April 1999
Chapter 3 Assessing market power for the purposes of Market Influence determinations
Chapter 4 Effect of a Market Influence determination
Annex I: Examples of applied market definitions and assessments of market power
These guidelines set out the approach the Director expects to take when considering a Market Influence determination. The guidelines refer to the draft Telecommunications Act licence currently being consulted on as part of the Licensing Directive implementation programme. These guidelines are without prejudice to the outcome of that consultation.
A Market Influence determination ‘triggers’ additional obligations that would otherwise lie dormant within an operators licence. The conditions that are triggered by a Market Influence determination are designed to prevent the operator using its position of Market Influence to behave in an anti-competitive manner.
A Market Influence determination depends on an operator’s position within the relevant market. In making a Market Influence determination the Director must, therefore, define the relevant market and assess the operator’s market power within that relevant market.
The contents of the guidelines are as follows;
Market Influence
1.1 Telecommunication Act licences define ‘Market Influence’ as the situation where an operator in any particular market has;
‘the ability to raise prices above the competitive level in that market for a non-transitory period without losing sales to such a degree as to make this unprofitable.’
1.2 This is also the definition which Oftel has used for the term ‘market power’ in previous documents including: Competition in the mobile market (February 1999), International Facilities Licences: Guidelines on Well Established International Operator (WEIO) determinations and Arrangements for Accounting in respect of International Conveyance Services (July 1997), Mercury as a Well-Established Operator (June 1997), and Fair Trading in the Mobile Telephony Market (April 1997). Market power is also defined as above in the Office of Fair Trading Draft Competition Act 1998: Assessment of market power Guidelines. The definition of ‘Market Influence’ is therefore identical to the definition Oftel uses for the concept of ‘market power’ and thus these two terms can be considered as synonymous.
1.3 Paragraphs 1.8 – 1.10 of these guidelines discuss market power and its relationship with ‘dominance’ and paragraphs 3.12 – 3.16 discuss market power and its relationship with market share.
1.4 Market Influence represents an identical position of economic strength in a relevant market to that associated with the concept of ‘Well Established Operator’ status which appears in certain Telecommunication Act licences. Market Influence will, subject to the ongoing Licensing Directive consultation, replace ‘Well Established Operator’ status in Telecommunications Act licences. Thus the concept of Market Influence does not either represent a new tougher form of regulation nor is it intended to place additional obligations on operators who do not currently have them. Indeed, the introduction of the Market Influence trigger as a replacement for the Well Established Operator trigger is deregulatory, since Market Influence does not (unlike Well Established Operator status) carry with it a service obligation for fixed Public Telecommunications Operators.
1.5 As a Market Influence determination depends entirely on the operator’s position within the relevant market, in making a Market Influence determination the Director must define the relevant market (see section 2, Market definition) and assess the operator’s market power within that relevant market (see section 3, Assessing market power for the purposes of Market Influence determinations).
1.6 These guidelines are intended to set out the general principles that the Director would expect to follow when considering a Market Influence determination. They do not form part of the licence and they do not affect its legal scope. However, the Director would normally expect to follow them and to give his reasons if he departed from them. The Director cannot legally fetter his discretion in advance and therefore he retains the ability to depart from the guidelines where the circumstances warrant it. The guidelines are, therefore, not legally binding on the Director. The guidelines will be updated from time to time to take into account developments in the telecommunications sector in the future.
Market Influence, Dominance and Significant Market Power
1.7 It should be noted that the concept of Market Influence is distinct from the concepts of ‘dominance’ and ‘Significant Market Power’. This sub-section explains the main differences between these concepts.
Market Influence and dominance
1.8 Article 86 of the EC Treaty, the Fair Trading Condition (which appears in all major Public Telecommunications Operator licences) and the new Competition Act (which comes into force in March 2000) all make use of the concept of ‘dominance’. Like Market Influence, the concept of dominance is assessed in relation to a relevant market or markets. Dominance was defined by the European Commission in United Brands (United Brands v Commission, ECR207) as;
‘a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately consumers.’
1.9 The Market Influence concept however represents a position of economic strength in the relevant market lower than that associated with dominance. The Office of Fair Trading Draft Competition Act 1998: Assessment of market power Guidelines state;
‘…if …[an operator is dominant] the implication is that it possesses market power and that it possesses more market power than any of its competitors.’
thus recognising the existence of market power below dominance. The Assessment of market power Guidelines define market power as ‘the ability to raise prices above competitive levels’ existing when ‘…undertakings are able to consistently and profitably to charge higher prices than if they faced effective competition.’ This is equivalent to the definition of Market Influence used in the draft trigger (‘the ability to raise prices above the competitive level for a non-transitory period without losing sales to such a degree as to make this unprofitable’). The relationship between dominance and market power in the context of market shares is discussed in paragraphs 3.12 – 3.16.
