the relevant market.
2.11 The separation of the process of analysing the extent of competition into two distinct stages is a formalised characterisation of the way in which the actual processes will interact. In fact there will typically be a degree of overlap between the sort of information required for market definition and that required for an assessment of competition because the demand and supply conditions influence competition. It is important to recognise in this context that the process of market definition is not an end in itself. The purpose of market definition is to support the analysis of competition. For instance, in order to be able to calculate market shares to compare the relative positions of different firms there needs to be a definition of the relevant market in the first place.
Application of methodology
2.12 Oftel has proposed that this methodology would form the basis of its investigation work as a competition authority. This means that it would be used in investigating complaints about anti-competitive behaviour and licence enforcement and, as mentioned above, this approach would also be used in the application of the Fair Trading Condition. Oftel proposes that the methodology for market definition would be the same whether the relevant market was being identified in the context of considering a complaint about anti-competitive behaviour or in considering whether regulatory controls should be relaxed.
2.13 Oftel also hopes that the exposition of the methodology for market definition and the assessment of competition will serve to indicate the type of information Oftel will be looking to the industry (both operators and users) to provide when making submissions in respect of anti-competitive behaviour, or breaches of licence conditions.
2.14 Oftel is aware that the telecoms industry, possesses features which, while they do not make it a unique industry, do mean that it is not a typical industry and this can complicate the analytical framework. For instance, certain markets within the telecoms sector have been subject to price regulation for a number of years and this will obviously have had an impact on the development of those markets. In addition the licensing regime can also serve to confine the range of activities which firms can undertake and thus potentially constrain the way in which markets develop.
2.15 Most telecoms and telecoms-related services are based on or around telecoms networks in which substantial investment has been ‘sunk.’ This implies that it is costly to enter these markets. The nature of the supply of telecommunication networks and services is characterised by economies of scale (stemming from large fixed costs) and economies of scope (giving rise to common costs). In addition the presence of vertical externalities means that telecommunications network operators tend to be vertically integrated, multi-product firms. This means that there is often the need to consider carefully the appropriate analytical framework which should be used and to take into account these various factors.
Technological developments
2.16 The telecoms industry is also characterised by rapid technological change. There is a steady stream of new products being offered to customers which in turn can result in improvements to existing products or even in the development of entirely new markets. By changing the economics of providing existing products, technological developments can also reduce the barriers to entry in existing markets. For instance, the development of fixed radio access networks has reduced the fixed costs of providing a local network, capital costs per subscriber will be lower than the cost of fixed wire technology and a greater proportion of these operators’ costs will be variable.
2.17 Products based on new technologies can extend the set of alternative services available to customers. One consequence of these technological developments is that they raise the possibility that the definition of relevant markets will change over time. Market definitions are not immutable and there will be a need to recognise this dynamic element. This would also suggest that there should be a presumption against defining markets in terms of the underlying technologies because the majority of customers purchase services rather than the specific technologies by which the services are provided.
2.18 It is also important to note that the concept of effective competition is not just concerned with the prices and costs – it is also caught up with considerations of factors such as the quality of service; the range of services that are available; efficiency; as well as incentives for innovation.
Responses to the consultation
2.19 In total Oftel received thirteen responses to the letter that was sent in December with the two main, substantive responses being from BT and from the Other Licenced Operators (OLOs). The latter was in the form of a report prepared by the economic consulting firm NERA. A number of operators also made individual responses on specific issues.
2.20 There were also responses from a number of major telecoms users – both in terms of end users and firms whose business relied on telecoms services. For example, responses were received from Reuters, the Direct Marketing Association and the Network Outsourcing Association. Oftel was particularly interested to obtain responses from these users – their input is crucial if Oftel is to have a thorough view of the development of competition and the actual impact it has on customers.
2.21 All the responses agreed that it was important for Oftel to review the development of competition, to roll back regulation where competition could be deemed to be effective and to identify areas where the lifting of restrictions or privileges could further assist the development of competition. Most of the responses also indicated that there was broad support within the industry for the principles that Oftel was proposing to use to assess the extent of competition.
2.22 However, one of the responses on behalf of a number of major telecoms users, did query whether Oftel was introducing an overly mechanistic or economic approach to make ‘academic’ evaluations of market competitiveness. The response reported that telecoms users did not always agree that there was effective competition in markets which Oftel had suggested were competitive. The response went on the recommend that Oftel should investigate the use of more qualitative measures rather than relying on quantitative measures. However, the response did not indicate the sort of qualitative measures it thought might be appropriate.
2.23 Oftel believes that its approach does try to take account of qualitative aspects of competition in trying to understand how competition operates in a particular market. For instance, the consideration of the demand conditions for a product is intended to identify what factors are important to the consumer in making their choices between different products eg price, quality, reliability etc. It is also the case that the methodology does make it clear that Oftel will not rely solely on structural factors such as market shares at a given point in time.
2.24 A number of the responses recognised that Oftel’s approach mirrored that used by competition authorities in the UK, Europe and the US and welcomed this. However, the responses of both BT and the OLOs cautioned that the application of the approach was not always straightforward and that there were areas where further explanation of the operation of the methodology would be necessary. In particular both responses also drew attention to the issues surrounding:
These issues are discussed below.
2.25 The December letter set out the broad principles that Oftel was proposing to use in its approach to analysing competition and sought support for that approach. Other competition authorities publish similar statements on the general principles that will be guide their approach to analysing competition – for instance, the latest version of the Commission’s Notice on the definition of the relevant market for the purposes of Community competition law (ref; 97/C 372/03) is available on the DGIV web-site. However, Oftel recognises that it would be useful if the statement on the methodology was expanded to some extent in order to provide industry participants with an indication of the sort of information that Oftel will typically need to consider when carrying out its functions. Oftel’s intention is to be as open as possible in respect of its approach but it has to be recognised that it is not possible at this stage to be absolutely definitive on each issue.
