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Issued by the Director General of Telecommunications March 2000 Chapter 1 Market Influence Chapter 2 Market Definition Chapter 3 Assessing market power for the purposes of Market Influence determinations Chapter 4 Effect of a Market Influence determination Annex A Consultation and responses Annex B Examples of applied market definitions and assessments of power Annex C Relevant sources SummaryS1 ‘Market Influence’ is a regulatory concept. A determination that a telecommunications operator has Market Influence triggers additional regulatory obligations which would otherwise lie dormant in the operator’s licence. The conditions are designed to prevent an operator using a position of Market Influence to behave in an anti-competitive manner. These guidelines are intended to inform the telecommunications industry of the approach the Director intends to take when making a Market Influence determination. S2 Market Influence is defined in the Telecommunications Act licences as: ‘the ability to raise prices above the competitive level in the relevant market for a non-transitory period without losing sales to such a degree as to make this unprofitable.’ S3 Market Influence is not in itself a measure of anti-competitive behaviour but is a level of market power which an operator has in a relevant economic market which, if abused, could stifle effective competition in that market. In making a Market Influence determination the Director will define the relevant market and assess operators’ market power within that market. S4 Oftel’s goal is to get the best deal for the consumer, and, as set out in the Strategy Statement published in January 2000, the prevention of anti-competitive practices is a key objective for the attainment of this goal. The power to determine that an operator has Market Influence will assist Oftel to meet this objective. The power complements the powers of the Competition Act 1998, which came into force on 1 March 2000. However, as set out in the Strategy Statement and in the Competition Act guideline The Application of the Competition Act in the Telecommunications Sector, where the Director has a choice between applying the Competition Act and enforcing regulatory obligations, such as those triggered by a Market Influence determination, he will generally apply the Competition Act. S5 Oftel will use a Market Influence determination to ensure that operators with Market Influence do not abuse their position. These operators will be obliged to:
S6 These Market Influence Guidelines are intended to inform the telecoms industry of the process the Director intends to take when making a determination. S7 The contents of the Guidelines are as follows:
Market Influence Market Influence 1.1 ‘Market Influence’ is a regulatory concept. A determination that a telecommunications operator has Market Influence triggers additional regulatory obligations which would otherwise lie dormant in the operator’s licence. These guidelines are intended to inform the telecommunications industry of the approach the Director intends to take when making a Market Influence determination. 1.2 Market Influence is a measure of the market power held by a telecoms operator in a relevant economic market which could enable an operator to raise prices to an uncompetitive level in that market. To prevent the possibility of abuse of this power a Market Influence condition has been included in all PTO licences which obliges all operators with Market Influence to:
1.3 Market Influence is defined in operators’ licences as: ‘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.’ 1.4 This is the definition of market power used in Oftel publications such as: Competition in the mobile market (February 1999) and International Facilities Licences: Guidelines on Well Established International Operator (‘WEIO’) determinations and Arrangements for Accounting in respect of International Conveyance Services (July 1997), An undertaking will therefore be designated as having Market Influence only if it is found to have market power. In defining the relevant market and then assessing whether an undertaking has market power the Director will follow the approach set out in the Competition Act guideline The Application of the Competition Act in the Telecommunications Sector, where it is stated that: ‘An undertaking has market power if it is not constrained effectively by competition. In practice an undertaking with market power will be able to raise prices consistently and profitably above the competitive level. It may also be able to consistently supply goods of a lower quality than it would be able to supply in a competitive market.’
1.5 The Director will determine if operators have Market Influence in accordance with the criteria set out in the Telecommunications Act licences. The Market Influence concept was introduced in all PTO licences in September, 1999 as part of the exercise to implement Directive 97/13/EC on a common framework for general authorisations and individual licences in the field of telecommunications services (the Licensing Directive) in the UK. The criteria which the Director may consider when making a determination are set out in the following standard condition which has been incorporated into the licences: "The Director may, in accordance with the procedure set out in paragraph 6 of Part 1 of this Licence, determine the Licensee to be an Operator having Market Influence in relation to any particular market specified by him where the Licensee has the ability to raise prices in that market for a non-transitory period without losing sales to such a degree as to make this unprofitable. In making such a determination, the Director may, in addition to any other factors which appear relevant to him, take into account all or any of the following factors: – level of entry barriers; – vertical integration; – control of access to end users; – number of active competitors; – market share; – extent of countervailing power among buyers; – the extent of any recent market entry or exit; – trends in market share and concentration; – pricing behaviour; – the level of profits; and the influence of other members of the Licensee’s Group operating in the same or similar markets which the Director is minded to specify for the purpose of this Condition." Competitive prices 1.6 Oftel will not seek to establish what the competitive level of prices in any particular market should be. Instead, the question of whether prices are at or close to the competitive level will usually be observed indirectly, by looking at a range of factors such as relative market shares, history of entry and exit, etc. Oftel may also take into account direct observations of the level of profits in a particular market and how those levels have changed through time. The various factors that would be considered are discussed further in Chapter 3. The Market Influence determination process 1.7 An undertaking will only be designated as having Market Influence if it is found to have market power within a relevant economic market. In making a determination, therefore, the Director must first define the relevant market (see Chapter 2, Market Definition) and assess operators’ market power within that relevant market (see Chapter 3, Assessing market power for the purposes of Market Influence determinations.) 