1.10 It is not necessary for the Director to have declared an operator as having Market Influence before that operator can be found to be dominant in a relevant market. However, if an operator is found to be dominant in a relevant market it is then likely to be determined to have Market Influence in that market: a dominant operator will always have market power.
Market Influence and Significant Market Power
1.11 Under the Open Network Provision Directives (e.g. the Interconnection Directive), the European Commission has adopted the concept of Significant Market Power (SMP). This concept is explained in some detail in Oftel’s February 1998 Statement; Effective Competition Review, although it is worth mentioning here that Significant Market Power is not intended to be assessed in relation to a relevant market or markets as defined in section 2 below. Instead, Significant Market Power must be assessed in relation to ‘markets’ that are pre-defined in the Open Network Provision Directives. It is therefore a distinct concept from Market Influence. It is the policy of the European Commission that decisions about Significant Market Power are without prejudice to an organisation’s position under EU competition rules. The EC 1998 Notice on the application of the competition rules to access agreements in the telecommunications sector, for example, states;
"...the fact that an undertaking has significant market power under the Open Network Provision rules will generally therefore not lead to a presumption of dominance, although in a particular situation this may prove to be the case. One important factor in this consideration, however, will be whether the market definition used in the Open Network Provision procedures is appropriate for use in applying the competition rules."
1.12 While this quote refers to the differences in market definition used in applying the competition rules (Articles 85 and 86 of the EC Treaty) and the market definitions prescribed by the Open Network Provision Directives, Market Influence involves an approach to market definition identical to that conducted under the competition rules. Market Influence is, therefore, a concept distinct from Significant Market Power.
The rationale for additional regulatory rules for operators with Market Influence
1.13 A Market Influence determination triggers additional regulatory rules explained in section 4 below. The rationale for such additional regulatory rules for is set out in this sub-section.
1.14 It is well recognised (in Article 86 of the EC Treaty, for example) that dominant firms may be able to engage in anti-competitive behaviour, such as exclusion from the market, excessive pricing and refusal to supply. However, dominant market positions are not the only basis for potentially anti-competitive behaviour: a more general and well recognised concept is that of market power. This more general concept concerning the ability of suppliers to affect market behaviour incorporates the concept of dominance, which can be seen as an extreme form of market power.
1.15 Certain markets within the telecommunications sector are characterised by strong entry barriers and a good deal of product homogeneity. Moreover a particular characteristic of certain markets is the extent of vertical integration especially among network operators. Although not in itself anti-competitive, vertical integration, when allied to market power, tends to facilitate the leveraging of market power into related markets. In the telecommunications sector the most obvious example of this is vertical squeezing by network operators with market power of retail competitors dependent on access to networks. The ability to raise prices of inputs, offer products and services only as a bundled package, etc, can significantly affect the ability of retail service providers to compete effectively with the retail arm of integrated network suppliers. Even though the extent of such behaviour may be constrained by an element of competition amongst integrated suppliers, on the margin leveraging of market power through vertical integration can tip the balance against a retail competitor dependent on the input. As a general proposition, therefore, the existence of market power (Market Influence) short of dominance is most likely to lead to significant anti-competitive behaviour where it is associated with vertical integration.
1.16 Through the leverage of market power, the supplier(s) can influence the extent of competition in the related market. The extent of any actual or potential market distortion could vary from significant to inconsequential and it would be wrong and counter productive to have heavily interventionist regulatory rules across the piece. Rather, in these circumstances, a trigger designed to be pulled to prevent the leverage of market power when market conditions allow would seem an appropriate regulatory approach. As discussed in section 4, this is what the Market Influence trigger is designed to do.
Market definition
2.1 This section on market definition reflects current practice by competition authorities in Europe, North America and elsewhere. In particular these guidelines have taken the approach of the European Commission as set out in its Notice on the definition of the relevant market for the purposes of Community competition law into account. The approach to market definition outlined here is also consistent with that set out in the Office of Fair Trading; Competition Act 1998: Market definition Guidelines.
The purpose of market definition
2.2 In order to establish whether an operator is in a position of Market Influence in respect of the supply of certain products, it is necessary to define the relevant market (or markets) and then to set the analysis of market power against the background of the operation of competition in the relevant market(s).
2.3 Market definition can thus be regarded as one stage of a Market Influence determination, with the investigation of the operation of competition in the relevant market being a closely related stage. The purpose of defining the relevant market is to provide a framework within which to analyse the operation of competition - market definition is not an end in itself.
2.4 However, it is important to be clear that these two stages should not be regarded as separate, self-contained exercises. There is an interaction between the two stages, not least because there is often an overlap in the sort of information required to define the relevant market and to assess the extent of competition. In any case, market definition is not an exact science and therefore invariably involves some element of judgement; it cannot be based purely on mechanistic rules. A consideration of the factors that are important in market definition is 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 operators operate and compete within it.