2.26 Interested readers might like to refer to the Office of Fair Trading Research Paper No.1 Market Definition in UK Competition Policy for a discussion of some of the more technical economic issues to do with market definition.
2.27 Where it is possible to add clarity to the statement of the general principles, Oftel is willing to do so. The remainder of this section discusses some of the reasoning behind the methodology for defining the relevant market and indicates where Oftel will modify the methodology to take into account the responses.
The ‘Hypothetical Monopolist’
2.28 A number of the responses (including that of BT) suggested that Oftel should be explicit in adopting the concept of the ‘hypothetical monopolist’ in its approach to market definition. It is indeed the case that Oftel intends to make use of this concept in considering the scope for demand-side and supply-side substitution.
2.29 Although it is not intended to be a representation of the actual market situation, the ‘hypothetical monopolist’ is a useful analytical concept to employ in trying to set the boundaries to the relevant product market in practical terms. It is an analytical tool that is beginning to be used explicitly by other UK competition agencies. For instance, in the MMC Report London Clubs International plc and Capital Corporation PLC there was an explicit reference to the use of this approach for the purposes of market definition. The report considered that:
“a market [consists of] a product or group of products and a geographic area in which it is produced or sold such that a hypothetical profit-maximising firm, not subject to price regulation, that was the only present and future producer and seller of products in that are would be likely to impose at least a small but significant and non-transitory increase in price.”
2.30 The concept of the ‘hypothetical monopolist’ focuses on whether alternative (not necessarily identical) products are available to customers to which they could switch, without significant effort and expense, if the supplier of the product in question tried to implement a small but significant and non-transitory price increase. The idea behind this concept is that if customers are able and likely to switch to other similar products in sufficient numbers for the initial price increase to be unprofitable, then that monopolist’s product is in direct competition with those products identified in this way and they form part of the relevant economic market. If such products can be found, they should be included in the definition of the product market as they would constrain the price-setting behaviour of the ‘hypothetical monopolist.’ This analysis is then repeated for the expanded product group until a set of products is arrived at where the ‘hypothetical monopolist’ would be able to maintain an increase in the price it charged for these goods. The concept thus involves a series of iterations, each time involving an examination of the likely reaction of customers to the change in relative prices.
2.31 One reason this process focuses on the reactions of customers to relative price increases is for operational and practical reasons: ie price levels are directly observable and thus provide an obvious benchmark. There may also be historical evidence of how customers have reacted to previous price increases or indeed other market events. This is sometimes referred to as shock analysis: the examination of actual responses by market players in response to a clearly identifiable change in competitive conditions (eg the way in which market players reacted to entry into the market by a new firm).
2.32 The Annex to this statement contains an expanded version of the methodology that Oftel proposes to use which incorporates specific reference to the ‘hypothetical monopolist’ approach.
The interaction of regulation and market definition
2.33 As described above, the concept of the ‘hypothetical monopolist’ is essentially an analytical instrument for use in considering the issue of market definition and focuses on behavioural aspects in relation to potential changes in relative prices. This can raise the issue of whether the existing price level is an appropriate starting point for this sort of analysis.
2.34 In a standard market analysis, there is not normally an issue as to whether the prevailing price level is an appropriate reference (ie the prevailing price level is generally taken as approximating to the competitive price level). However, there is a danger that if the prevailing price is in fact already at or close to the monopoly price, then an increase above this level would lead to customers switching to products that they would not normally regard as close demand-side substitutes and this in turn would tend to lead to a definition of the relevant market that was in fact too broad and would thus not be appropriate for considering competition issues.
2.35 Where a market has been subject to price control there must be a question of whether it is appropriate to use the prevailing price level as the benchmark against which to assess the impact of a small but non-transitory increase in price. A number of the responses argued that the price level (and tariff structures) around which competition develops will be BT’s regulated tariffs and seemed to suggest that using BT’s prices as the reference tariff would not be appropriate. However, Oftel’s view is that this would ignore the impact of price regulation on BT since it was privatised.
2.36 The aim of the price regulation of telecoms in the UK has been to mimic the effects of the competitive process – but at the same time recognising that price control is a second best solution to effective competition – and to protect the customer from being exploited. The structure of the price control should also ideally give the regulated company incentives to reduce costs as far as possible. To this end the value of ‘X’ in the RPIBX formula is set to take into account the anticipated scope for costs savings for the period of the price control. This has meant that, in practice, prices have fallen substantially in real terms since BT was privatised.
2.37 Oftel believes that it is probably sensible to proceed on the basis that the prevailing price levels provide a reasonable basis from which to start the analysis unless there is evidence to suggest that this is not in fact the case ie Oftel will use the presumption that, where there are price controls, the prevailing price levels are not the monopoly prices and they can be used as a starting point for analysis.
Assessing the development of competition
3.1 The submissions to Oftel dealt with the issue of assessing the extent of competition and the actual development of effective competition in the UK in two contrasting ways.
3.2 BT’s submission reviewed the development of alternative infrastructure in the UK and had two broad themes running through the submission. The first was that new entrants have a considerable technological advantage in being able to incorporate new technologies into their networks from the outset and thus reap the benefits associated with more technically efficient network structures – for instance, new entrants are better placed to utilise new transmission technologies such as Synchronous Digital Hierarchy (SDH). The second theme was that the development of alternative infrastructures has meant that there is a degree of excess capacity in the industry which not only means that competitors would be able to compete for significant amounts of BT’s traffic but also reduces the barriers to entry for service providers by giving them a choice of network operators.
3.3 In its response BT proposed that the appropriate test for the effectiveness of competition
“should be that competition has sufficient momentum such that it will, by itself, be ‘effective’ in substituting for the specific regulatory control that is being removed.”