1.8 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 lawfully 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. Abuse of Market Influence 1.9 Oftel makes no presumption that the mere existence of Market Influence will lead to abuse of that power, either through leveraging that power into downstream markets or otherwise. The extent of any actual or potential market distortion could vary from significant to inconsequential and Oftel will respond to each individual case in a proportionate way. Market Structure 1.10 Some market structures may be conducive to a muted form of competition due interdependencies between firms, for example oligopolistic markets. In markets of this type, where there are a small number of firms producing relatively homogenous products, there is an interdependency between firms, which may mutate competition. (In this sense, the concept of market influence is similar to the developing competition theory of collective dominance, which is described in paragraph 1.21 – 1.24 below). A firm’s incentive to seek competitive advantage when making price or quantity decisions, will be conditioned by how it expects other firms in the market to react. Further, the smaller the number of other firms, the more likely it is that their expected reactions will be built into the firm’s decisions. A consequence of this is that prices may be higher than the competitive level. 1.11 The definition of market influence used in the licences (see paragraph 1.3), does not necessarily rely, therefore, on the operator having more market power than any of its competitors, which would enable it to act independently of other operators in the market. Instead, it is intended to cover behaviour of firms that operate within market structures that facilitate prices being raised above the competitive level. It may be necessary, therefore, to take action against one firm in an oligopoly because forbearance of others provides it with power. Vertical integration 1.12 A particular characteristic of many telecommunications markets is the extent of vertical integration, especially among network operators. Although not in itself anti-competitive, vertical integration, when allied to market power – either in the form of dominance or Market Influence – may make it easier to leverage market power into related markets. 1.13 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, for example, to raise prices of inputs or to offer products and services only as a bundled package, could affect significantly 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. 1.14 As a general proposition, therefore, the existence of market power short of dominance, (ie Market Influence) when combined with vertical integration, may make it easier to engage in significant anti-competitive behaviour. Through the leverage of Market Influence, the supplier(s) can influence the extent of competition in the related market Market Influence and other measures of market power 1.15 Oftel takes market power to be a spectrum – with firms with no market power at one end and firms with dominance at the other. Market Influence is a new term to describe a measure of market power in the telecommunications market that is short of dominance. The similarities and differences between Market Influence and other measures of market power are set out below. Market influence and Dominance 1.16 The concept of Market Influence is distinct from the concept of dominance. The Competition Act 1998, which came onto force on 1 March 2000, prohibits anti-competitive agreements (‘the Chapter I prohibition’) and abuses of dominance (‘the Chapter II prohibition’). Further details are given in the Competition Act guideline The Application of the Competition Act in the Telecommunications Sector. 1.17 A dominant undertaking will possess a substantial degree of market power that is in excess of any market power held by its competitors, and which therefore allows it to act to an appreciable extent independently of its rivals. The key difference between dominance and Market Influence is that Market Influence does not require that the operator is able to act independently of its rivals. 1.18 Article 82 of the EC Treaty, and the new Competition Act (which came into force on 1 March 2000) make use of the concept of ‘dominance’. Like Market Influence, the concept of dominance is assessed in relation to a relevant economic market or markets. Dominance was defined by the European Commission in Case C27/76 United Brands v. Commission, [1978] ECR 207, [1978] 1 CMLR 429 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.’ 1.19 The Market Influence concept represents a position of power in the relevant market lower than dominance. The Competition Act guideline Assessment of market power state: ‘An undertaking is unlikely to be dominant if it does not have substantial market power. Market power is not, however, an absolute term but a matter of degree…’ 1.20 An operator found to be dominant in a relevant market will have a higher level of market power than is necessary for a determination of Market Influence, and would therefore fulfil the requirements necessary for a Market Influence determination. It is not necessary, however, for the Director to have declared an operator as having Market Influence before deciding in the context of a Competition Act investigation that the operator is dominant A finding of dominance will over-ride a determination of Market Influence. The relationship between dominance and Market Influence in the context of market shares is discussed further in paragraphs 3.14 – 3.18. Market Influence and Collective Dominance 1.21 As mentioned in paragraph 1.10 above, collective dominance is an evolving competition theory which is based on similar economic concepts to Market Influence. The Chapter II prohibition contained in the Competition Act prohibits conduct on the part of one or more undertakings which amounts to the abuse of a dominant position. Undertakings may therefore be dominant collectively. 1.22 Undertakings in the same corporate group may have collective dominance. Collective dominance may also exist when two or more undertakings are linked in such a way that they adopt the same conduct in the market. The Court of First Instance stated in Case T-68/69 etc Societa Italiano Vetro SpA v. Commission [1992] 2 ECR 1403, [1992] 5 CMLR 302, that: ‘There is nothing in principle to prevent two or more independent economic entities from being, on a specific market, united by such economic links that, by virtue of that fact, together they hold a dominant position vis-à-vis the other operators on the market. 