2.5 Market definition is therefore an important stage in making a Market Influence determination because:
2.6 Operators often use the term ‘market’ to refer either to the area where they sell their products (the terms ‘products’ and ‘services’ are used interchangeably throughout the text) or more generally the sector to which they belong. However, in the context of a Market Influence determination, 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.
2.7 The approach to market definition focuses on identifying the constraints on the price-setting behaviour of operators. There are two main competitive constraints 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 could increase or switch production capacity to supply, or supply more of, the relevant products (so-called supply-side substitution). It is also important to consider the geographical scope within which demand and supply-side substitution can take place.
2.8 In terms of examining the pricing constraints on an operator, the concept of the ‘hypothetical monopolist’ can be a useful analytical tool for identifying close demand-side and supply-side substitutes. Although it is not intended to be a representation of the actual market situation, the ‘hypothetical monopolist’ concept can be constructive in trying to set the boundaries to the relevant product market in practical terms. See the Office of Fair Trading; Competition Act 1998: Market definition Guidelines for a general discussion of this concept.
Regulated prices
2.9 Where there are certain products which are subject to price control, there might be an issue as to the appropriate price level to be used in the assessment of demand-side and supply-side substitution. There is a risk that if the current price level is too high - i.e. because there is little competition for a particular 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. However, it is intended 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. It should also be noted that price regulation, such as BT’s obligation to offer uniform national prices for a range of services as part of its universal service requirement, may also have implications for defining the geographical boundaries (discussed below) of product markets.
Geographic markets
2.10 The relevant market is defined not only in terms of the products or services but also in terms of a particular geographic area: e.g. 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 suppliers can impose competitive constraints on the operator 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. The European Commission Notice on the definition of the relevant market for the purposes of Community competition law states that:
"The relevant geographic markets comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas."
2.11 The issue of the appropriate geographical market will be an important aspect of market definition because for certain telecommunications products, geographical location can be an important determinant on the choices available to customers and the likely supply-side response of other operators. For instance, the geographical dimension is particularly relevant to products such as the provision of exchange lines or private circuits where the scope for demand and supply-side substitution is likely to depend on operators being located close to the customer.
2.12 It is thus possible that the geographical market could be defined in terms of a region in the UK or even more specific areas. For instance, because of the special circumstances with regard to Kingston Communications’ provision of telecommunications services in the Hull area, Oftel considered that the relevant geographical market for the purpose of considering the supply of certain telecommunications services (e.g. exchange lines, certain call services) was limited to the geographical area in which Kingston operated (for example, BT’s licence did not authorise it to run systems in the Hull area and although a cable franchise was available for the area, it had yet to be awarded).
Pre-defining markets
2.13 It should be noted that it is not practical to pre-define the relevant markets within which Market Influence determinations might be made and any market definition is, particularly in the telecommunications sector which is subject to rapid technological and regulatory change, likely to become obsolete. The EC 1998 Notice on the application of the competition rules to access agreements in the telecommunications sector recognises this and states;
"any attempt to define particular product markets in [the EC Notice] would run the risk of rapidly becoming inaccurate or irrelevant. The definition of particular product markets... is best done in the light of a detailed examination of an individual case."
2.14 In the same way that the EC 1998 Notice recognises that market definition is an exercise best undertaken in the context of a particular Article 85 or 86 competition case, it is equally true that market definition for the purposes of Market Influence determinations is best done in the context of considering a Market Influence determination. This is consistent with the main purpose of market definition, which is to identify operators with market power - rather than market definition being an end in itself.
2.15 Examples of how Oftel has in the past approached the issue of market definition are given in annex I.
Assessing market power for the purposes of Market Influence determinations
3.1 A Market Influence determination will always, by definition, involve assessing whether the operator(s) in question possess market power in the relevant markets.
3.2 This section reviews some of the factors that may be taken into account when assessing market power. The approach set out here reflects current practice by competition authorities in Europe, North America and elsewhere. The approach to assessing market power outlined here is also consistent with that set out in the Office of Fair Trading; Draft Competition Act 1998: Assessment of market power Guidelines.
Factors relevant to assessing market power
3.3 There are a number of factors which need to be considered when assessing whether a firm is likely to have market power and is therefore likely to be determined as having Market Influence. A non-exhaustive lost of relevant factors are set out in the Market Influence trigger. They are:
3.4 The factors in this non–exhaustive list are discussed in the following paragraphs.
Level of entry barriers and the extent of any recent market entry or exit
3.5 The extent to which the actions of existing players in a market are constrained by the threat of new entry into the market is a significant factor in assessing the degree of competition in a given market. If entry barriers are low or non-existent, then the possibility that new competitors may enter may provide an effective constraint on behaviour. A firm is unlikely to possess market power if entry barriers are low. There are three basic sources of entry barriers: absolute advantages; strategic advantages, and exclusionary behaviour.