3.4 This might be characterised as a forward-looking approach but it appears to involve a pre-judgement about the development of competition so that regulatory restrictions are removed as there is a general move towards more competition in a market ie it seems to anticipate competition becoming firmly established in a market. BT also proposed the use of a series of ‘Bright Line’ tests – these are dealt with below in paragraph 54.
3.5 BT’s response also proposed that the decision to deregulate should include an assessment as to whether the situation would be improved/worsened by the change contemplated ie Oftel should consider the question of whether the market would be effectively competitive if price regulation were removed and, in particular, whether there would be sufficient constraints to prevent price rises taking into account other aspects of the regulatory regime.
3.6 In contrast the response from the OLOs chose to explore some of the main market definitions proposed by Oftel and then attempted to carry forward the analysis of competition in the context of those specific markets.
3.7 Other responses tended not to provide quite the same level of market analysis as that provided by BT and the OLOs but rather concentrated their comments on specific areas. For instance, the Network Outsourcing Association said that the market for network outsourcing had initially been viewed in terms of Wide Area Networks (WANs) but that there was now a trend to include Local Area Networks (LANs) as well. This is perhaps an indication that the extent of competition is changing and evolving.
3.8 For those submissions that did consider the issue of market definition in practical terms ie in terms of actually discussing the demands and supply conditions surrounding the provision of particular products, there was broad agreement that the market definitions for the main telecoms products (eg call services, network access etc) proposed by Oftel provided an appropriate base from which to assess the development of competition. In future any analysis of competition will set out the definition of the relevant market together with the factors that are important in reaching that definition.
Bright line tests
3.9 BT’s response suggested that Oftel might usefully introduce a series of so-called ‘Bright Line’ tests in the context of assessing the extent of competition and as a way of simplifying the information gathering process. These bright line tests would set out clear reference points by which the development of competition in an individual product market could be judged such that further work on assessing competition would only be necessary if the bright line test were not satisfied.
3.10 BT proposed four levels of bright line tests involving a consideration of the:
3.11 The idea of this four level bright line test approach was that there would only be a need to ‘escalate’ the investigation process to the second stage (ie to consider the competitive constraints imposed by the threat of new entry into a market) if an initial assessment of the extent of competition suggested that there were not sufficient competitive constraints provided by other firms already in the market.
3.12 In particular BT proposed a specific test at the first stage of analysis such that a market with at least three ‘significant participants’ should be considered to be competitive. Under the terms of this test a significant participant was a firm which had the basic capabilities (either in terms of excess capacity or in terms of access to capacity) necessary to meet a proportion of the consumer demand (at least 10% of the relevant market).
3.13 Although Oftel would in principle be attracted to the use of tests which would simplify the information gathering process as well a provide relatively simple measures which would be understood by the industry at large – it remains sceptical about whether tests can be devised which are not overly simplistic and which do not mask the underlying complexity of competition in a particular market. For example, the test described above would imply that a market structure of one firm with 80% and two firms each with 10% of the market could be described as effectively competitive without the need for further detailed assessment of competition in that market. However, there would be no reference of how one firm came to have 80% of that market nor any examination of the barriers to entry in this market etc.
3.14 In general the tests proposed by BT (and in particular the test outlined above) focus very heavily on structural factors such as market shares and make no mention of behavioural factors. However, market shares on their own do not provide a reliable indication of the extent of competition in a market: they merely provide a snapshot of the market at given point in time. This means that any bright line test incorporating market share tests runs the risk of compounding this deficiency. The tests also appear to suggest that an examination of competition is a linear process as though each stage of analysis can be conducted in isolation. In practice such a separation is more difficult.
Enhanced services
3.15 In terms of reviewing the extent of competition in respect of enhanced services, the responses indicated that there was a belief that the service categories described by Oftel in the Promoting Competition in Services over Telecommunications Networks Consultative Document did not provide adequate descriptions of relevant product markets. The responses tended to argue that there were in fact potentially a large number of markets subsumed within the categories of: voice-based enhanced services; data-based enhanced services and video-based enhanced services.
3.16 Oftel would not dissent from this view. The Consultative Document used these distinctions as a way of classifying the types of enhanced services that were available. These three broad categories were not intended to represent Oftel’s assessment of relevant product markets that would be used for competition analysis. The responses to this particular issue about identifying and categorising enhanced services indicates that, because of the nature of the services, it may be difficult to be as prescriptive about the relevant product market as it is for the core telecoms markets.
3.17 However, the response on behalf of the OLOs went on to explore in a constructive way some of the issues that would be important to market definition in this area. In particular, it discussed the possibility that although there might appear to be a large range of enhanced services, in a number of cases there could be the possibility of supply-side substitution between similar types of enhanced services. This in turn would mean that several different services could be grouped together within one economic product market.
3.18 The specific example discussed in the OLOs’ response related to the provision of number translation services which underlie a large range of specially tariffed services such as freephone, part-paid, national rate, and Premium Rate Services (PRS) services. The OLOs’ response made the point that although the these services might not be very good substitutes from the point of view of the firm using the numbers (ie the demand-side), the fact that on the supply-side the same number translation and billing technology that was used for, say, providing an 0800 number service as was used to provide an 0345 service was likely to be an important competitive constraint which would be reflected in defining the scope of the relevant market as, say, the market for number translation services. Oftel welcomes this discussion and also the recognition that the scope for supply-side substitution can have an important role to play in market definition.
Information gathering
3.19 Again there was broad agreement that there was a need to ensure that the information gathered in the course of an investigation into a particular market was not excessive or unduly onerous. The response by the OLOs pointed out that the data gathering process could be expensive and Oftel accepts that there is need to balance the cost of additional data collection against the additional information that the data might yield in terms of understanding of a particular market. It should perhaps be stressed at this stage that in terms of data gathering, Oftel has in mind not just quantitative data in terms of, say, estimates of the size of markets as well as market share information but also what might perhaps be termed ‘qualitative’ information about the history of the market and the factors which have shaped its development.
3.20 The response by the OLOs suggested that the informational gathering process should be formally split ie that Oftel would have to justify moving on to the second stage of more detailed information gathering by setting out the conclusions that it had reached on the basis of market definition and structural assessment. The OLOs suggested that at this stage the parties involved would have the ability to challenge the preliminary analysis before having to engage in the more detailed and possibly expensive data collection process.
3.21 Oftel believes that this would add an unnecessary layer of administration to the process and would be likely to slow down the process of investigating both general issues and also specific complaints.
3.22 Oftel is aware that its methodology for assessing effective competition does not refer to some of the more technical and quantitative economic concepts which might inform the process of market definition. An example of this would be the use of cross-price elasticities for different products to establish where an element of substitution may be possible although cross elasticities in themselves do not set the limits to the relevant product market. The cross price elasticity of two products measures the change in demand for one in response to a change in price of the other. Where the cross-price elasticity of demand between two goods is positive and large (ie the demand for one increases in response to a price increase for the other), it could be possible to conclude that consumers view these goods as substitutes.
3.23 However, Oftel is aware that it can be extremely difficult to collect sufficient data to support a robust analysis. For instance an attempt to calculate the cross-price elasticity of two products would require the specification and estimation of a complex demand model. The response from the OLOs also recognised this problem. The absence of any reference to the more technical concepts was deliberate in that the methodology is intended to set out the framework for market definition/competition analysis rather than to prescribe how it should be carried out. However, Oftel is certainly not rejecting the use of these concepts and if any party wished to present this sort of technical evidence to support its views about the relevant economic market Oftel would welcome such analysis.
Implications for the regulatory framework
4.1 The way in which markets are defined and competition is assessed can have important regulatory implications not just in terms of individual cases but also in terms of broader policy issues. This next section discusses two important issues that arise in the context of examining market definition and the analysis of competition.
4.2 The first is the issue of the geographical scope of markets for telecoms services.
Geographical scope of markets
4.3 As has been set out above, an economic market is defined not only in terms of products or services that are supplied but also in terms of a particular geographic area within which those products are supplied. This means that definition of a relevant product market will comprise a description of the product(s) in question together with a reference to the relevant geographical market in which competition for the supply of these products takes place eg a specific part of the UK, the whole of the UK, EC-wide etc.
4.4 In the consultative document Pricing Telecommunications Services from 1997 published in December 1995 Oftel put forward the proposition that there would be a (rebuttable) presumption that it was appropriate to define national markets for core telecommunications services. The implication was that the geographical scope of the relevant market would need to be established on case by case basis. The geographical scope of the product market is likely to be an important issue in the context for the operation of the FTC because the FTC explicitly prohibits the abuse of a dominant position “within the UK or a substantial part of it.” This obviously leaves open the possibility that the relevant geographical market can be smaller in scope than the UK.
4.5 In the UK the supply of telecoms services is organised on a variety of different levels in that there are operators providing telecoms services on a national, as well as regional and local basis. In part this is underpinned by a hierarchy of licences incorporating original and slimline PTO licences for operators such as BT, Cable & Wireless Communications (CWC), Energis, Ionica etc, which enable the operator to offer telecoms services on a national basis (although BT is in fact not permitted to offer services in the Kingston (Hull) area) – down to licences for individual cable franchises which allow the cable operator to offer telecoms services in the specific franchise area.
4.6 It would perhaps be possible to assume that because cable companies are constrained to operating in specific geographical areas under the terms of their licences, this in effect would define the geographical scope of the relevant product markets within which they compete and thus it would be appropriate to define a series of geographical markets based on the cable franchise areas. However, it is important to recognise that the licencing regime on its own should not be taken as delineating a series of separate geographical markets for various telecommunications services. The fact that an operator only operates in a particular area of the country does not automatically define the geographical scope of the relevant market in which they are competing.
4.7 As with determining the range of products that should be included in the relevant market, described above, determining the geographical scope of the relevant market involves a consideration of the competitive constraints that would exist on the hypothetical monopolist ie the aim is to identify the geographical area within which demand-side and supply-side substitution would be feasible. For the purposes of assessing the geographical dimension of the market in the context of the hypothetical monopolist test, the issue to consider is whether customers can switch to taking services from companies located outside the area in which the hypothetical monopolist is initially considered to operate and also whether an increase in price would be likely to encourage other operators located outside that area to begin to offer services to customers in that area. If customers can easily purchase from operators located elsewhere or other suppliers can quickly and cheaply begin to offer services in that area, then the scope of the initial geographical market needs to be expanded. This process continues until a geographical area is established in which it would be possible for the hypothetical monopolist to sustain a small but non-transitory increase in price. In applying the hypothetical monopolist test there is the need to abstract from the existing geographical pattern of telecoms networks eg BT’s geographical ubiquity as well as cable companies ‘local’ franchises.
4.8 It is important to bear in mind that the purpose of market definition is to facilitate an assessment of competition in a particular market and in particular to decide whether firms have market power or not. While it is generally the case that consideration of the appropriate market definition should attempt to abstract from price regulation, when assessing the actual exploitation of market power there will be the need to take into account the effect of the existing regulatory framework under which a firm operates. For instance, it may be possible to conclude that BT had market power in a specific geographical area where it did not face any competitive constraints from other operators. However, BT’s ability to exploit or abuse the market power in that area could be circumscribed by the various regulatory constraints under which it operates eg the requirement to offer geographically averaged tariffs.