3.6 In telecommunications markets there may exist regulatory or technological barriers to entry and these barriers to entry may confer an absolute advantage on incumbent firms. For instance, in terms of the provision of mobile networks, there is a finite amount of radio spectrum available for mobile communications with the result that only four firms are currently licensed to operate mobile networks. Similarly, prior to December 1996, only BT and CWC were permitted to own and operate international facilities (i.e. the infrastructure for handling international telecommunications traffic). This regulatory restriction on market entry was an important factor in assessing the extent of competition between BT and CWC prior to full liberalisation of international facilities.
3.7 When assessing market power, the Director General will need to take into account whether there is any prospect of any relevant regulatory restrictions being eased or any relevant technological barriers being surmounted in the short to medium term and, if so, to gauge how quickly entry might occur.
Vertical integration
3.8 Vertical integration in itself does not imply that a firm has market power. However, where a firm has market power in one market and is vertically integrated into upstream or downstream markets around that market, then it may have the ability to affect adversely competition in the upstream or downstream markets. Consequently, the potential for vertical integration to lead to a misuse of market power is likely to be a significant aspect of the analysis of market power in telecommunications.
3.9 In some cases other operators and independent service providers may rely on a vertically integrated company for the provision of network inputs while at the same time competing with that vertically integrated operator in certain downstream markets If the vertically integrated operator had market power in the provision of certain network inputs there could be scope for it to leverage its position into the downstream market in the absence of effective regulation (such as a prohibition on undue discrimination). This is discussed in paragraph 4.3 below. An example of vertical foreclosure might arise where one operator with Market Influence has control over a network which competing firms must interconnect with in order to provide a service to the customers on that network; in the absence of effective regulation, the firm that controlled the network might able to exclude those competitors by refusing access (absolutely or in effect) to its network. Such behaviour might have an exclusionary effect in the downstream market thus allowing the vertically integrated operator with Market Influence to raise prices above the competitive level in that market.
Number of active competitors
3.10 The number of firms in a market gives some idea of the state of competition. An unregulated monopolist is likely to enjoy the maximum level of market power as it will be able to set prices without fear of being undercut by (existing) rivals. Firms in a duopoly will also generally possess market power because, with only two firms, (tacit) collusion is likely to be relatively easy. In general, the larger the number of firms, the less likely it is that any individual firm will possess market power and, therefore, be determined as having Market Influence.
3.11 However, even a monopoly is not strictly a sufficient condition for the existence of market power. In the special circumstances of the perfectly contestable market, the threat of entry is sufficient to restrain prices to competitive levels even if there is a monopoly producer. Whilst the stringent conditions for perfect contestability may rarely, if ever, be met, the concept at least illustrates the need to consider other indicators of market power, particularly entry conditions, in addition to the number of firms.
Market share and trends in market share and concentration
3.12 It is unlikely that a firm without a significant share of the relevant market would have market power. However, a large market share may not be sufficient to establish market power – for example, if entry into the market is easy, there may be a strong threat of competition from new entrants. There could also be countervailing buyer power. If the relevant market has been defined correctly and firms have very low market shares, then they will almost certainly not possess market power, and a Market Influence determination is unlikely to be made.
3.13 In the context of the AKZO Article 86 investigation, the European Court of Justice held that there was a presumption of dominance, in the absence of evidence to the contrary, if a firm has a market share persistently above 50%. Market Influence determinations however are concerned with a position of economic strength in the relevant market lower than that associated with dominance. The Office of Fair Trading Draft Assessment of market power Guidelines state;
‘…market power is more likely to exist if an undertaking (or group of undertakings) has a persistently "high" market share…[which] could be relative to absolute thresholds or relative to other competitors.’
3.14 In the context of Market Influence determinations, Oftel considers that a market share of 25% can be used as a rule of thumb approximation below which operators are unlikely to possess market power. The 25% market share rule of thumb is consistent with the market share required for an investigation under the scale or complex monopoly provisions of the Fair Trading Act, 1973 and also consistent with the level beneath which the Director General of Fair Trading (and the regulators with concurrent powers) will take the view that an agreement, decision or concerted practice will generally not have an appreciable effect on competition for the purposes of the Chapter I (equivalent to Article 85 of the EC Treaty) prohibition of the Competition Act, 1998.
3.15 However, there is no presumption that an operator with a market share in excess of 25% does have market power: as this section makes clear, market share is only one indicator that needs to be taken into account when considering a Market Influence determination. It should also be noted that the AKZO case explicitly refers to a market share persistently in excess of 50%. There is thus a need under Article 86 of the EC Treaty, the Competition Act 1998 and the Fair Trading Condition to examine changes in the pattern of market shares over time and this test applies equally when considering Market Influence determinations. Changes in the pattern of market shares over time may provide a better indication of whether an operator has Market Influence than a simple ‘snapshot’ market share figure. This will also, therefore, mean that just because a firm is first into a new market (and hence temporarily has a 100% market share) that firm would not automatically be presumed to be in a position of Market Influence.