4.9 An important factor for market definition is whether there are sufficient marginal customers whose ability to switch will protect the infra-marginal customers (ie in this case those customers without an effective choice) from price increases. It is not necessarily the case that every customer should have a choice, just that a sufficient number have a choice such that if there were to be a price increase and they were to switch to another supplier, the price increase would become unprofitable.
4.10 The ability of the customer to exercise a choice will be related not only to the availability of substitutes but also the location of the suppliers of those substitutes. For some telecom services a local presence may not be a key factor for competition. For instance, indirect access operators do not need to provide a local presence to be able to offer national and international call services to customers. For other services a local presence may be important for an operator to be able to compete (eg the provision of exchange lines), which would imply that demand- and supply-side factors for these services will be closely linked to the roll-out of competing network infrastructures.
4.11 For instance, operator A could have established a complete monopoly of the provision of a particular telecoms service in a specific geographic area and the service was such that a local presence was important in being able to serve customers. However, if in areas contiguous to Operator A’s monopoly, Operator – was offering the same telecoms service by means of a network which could quickly and easily be extended to offer services to a significant proportion of customers of Operator A, then Operator A’s ability to exploit its position could be effectively constrained. That is, any attempt by Operator A to increase prices in its operating area could induce Operator – to begin to offer services in that area using its existing network. An example of where this form of supply-side substitution might be feasible would be for operators using networks based on radio fixed access technology or indeed microwave relays. In this simple example this could imply that the relevant geographical market would be defined as being broader than just the area in which Operator A was licensed to operate. However, at the other extreme, this does not necessarily imply that the relevant geographical scope of the market is the largest area in which any single operator is licensed to operate. It may well be possible that the relevant geographical market forms a part of a particular operator’s licenced area.
4.12 The above discussion illustrates the factors that Oftel will look at in assessing the relevant geographical market but it is important to recognise that it is very difficult to be prescriptive in this area. An implication of this is that the continued roll-out of the different types of networks (eg cable and fixed radio access networks) are likely to provide important competitive interactions. This also means that as the roll-out of competing networks progresses, the geographical scope of markets would tend to increase over time. Oftel does not wish to suggest that the geographical scope of a market remains fixed for all time. As a result Oftel proposes to continue with its case by case approach based on the principles set out here.
Kingston Communications
4.13 There is one area of the country where the licensing regime has operated in such a way that the conditions of competition appear very different and it does appear appropriate to define a specific narrow geographic market at this time. This is Hull: the area in which Kingston Communications operates.
4.14 At present Kingston does not face any direct competition from other operators: BT is not authorised to operate in Hull under the terms of its licence, and no cable or Local Delivery Operator (LDO) licence has been awarded for the Hull area. In addition Ionica does not appear to have any early plans to roll out its fixed radio access network in this area so there does not appear to be any immediate competitive threat from that quarter. It thus does seem possible to argue that an application of the hypothetical monopolist test would indicate that the relevant geographical market at this time was the Hull area for certain telecom services.
Dominant firms and effective competition
4.15 There has been some discussion about the operation of the FTC which is now included (or is about to be included) in most licences and in particular whether it is possible for a firm to have a dominant position in a market where there is also considered to be effective competition.
4.16 The FTC prohibits the abuse of a dominant position as well as the making of any agreement which has the object or effect of preventing, restricting or distorting competition. In the context of testing for the abuse of a dominant position, Oftel proposed that single firm dominance would be considered as the ability of a firm to act independently (whether in terms of pricing or output decisions) of other firms in the market. It is important to stress that dominance is a market based concept and thus needs to be put in the context of a relevant market.
4.17 As mentioned in Chapter 2, the concept of effective competition is not so much to do with market structures but rather the outcome of competition in a market ie effective competition is assessed in relation to a range of factors such as prices, costs, efficiency, quality of service and innovation. One of the features of a market where there is effective competition is that no one firm would be able to change prices independently of the other firms.
4.18 Comparing the above descriptions of market dominance and effective competition it is apparent that a firm cannot have a dominant position in a market at the same time as the market is considered to be effectively competitive – they are mutually inconsistent positions.
4.19 However, that is not to suggest that competitive conditions cannot change over time so that a firm can acquire a dominant position in a market which had been previously considered competitive and equally a market where there is currently a dominant firm can become competitive in time. The regulatory regime already provides for this possibility. In the context of interconnection services (Standard Services), Condition 16B.6 of BT’s licence already provides for any operator not only to request a determination to have specific markets classified as being competitive but also provides for requests to determine that the description of markets as being competitive should be rescinded and that markets can be declared no longer competitive.
4.20 One aspect of competition analysis is to try to identify these sorts of trends in markets and there should be a dynamic element to both market definition and the assessment of competition. For instance, the extent of competition in a market can change over time in response to technical change so that a firm can have a monopoly over a particular delivery technology but still face competition in the provision of a particular service if other technologies can deliver a comparable service to the customer ie so that as far as the customer is concerned the two delivery mechanisms are close substitutes.
4.21 There has been a presumption that price regulation should not be applied to new services on the grounds that this would tend to discourage innovation and investment. However, this approach does not rule out the possibility that at some time in the future, regulatory intervention might be required to assist the functioning of a competitive market. In the event that such a situation arose, Oftel would assess the extent of competition using the same criteria as are set out in the methodology attached in the annex to this statement.
SMP, dominance and WEO
4.22 In the context of a number of Directives (eg the Interconnection Directive), the EU has adopted the concept of ‘Significant Market Power’ (SMP). Oftel has recently published a Consultative Document in relation to SMP and the implementation of the Interconnection Directive: Identification of Significant Market Power for the Purposes of the EU Interconnection Directive. An operator that is found to have SMP in the three sectors identified in the Directive (the Fixed, Mobile and Leased Lines sectors) will be required to comply with certain obligations that will apply across the all its activities within that sector. For instance, an operator that is considered to have SMP in the mobile sector will thus be required to comply with certain obligations relating to the whole of its activities in the mobile sector.