3.16 The calculation of market share can usefully be conducted with reference to both value and volume data. In particular, it may be that, whilst new firms may be able to win low value customers, incumbent firms are able to retain high value customers (or charge higher prices), which may indicate that they have a position of Market Influence despite entry to the market. this may be reflected by established firms taking a higher share of the market by value than by volume.
Extent of countervailing power among buyers
3.17 The market power of a producer may be offset by the countervailing power of buyers. Countervailing power is likely to be important where the buyer purchases a large volume relative to the producer's total output, where the buyer's purchases represent a large proportion of the buyer's total costs, where the buyer can switch between suppliers easily but the seller perhaps has some customer specific investment and where the buyer has alternative sources of supply, perhaps by in-house production. Large telecommunications users, for example, are likely to be well-informed about competitive offerings and telecommunications may form an important part of their own costs. Multinational companies may have the ability to choose between telecoms operators located in different countries. It should be borne in mind, however, that where a firm with countervailing power also has market power in a downstream market, it may not pass any benefits on to final customers.
Pricing behaviour and the level of profits
3.18 In looking at the competitiveness of a market and whether an operator has market power and should therefore be determined as having Market Influence the Director will examine whether there is genuine independent price competition in the market or whether pricing changes are, for example, better characterised in terms of a leader-follower situation. Such an analysis would need to include the impact of price regulation, where relevant, on pricing structures. In addition, the profitability of firms in the market can also be indicative of the extent of price competition - sustained excess profits could indicate not only a lack of effective price competition between existing firms but also that there are barriers to entry (incumbent operators may have special, or privileged, access to necessary inputs and these access rights are limited - for example radio spectrum for the provision of mobile services or the control of access to cables for international operators) which prevent excess profits from being competed away by new entrants. However, the Director recognises the role of profit in stimulating innovation and encouraging market entry, from which consumers benefit. The Director also recognises that high profits can result from relative efficiency or innovation. Similarly, low profits are consistent with the possession of market power if the operator is inefficient.
The influence of other member of the Licensee’s Group
3.19 Oftel is particularly concerned about the leverage of market power from closely related markets where other member’s of the licensee’s group are involved in the markets in question. For example, where one company in a group has Market Influence and controls an input which is used both by another company in the group and that company’s competitors. The markets in question could be vertically related (e.g.; in the case of Mobile networks and their Tied service Providers) or horizontally related (e.g.; where two services are bundled together as in fixed/mobile packages).
3.20 Examples of how Oftel has in the past approached the issue of assessing market power are given in annex I.
Effect of a Market Influence determination
4.1 A Market Influence determination ‘triggers’ additional obligations that would otherwise lay dormant within the operator’s licence. It should be emphasised that the conditions that are triggered are only relevant insofar as they apply to the licensee’s activities that fall within the relevant market(s) in which it is determined to have Market Influence. Thus, if a licensee was determined to have Market Influence in a particular market the conditions outlined below would attach to that operators activities in that market and that market alone.
4.2 In some instances there may be scope for the operator in question to lever market power from the market in question into related markets (such as those up- or downstream of that market). Oftel would take such a possibility very seriously but would not generally consider determining the operator as having Market Influence and imposing additional regulation in those related markets as this may lead to over-regulation. Oftel would instead rely on the obligations triggered in the market within which the operator has market power to be sufficient to ensure the operator’s ability to lever market power from that market was effectively regulated.
4.3 For example, an operator with Market Influence in the market for international services to other operators on a particular route may compete downstream on that route in the market for international retail services. Where downstream competitors are reliant, at least in part, on the operator with Market Influence upstream for the sourcing of conveyance services, that operator could subject those competitors to a two-way margin squeeze by reducing its prices to end consumers while simultaneously increasing the prices it charged to its competitors for the use of its conveyance services. However, the price publication obligation (discussed in paragraphs 4.9 – 4.11 below) would ensure transparency of prices for conveyance services. If the vertically integrated operator (who was no more efficient than downstream competitors) was selling the corresponding international retail services in the downstream market at a price that did not allow a margin sufficient for downstream competitors to compete, there would be prima facie evidence that the operator with market power was levering its market power into downstream markets by unduly preferring its own downstream operations relative to competing downstream operators. Equally, there would be prima facie evidence that the operator with market power was levering its market power into downstream markets by cross-subsiding its downstream operations.
4.4 It should be noted that the following paragraphs are intended to outline the conditions triggered by a Market Influence determination and the purpose of the conditions triggered. It is not intended in any way to be a legal interpretation of the conditions. The draft conditions are contained in the draft licences available from the DTI.