4.23 The Consultative Document sets out the way in which Oftel will assess SMP for the purposes of the Interconnection Directive and it makes it clear that SMP is not intended to be assessed in relation to a particular economic market but is intended to relate to the activities of specific operators and broad market sectors. The notion of SMP is intended to be a reflection on the operator’s position in the markets set out in the Directive within the geographic area within which it is authorised to operate. The concept of SMP and the associated regulatory framework is intended to work in parallel to the existing competition rules rather than to replace them.
4.24 The UK regulatory regime also currently makes use of the concepts of Dominance and ‘Well Established Operator’ (WEO). Unlike SMP, both of these concepts are intended to be applied in the context of specific product markets. This means that the guidelines on assessing the relevant product market will be of importance when interpreting these two concepts.
4.25 It is important to be clear that there is not an automatic link between an operator that is considered to have SMP and its position in respect of any specific product market. This means that an operator classified as having SMP in a broadly defined sector is not automatically dominant in every product market which falls within that sector. Equally it will be possible for a firm to be found to be dominant in a specific product market without having been declared to have SMP. A finding of dominance in a specific market will not imply that an operator will then subsequently be deemed to have SMP.
4.26 It is the policy both of the EU Commission and of Oftel that decisions about SMP are without prejudice to an operator’s position under EU or UK competition rules.
4.27 As mentioned above both dominance and WEO are intended to be market based tests. Although the FTC Guidelines make it clear that it is difficult to develop a market share threshold above which a firm could be presumed to be dominant on market share evidence alone, there is a market share trigger for investigating whether an operator has become well-established. In the case of WEO, once an operator has a market share of 25% or more of what is in the opinion of the Director General the relevant market, it will create a rebuttable presumption of WEO status ie it is not automatic.
4.28 In terms of the interaction between dominance and WEO status, it is not the case that the Director General has to have declared an operator to have WEO status before that operator can be found to be dominant in a specific market – WEO status is not a necessary precursor to a finding of dominance. It will therefore be possible for an operator to be found to be dominant in a specific product market without having first been declared to have WEO status in that same market. However, if a firm is found to be dominant in a specific market it is then likely to be deemed to have WEO status in that market.
4.29 Oftel believes that over time as more experience is gained of the interaction of these various elements of the regulatory system (ie EU and UK), it will be able to increase the guidance it is able to give to operators.
Revised methodology
A.1 Firms often use the term ‘market’ to refer either to the area where it sells its products or more generally the sector to which it belongs. However, in the context of competition analysis, the term market, or more specifically the relevant market, is used with a specific economic meaning and combines both a description of the product(s) that make up the market and an assessment of the geographical dimension of the market.
Methodology for assessing extent of competition
A.2 For the purposes of analysing the extent of competition in telecoms markets Oftel proposes to use a simple two stage process:
A.3 It is important to recognise that these two processes are not separate, self-contained exercises: the purpose of defining the relevant market is to set the boundaries of the relevant market and thus to provide a framework within which to analyse the operation of competition. There is an interaction between the two stages, not least because, in practice, there is often an overlap in the sort of information required to define the relevant market and to assess the extent of competition. For instance, it is difficult to appreciate the scope for demand-side substitution without understanding what features of the product are important to customers and whether other firms try to differentiate themselves based on these factors. Equally it is difficult to consider the scope for supply-side substitution without at the same time considering barriers to entry.
A.4 A consideration of the factors that are important in market definition is also a useful discipline in that it should involve a careful review of the information required to build up a picture of the relevant product market and the way in which firms operate and compete within it.
Stage 1: Market Definition
A.5 Oftel’s approach focuses on the existence of constraints on the price-setting behaviour of firms. There are two main aspects to consider: how far it is possible for customers to substitute other services or products for those in question (so-called demand side substitution) and how far suppliers not presently providing relevant products and services can readily do so (so-called supply side substitution). This is explained in more detail below.
Demand-side substitution
A.6 Demand-side substitution involves a consideration of the choices available to consumers and the extent to which the availability of alternative products can impose a constraint on the way in which a firm prices a particular product.
A.7 In terms of examining the pricing constraints on a firm, the concept of the ‘hypothetical monopolist’ can be a useful analytical tool for identifying close demand-side substitutes. Although it is not intended to be a representation of the actual market situation, the ‘hypothetical monopolist’ can be constructive in trying to set the boundaries to the relevant product market in practical terms.
A.8 The concept of the ‘hypothetical monopolist’ focuses on whether alternative (not necessarily identical) products are available to customers to which they could switch, without significant effort and expense, if the supplier of the product in question tried to implement a small but significant and non-transitory price increase. The idea behind this concept is that if customers are able and likely to switch to other similar products in sufficient numbers for the initial price increase to be unprofitable, then that monopolist’s product is in direct competition with those products identified in this way and they form part of the relevant economic market. If such products can be found, they should be included in the definition of the product market as they would constrain the price-setting behaviour of the ‘hypothetical monopolist.’ This analysis is then repeated for the expanded product group until a set of products is arrived at where the ‘hypothetical monopolist’ would be able to maintain an increase in the price it charged for these goods. The concept thus involves a series of iterations, each time involving an examination of the likely reaction of customers to the change in relative prices.
A.9 For practical purposes the term ‘small but significant’ is often translated into a price increase in the range 5–10%. In general the larger the price increase considered, the broader will be the relevant market and there are no theoretical rules for using, say, a 10% increase rather than a 5% increase. As a general principle the key factor is that the price increase ought to be ‘significant’ from the point of view of the consumer but at the same time not so large that products which are only weakly substitutable are included in the market definition. The small but significant and non-transitory increase in price is used solely as an analytical tool and not as a judgement about what are acceptable price increases.
A.10 One reason this process focuses on the reactions of customers to relative price increases is for operational and practical reasons. For instance, because current price levels are observable, customers can in fact be asked directly how they might react in response to, say, a 5% increase in the price of a particular good. There may also be historical evidence of how customers have reacted to previous price increases or indeed other market events eg new entry which can provide actual examples of product substitution. This is sometimes referred to as shock analysis where actual responses by market players in response to a discrete change in competitive conditions is examined.
A.11 The sorts of factors that Oftel would consider in ascertaining the extent to which demand-side substitution is likely would include:
A.12 This list is not intended to be exhaustive but rather it is intended to illustrate the sorts of evidence that could be used to support assertions about the extent of demand-side substitution. What is important in this instance is to try to identify the actual behaviour of customers and suppliers and consequently any investigation is likely to involve a dialogue with both groups.
A.13 There is also an issue as to what might be the appropriate price level to be used in the assessment of demand-side substitution. There is a risk that if the current price level is too high – ie because there already is a monopoly supplier of a product – an assessment of demand-side substitution based on this level might encompass products which would not in fact be close substitutes if the price were closer to the competitive level. Any assessment of market definition must therefore be aware of this potential difficulty. It is probably sensible to proceed on the basis that the prevailing price levels provide a reasonable basis from which to start the analysis unless there is evidence to suggest that this is not in fact the case.
Supply-side substitution
A.14 As well as considering the behaviour of customers in response to changes in price, it is necessary to consider whether there are firms which, though they may not currently supply the product in question, would not only be able to switch some of their existing production facilities to produce that product but would also be likely to do so in the event of an increase in the price of the product by the original supplier. As well as the ability to switch production in the short term, there is also the need to consider the ability of these firms to market and distribute the product in question. If such firms do exist, they need to be factored into the definition of the relevant product market.
A.15 The need to take into account the scope for supply-side substitution can be particularly important where companies produce a range of qualities or variants of a particular product. Although as far as the final customer is concerned, the different variants may not be substitutable, they might still be capable of being grouped into the same relevant market if the suppliers can quickly switch production capacity between the different models without incurring significant additional costs.
A.16 As with demand-side substitution, this focuses on the response (in this instance of other firms) to a small, but significant and non-transitory increase in price. The scope for supply-side substitution would be examined by reference to the same magnitude of price increase as was used for examining the scope of demand-side substitution.
A.17 The sorts of factors that would be taken into account would include any evidence on the ability of other suppliers to shift production in response to relative changes in price, as well as the likelihood of such a response.
Geographical Scope of the Market
A.18 The relevant market is defined not only in terms of the products or services but also in terms of a particular geographic area eg part of the UK, the whole UK etc. In trying to define the geographical boundaries to a product market the aim is to identify the extent to which the proximity of rival manufacturers can impose competitive constraints on the firm in question. As with the analysis of the demand-side and the supply-side, the definition of the geographical scope of the market is based on an assessment of substitutability in response to changes in relative prices.
A.19 A key factor for market definition is whether there are marginal customers whose ability to switch will protect the infra-marginal customers (ie in this case those customers without an effective choice) from price increases. It is not necessarily the case that every customer should have a choice, just that a sufficient number have a choice such that if there were to be a price increase and they were to switch to another supplier, the price increase would become unprofitable. This of course assumes that the firm cannot discriminate between those who are in a position to switch and those who, for whatever reason, cannot. In trying to determine the geographic scope of the market it would not be correct simply to identify customers that are ‘captive’ to a particular supplier as being the basis for a market definition. In the absence of price discrimination, even captive customers benefit from the constraint which a substantial number of marginal customers and products would provide. In the context of telecoms, this can imply that the relevant geographical market for a particular product or service is not necessarily limited to specific localised areas in which individual operators are actually licenced to provide services.
A.20 Another way of expressing the geographical dimension to market definition is provided by the EU which has described the geographical market as follows:
“The relevant geographical market comprises the areas in which the undertakings concerned are involved in the supply and demand of products or services in which the conditions of competition which are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas”
Chains of substitution
A.21 In certain cases the existence of ‘chains of substitution’ might lead to the definition of a broad market where products or geographical areas at the extreme of the market are not directly substitutable. For instance, consider a situation where product – is a demand-side substitute for products A and C but products A and C are not themselves directly substitutable ie a customer would not regard one as a close demand-side substitute for the other. It is still possible that the relevant market could comprise products A, – and C if the pricing of both A and C is constrained by the possibility of substitution to product B.
A.22 In considering whether there is in fact a chain of substitution which links different products or areas together, the key question is whether the links between the different products/areas sufficiently strong to constrain behaviour.
Market definition in a dynamic industry
A.23 It is important to be aware that market definitions can change over time as new opportunities for demand and supply-side substitution arise. The implication of this is that in considering, say, a complaint about anti-competitive behaviour it would always be necessary to revisit the issue of market definition to examine whether the demand or supply conditions in that market had altered.
Stage 2: Extent of competition
A.24 There is no unique indicator of the degree of competition in a market – market shares, which are often used as a means to indicate the extent of competition, only give a partial picture at a particular moment in time and also do not reveal anything about the competitive constraint imposed by the possibility of new entry into that market ie the contestability of the market. As a result it will be necessary to look at a range of factors in order to build up a picture of the operation of competition in that market. It should be noted that although it is intended that these Guidelines should improve a clearer indication of the factors that Oftel will take into account in assessing competition, it is not possible to remove the exercise of judgement from that assessment.
A.25 The factors which Oftel proposes to take into account in considering the extent of competition in a particular market cover a range of topics. They include:
A.26 Other factors that Oftel will take into account include customer awareness and customer inertia – these factors may also have a bearing on the definition of the relevant market.