Prohibition on undue preference and undue discrimination
4.5 This condition prohibits the licensee from practising undue preference and undue discrimination in respect of charges, terms and conditions in the market within which it has Market Influence. Discrimination and preference within that market are not prohibited per se. Only undue discrimination or undue preference is prohibited. Oftel considers that discrimination or preference when practised by an operator with Market Influence may be considered to be undue when:
- where that discrimination or preference (e.g.; differential pricing not justified by underlying costs) takes place and that discrimination or preference may be considered as exploitative towards certain sub-sets of customers in that it has the object or effect of reducing customer welfare, or;
- where that discrimination or preference (e.g.; differential pricing not justified by underlying costs) takes place and that discrimination or preference has an exclusionary impact in that it has the object or effect of foreclosing market entry or encouraging market exit.
4.6 It should be noted that these two categories of undue discrimination and undue preference are not mutually exclusive. For example, in a situation where a vertically integrated operator with Market Influence controlled certain services which formed the key inputs for firms competing with its downstream subsidiary, it could be in a position to increase the price of those inputs while at the same time leaving its corresponding retail prices unchanged. If it were to behave in this way, it is possible that that this could be considered either as an example of anti-competitive or exploitative behaviour depending on the effect on competition and the nature of any complaint or investigation into this pricing strategy.
4.7 Thus, there is no blanket prohibition on discrimination or preference. Price discrimination, for example, can be defined in economic terms as a situation in which different units of the same good or service are sold at different prices where the price differences do not directly correspond to differences in the cost of supplying them. Equally, price discrimination can also arise where different units of the same good or service are sold at the same price where there are differences in the cost of supplying them. Where there are objective cost reasons for a firm charging different prices to different customers - for instance, where there are different transport costs - then that pricing structure may not be considered discriminatory. Where differences in prices for the same product can be objectively verified in terms of costs, this form of pricing is sometimes referred to as ‘price differentiation’ in order to distinguish it from price discrimination.
4.8 The Director also makes no presumption that price discrimination by an operator with Market Influence is ‘undue’. Where substantial fixed or common costs have to be recovered, the Director recognises that price discrimination, taking account of the different demand conditions the firm faces across customer groups for example, might be involved in their efficient recovery. Because there can be important economic reasons why an operator might practice price discrimination, the Director cannot be too prescriptive: he needs to retain the flexibility to examine price discrimination issues according to the circumstances of the case.
Publication of charges, terms and conditions (the ‘price publication obligation’)
4.9 This condition requires that the licensee publishes in advance the precise charges, terms and conditions of those services that it supplies in the market within which it is determined to have Market Influence. While this condition is activated within the market where the operator has market power following a Market Influence determination, the Director retains the power to issue a consent to non-publication or to waive the requirement to publish in advance. The Director can also modify the price publication obligation in other ways insofar as it makes that obligation less onerous for the licensee (by, for example, consenting to non-publication but requiring the licensee to notify Oftel of changes in charges, terms and conditions).
4.10 The purpose of the price publication obligation is to allow Oftel and the operator’s competitors and customers (both retail and wholesale) to monitor discrimination and preference as they relate to the charges, terms and conditions that the operator with Market Influence is prescribing and hence to detect possible instances of undue discrimination and undue preference.
4.11 As noted, the Director can consent to non-publication or modify this obligation in other ways. The Director would generally consider doing this in circumstances where;
Additional conditions that are triggered for Mobile licensees
4.12 Mobile operators have, in addition to the prohibition on undue discrimination and undue preference and the price publication obligation, two additional obligations triggered as a result of a Market Influence determination. The reason mobile operators with Market Influence have these additional conditions imposed on them is predicated on the structure of the mobile market. Due to spectrum scarcity, the four incumbent mobile operators have privileged access to spectrum. This constitutes an absolute barrier to market entry by new mobile operators for the time being. This absolute barrier to entry can be consistent with a collusive outcome and the generation of excess profits (as the barrier to entry prevents newcomers participating in the market and competing excess profits away). However, in the ‘downstream’ market for mobile service provision no such barrier to entry exists and competition between service providers in this market may benefit consumers by providing a valuable channel to market for mobile services, enhancing competition in the provision of calls, and encouraging the provision of value added services by service providers to differentiate their offerings.
4.13 However, mobile operators with market power at the network level may have an incentive to lever or extend this market power into the downstream services market. They may seek to do this by refusing to supply Independent Service Providers (ISPs) or, where they do supply ISPs, doing so on terms that put ISPs at a competitive disadvantage relative to the network operator’s own Tied Service Providers or Direct Business. Mobile operators may wish to lever or extend their market power into the downstream services market for the purposes of enhancing or protecting excess profits made at the upstream network level of operation.
4.14 Thus, to prevent mobile operators with market power acting anti-competitively towards ISPs in the downstream market, two additional conditions are imposed on mobile operators with Market Influence. A more detailed discussion of the mobile market is contained in Oftel’s February 1999 consultative document, Competition in the mobile market.
Provision of Mobile radio telecommunications services to service providers
4.15 This condition obliges mobile operators who are determined to have Market Influence, subject to certain caveats set out in the relevant condition, to provide mobile radio telecommunications services to service providers for resale. The condition is intended to prevent mobile operators refusing to supply ISPs with mobile radio telecommunications services thus preventing them from competing with the mobile operators own downstream Tied Service Providers or Direct Business.