Market Structure: at a very basic level this is simply the number and identity of firms in the market together with an idea of the distribution of market shares within the market: ie how concentrated a market is. At the same time additional information such as who the principal competitors are, whether there are different sorts of companies competing in different segments of the market (eg serving different customer groups) etc, is important in order to build up a picture of the market.
Although there will be a presumption that an unconcentrated market is likely to be a competitive market, there is no presumption that a highly concentrated market is uncompetitive.
Market Shares: the most recent market share figures are often the first indicator that is examined but on their own they are only a partial indicator of the state of competition in a market. What is more important in the context of assessing the extent of competition is to understand how those market shares have changed over time – changes in the pattern of market shares over time provide a more significant indicator about the development of competition.
The calculation of market shares obviously depends on being able to set the boundaries of the relevant market and then calculate the total size of that market. In order to ascertain market shares comprehensively, Oftel would generally wish to consider market share data in both value and volume terms. Discrepancies between the two can reveal that new firms may be successful at, say, winning low value customers but that the incumbent is able to retain the high value customers and thus could still retain a degree of influence in the market.
It is not the case that Oftel is simply looking to see a previously dominant incumbent losing market share – that could be a signal that the incumbent is simply accommodating market entry without seriously trying to compete. The accommodation of inefficient entry defeats the whole process of trying to stimulate effective competition and also negates the efficiency incentives associated with effective competition.
Barriers to Entry: in order to appreciate the competitive forces at work on a market, it is important to understand the extent to which the actions of existing players are constrained by the threat of new entry into that market. It will be important to try to gain an understanding of the magnitude of any barriers to entry as well as what form the barriers might take eg regulatory, technical, etc. In the case of regulatory barriers there will also be the issue of whether they are likely to be relaxed in the short to medium term. One way of assessing the scale of entry barriers is to estimate the cost to a new firm of entering and obtaining, say, a 5% share of the market, as well as trying to assess the time scale within which such entry could be accomplished.
A factor which could be important in considering the scope for market entry in telecoms markets would be the extent to which excess capacity in the market and whether potential competitors could obtain easy access to that capacity. There could also be other issues such as the extent to which there are significant first mover advantages as well as the importance of economies of scale or scope.
In order to assess the significance of barriers to entry examining the recent history (eg over the previous 3B5 years) of entry to and exit from the market will also be instructive.
The OFT Research Paper Barriers to entry and exit in UK competition policy provides a more thorough discussion of the concept of entry barriers.
Pricing/Profitability: the consideration of profitability and/or pricing trends is part of the attempt to address the issue of whether there is effective competition in the relevant market. For instance, it should be relatively simple to determine whether prices are on an upward or downward trend. The profitability of firms in the market can also be indicative of the extent of price competition – sustained excess profits across a number of firms could indicate not only that there is no serious attempt to compete on price but also that there are barriers to entry which prevent the excess profits from being competed away. An examination of pricing structures in the market would of course need to take into account the impact of (any) price regulation.
Operation of Competition & Other relevant factors: it is difficult to provide a comprehensive list of all the factors that might be important in the consideration of the extent of competition in any given market. The objective of gathering this information is to gain a better understanding of how a particular market actually functions and that necessitates going beyond just examining the structure of the market but the sorts of factors that are important to the operation of competition will vary from market to market. To extend the analysis it is necessary to consider the factors that are important in the customers’ purchasing decisions and how this is reflected in the way in the way in which firms behave and compete. For example, in a market where the product is basically homogeneous, firms are likely to compete solely on the basis of price. In other markets where customers are prepared to accept price/quality trade-offs, firms may attempt to differentiate their products and other factors such as branding and advertising spend can become more significant.
Other issues such as:
can all be important in assessing competition in telecoms markets.
A.27 In all these instances, input from the industry (both in terms of suppliers and customers) will be particularly important.
Barriers to entry – An additional cost which must be borne by entrants but not by firms already in the industry; or other factors, which enable an incumbent to maintain prices above the competitive level without inducing entry.
DGIV – The Competition directorate of the European Commission
Dominant – a dominant firm is one which is able to act largely independently of its competitors and customers in terms of pricing or output decisions. Dominance has to be assessed within the context of an analysis of the degree of competition within a relevant market.
Economies of scale – These are present where the unit cost falls as the level of output rises.
Economies of scope – These are present where the unit cost of a service is lower because the firm also provides other services ie the provision of service – reduces the unit cost of supplying service A.
Enhanced services – These are services with a telecommunications component but containing some function over and above basic retail services. They are made up of basic retail services plus additional elements that add value. In many cases, theses additional functions are also readily capable of being performed by independent service providers.
Fair Trading Condition (FTC) – The Fair Trading Condition is modelled on Article 85 and 86 of the EC Treaty and prohibits the abuse of a dominamt market position and agreements which prevent, restrict or distort competition.
NERA – National Economic Research Associates
RPI – Retail Price Index.
Significant Market Power (SMP) – A concept adopted by the EU in relation to a number of Directives. SMP is intended to relate to activities of specific operators across broad market sectors.
Synchronous Digital Hierarchy (SDH) – A method of telephony transmission using digital techniques where the data is packed in containers which are synchronised in time enabling relatively simple modulation and demodulation at the transmitting and receiving ends. The technique is used to carry high capacity voice circuits over long distances.
Well Established Operator (WEO) – A regulatory concept applied in the context of specific product markets. In the case of WEO, once an operator has a market share of 25% or more of what is in the opinion of the Director General the relevant market, it will create a rebuttable presumption of WEO status.
Vertical integration – Where a single company is active in more than one stage in the production and supply of a good or service eg where a network operator also provides enhanced services which are carried over the network or supplies the consumer equipment needed to access services it provides.