Separation of activities and preparation of accounts
4.16 This condition obliges mobile operators who are determined to have Market Influence to carry out the activities of its Direct Business separately from the other businesses it conducts and produce separate accounts for the provision of telecommunications services, apparatus supply or related activities insofar as these activities are to or for its Direct Business or its Tied Service Providers. The purpose of this condition is to provide information necessary to monitor the mobile operators treatment of ISPs relative to its own Tied Service Providers and Direct Business and in particular to facilitate the detection of instances of undue discrimination or undue preference or cross subsidy in favour of its own Tied Service Providers or Direct Business.
The consultation on these draft Guidelines will run until 30 April 1999. Comments are invited on any aspect of these draft Guidelines.
Written comments should be submitted to:
David O’Neill
Consultation: Market Influence Guidelines
Oftel
50 Ludgate Hill
London EC4M 7JJ
Fax: 0171 634 8757
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Examples of applied market definitions and assessments of market power
Applied market definitions
A1.1 For the purposes of these guidelines, the Director believes that it would be useful to give practical examples of how Oftel has in the past approached the issue of market definition in the context of specific competition investigations and Well Established Operator determinations (equivalent to Market Influence determinations) and the way in which it has made judgements about the importance of demand- and supply-side factors. Oftel’s February 1999 document Competition in the mobile market, currently subject to consultation, looks at market definition where mobile telephony is concerned.
International calls market definition (July 1997)
A1.2 In a Statement published by Oftel in July 1997 (International Facilities Licences: Guidelines on Well Established International Operator (WEIO) determinations and Arrangements for Accounting in respect of International Conveyance Services) Oftel indicated that it proposed to regard the relevant markets for WEIO determinations as:
This market would generally consist of international retail calls only. However, in instances where it was appropriate to look at markets by customer type, international private leased circuits (normally considered as part of the ‘market for international services to other operators’) might also be included in this market insofar as they represented a substitute for international retail calls for large corporate customers.
This market encompassed the three alternative mechanisms for conveying international retail services, which could be viewed as potentially substitutable for each other. The alternative mechanisms for conveying international retail services were the wholesale international direct dial method, the facilities based method and the international simple resale based method.
A1.3 Insofar as the market for international services to other operators was concerned, Oftel considered it appropriate to regard the three alternative methods of conveying international retail services as part of the same market because they were all potential substitutes for each other. At the time, on many routes, one or more of these conveyance methods was not available. This may have prevented the alternative methods of conveying international retail services acting as effective substitutes for each other. Oftel considered that this lack of effective substitutability was in fact a reflection of competitive conditions within the market, rather than an issue of market definition.
A1.5 When considering the geographical definition of the markets for international retail services and international services to other operators, it was felt appropriate to treat different paired country routes as separate markets. On the demand side, substitution between different country routes was not possible as a call to one country was not a good alternative for a call to another country, while on the supply side it was not generally possible for an operator to switch capacity from one route to another.
Internet access market definition (November 1997)
A1.6 In a Statement published by Oftel in November 1997 (BT Internet Services Investigation) which discussed the position of BT Internet and BTnet, Oftel indicated that it proposed to regard the relevant market as the provision of Internet access in the UK and that it was not proposing - at that stage - to make a distinction between a market for dial-up Internet access and a market for permanent (i.e. leased line) Internet access.
A1.7 In the first instance, Oftel believed that it was appropriate to define a separate product market for access to the Internet compared to other forms of on-line information services. There was then an issue of whether the different means of accessing the Internet e.g. dial-up access via a modem or a permanent connection via a leased line constituted separate product markets.
A1.8 In terms of the demand-side, it was not clear that all customers would be able to switch between these different access technologies in response to a change in relative prices. For instance, low-users - which would typically be residential or small business customers - would be unlikely to pay the additional cost of a leased line if the cost of dial-up access were to be increased. However, it was the case that a substantial proportion of dial-up customers were medium-sized and large corporate customers which were not only heavier users of the Internet but also better placed to consider upgrading their access connections in response to changes in price. It was thus possible that the ability of the larger corporate customers to upgrade their access connections would be sufficient to protect lower use customers.
A1.9 However, on the supply-side it was clear that there was considerable scope for substitution between providing dial-up access and providing leased line access i.e. an Internet Service Provider (ISP) that only provided leased line access would be able, quickly and easily, to switch its existing Internet platform to offer dial-up access without incurring significant additional expenditure and vice versa. In fact even at that time, most ISPs - and certainly most major ISPs - were already offering a range of different access technologies to their customers. They perceived the various access technologies as a portfolio of services which they could offer to customers wanting to arrange Internet access.
A1.10 In terms of the geographical scope of the product market, it was clear that the geographical location of an ISP was not a significant factor in determining the competitive conditions as customers were able to choose between ISPs located virtually anywhere in the UK. Based on this consideration of demand- and supply-side factors, Oftel thus defined the relevant market as the provision of Internet access in the UK.
A1.11 It is important to again emphasise that market definitions can and do change over time as new opportunities for demand and supply-side substitution arise. The implication of this is that in considering Market Influence determinations, it will always be necessary to revisit the issue of market definition to examine whether the demand or supply conditions in the market in question have altered.
Applied assessments of market power
A1.12 For the purposes of these guidelines, the Director believes that it would be useful to give practical examples of how Oftel has approached the assessment of market power in the past.
Mercury’s market power in certain international markets (June 1997)
A1.13 In June 1997, Oftel published a Statement (Mercury as a Well-Established Operator) setting out its review of Mercury’s (now known as CWC) Well Established Operator (equivalent to Market Influence) status in the market for international services to other operators and the market for international retail services on the UK/USA, UK/Canada and UK/Germany routes. This review was based on the principles set out in the International Facilities Licence: Guidelines on Well Established International Operator determinations discussed above.
A1.14 In the market for international services to other operators on the UK/Germany route, Oftel concluded at the time that Mercury retained its market power on this route and should retain its Well Established Operator status. The factors in favour of the finding that Mercury retained market power included the following:
A1.15 In the market for international retail services on the UK/Germany route, Oftel concluded that Mercury no longer had market power. The factors in favour of the finding that Mercury did not have market power (and should no longer be regulated as a Well Established Operator) included the following:
Market power in the mobile market (April 1997)
A1.16 In April 1997 Oftel published a statement (Fair Trading in the Mobile Telephony Market) which examined the positions of both Vodafone and Cellnet (it should be noted that Oftel have recently revisited this issue - see Competition in the mobile market, February 1999, currently under consultation). In terms of the way in which the analysis of competition was developed in the April 1997 statement, Oftel first of all addressed the issue of the relevant market. Taking in to account a number of factors, Oftel considered mobile telephony to be a separate product market from fixed telephony. Oftel did, however, consider that analogue and digital mobile systems were part of the same market.
A1.17 In terms of analysing the extent of competition between the various mobile networks, Oftel took into account the fact that the number of operators licensed to provide mobile networks was limited to four and that lack of spectrum constituted an effective barrier to entry for new mobile operators conferring an absolute advantage on incumbents. Oftel also took into account the fact that Orange and One-2-One were still in the process of building out their networks.
A1.18 In terms of market shares Oftel noted that although the advent of One-2-One and Orange had had an impact on the market structure, the trend decline in market shares was fairly slow. At that time Vodafone and Cellnet accounted for 41.1% and 39.4% (respectively) of all subscribers. In the digital segment of the market Vodafone accounted for 35.5% of subscribers and Cellnet for 25.7%. Oftel also took into account the fact that number portability had yet to be introduced for mobile networks.
A1.19 In terms of prices there was evidence to suggest that the entry of Orange and One-2-One had resulted in increased price competition. However, there was a clear distinction in terms of profitability between the two established networks and the new entrants; Vodafone was highly profitable and there was little to suggest that high rates of return on sales and capital were being eroded.
A1.20 Oftel concluded in the April 1997 statement that although Vodafone and Cellnet were not necessarily dominant, they did each individually possess market power. While this example of a market power assessment was not conducted for the purposes of a Market Influence (or Well Established Operator) determination, the approach to identifying market power adopted was identical to that set out in these guidelines.
Relevant sources
European Commission, 1998, Notice on the application of the competition rules to access agreements in the telecommunications sector
European Commission, Notice on the definition of the relevant market for the purposes of Community competition law
Office of Fair Trading Draft, Competition Act 1998: Assessment of market power
Office of Fair Trading Competition Act 1998: Market definition
Oftel, February 1999, Competition in the mobile market
Oftel, February 1998, Effective Competition Review
Oftel, November 1997, BT Internet Services Investigation
Oftel, June 1997, Mercury as a Well-Established Operator
Oftel, April 1997, Fair Trading in the Mobile Telephony Market
Glossary
Dominance – a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately consumers.
Independent Service Provider (ISP) – entities which provide telecommunications services over fixed or mobile networks, or services with a telecommunication service component, to the public at large but do not own or operate telecommunications networks. Some independent service providers may not use telecommunication networks, for example they may be publishers of printed directories.
Market Influence – the ability to raise prices above the competitive level for a non-transitory period.
Market power – see Market Influence.
Service provider – provider of telecommunication services, or services with a telecommunication service component, to third parties whether over its own network or otherwise.
Tied Service Provider (TSP) – service providers which are owned by or in common ownership with the network operator’s Group.
‘Well Established Operator’ status – a concept currently used in licences, equivalent to Market Influence except insofar that it carries with it a service obligation for fixed Public Telecommunications Operators. Subject to the Licensing Directive consultation, this concept will be replaced by Market Influence.