1.23 A recent decision of the Court of First Instance under the EC Merger Regulation, CaseT-102/96 Gencor v. Commission [1999] 4 CMLR 971, suggests that collective dominance (at least for the purpose of that Regulation) may also exist where there are no such links between the undertakings in question, but where they are acting in the same way on the market. This is likely to be the case, however, only in oligopolistic markets characterised by homogeneous products and high entry barriers. It is not yet clear whether this broader definition of collective dominance under the Merger Regulation will also be applied to Article 82 of the EC Treaty (on which the Chapter II prohibition is based). 1.24 Section 60 of the Competition Act sets out certain principles with a view to ensuring that the United Kingdom authorities handle cases in such a way as to ensure consistency with EC law. If, as the case law of the European Court develops, it becomes clear that the concept of collective dominance is wider than has previously been the case, it may become unnecessary for Oftel to make Market Influence determinations to ensure that it is possible to prevent anti-competitive behaviour by operators that have market power, but are not dominant. Market Influence and SMP 1.25 Under the Open Network Provision (ONP) Directives (eg Directive 79/33/EC, 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. It should be noted that SMP is not intended to be assessed in relation to a relevant economic market as defined in Chapter 2 below. 1.26 SMP is intended to relate to the activities of specific operators in broad market sectors and to reflect an operator’s position in the markets set out in the Directive within the geographical area within which it is authorised to operate. The SMP framework allows for the regulation of important network operators to ensure appropriate interconnection terms and interoperability rules. It is intended to work in parallel with the existing competition rules rather than replace them. SMP is assessed in relation to markets that are pre-defined in the ONP Directives. It is a distinct concept from Market Influence and an operator may be designated as having both Market Influence and SMP, each determination triggering a separate set of regulatory obligations. It is the policy of the European Commission that decisions about SMP are without prejudice to an undertaking’s position with regard to the application of competition rules. 1.27 SMP determinations relate to broad pre-determined markets and there are therefore likely to be differences between market definitions used in applying the Competition Act (and Articles 81 and 82 of the EC Treaty) and the markets to which SMP determinations relate. By way of contrast, Market Influence involves an approach to market definition identical to that conducted under the competition rules. 1.28 The fact that an operator has been determined as having SMP and/or Market Influence status in a particular market does not imply that it will have market power in all markets in which it operates. In particular, it does not imply that it will have market power in any market that may be subject to a Competition Act investigation. This will have to be considered fully as part of that investigation, with the Director first defining the relevant market and then assessing whether the operator has market power. Market Influence and Well Established Operator 1.29 Market Influence represents an identical position of market power in a relevant market to that associated with the concept of ‘Well Established Operator’, and replaces this concept in the new licences. The introduction of the Market Influence trigger as a replacement for the WEO trigger is deregulatory, since a determination that a fixed PTO has Market Influence does not, in general, result in a service obligation. The exception to this is where Mobile Operators have been determined as having Market Influence. Market Influence and Oftel’s strategy 1.30 In January, 2000 Oftel published a statement of its strategy – Achieving the best deal for consumers. Central to the Strategy was the recognition that effective competition is the best way of ensuring that consumers get the best possible deal. Oftel therefore committed itself to regulate only where competition is not yet effective or where competition, even if effective, does not provide sufficient protection or information for consumers. The Market Influence concept is therefore consistent with Oftel’s strategy as it supports the objective of preventing anti-competitive behaviour and protects consumers in a way which competition alone will not do. 1.31 The Strategy commits Oftel to moving to lighter regulation where possible. As explained in paragraph 1.29 above the Market Influence trigger replaced the Well Established Operator trigger in PTO licences. This is a move to lighter regulation as Market Influence (unlike Well Established Operator status) does not carry with it a service obligation for fixed Public Telecommunications Operators. Also these Guidelines will be reviewed from time to time to take into account developments in the telecommunications market and the legislative framework. As EU and UK competition law and jurisprudence develops the Director will forebear from using Market Influence determinations in favour of allowing general competition law to regulate all levels of market power in the telecoms sector.
Market definition 2.1 This chapter on market definition reflects current practice by competition authorities in Europe, North America and elsewhere. In particular these guidelines have taken into account 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. The approach to market definition outlined here is also consistent with that set out in the Competition Act guideline: Market definition and in the Competition Act guideline: The application of the Competition Act in the telecommunications sector. 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 first 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 Thus market definition can 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:
Approach to market definition 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 or products which 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 would be 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 of the product market. 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 Competition Act guideline: Market definition for a general discussion of this concept as well as the Competition Act guideline: The application of the Competition Act in the telecommunications sector Market definition in practice Regulated prices 2.9 Where there are certain products that 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 – ie 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, whether or not the products concerned are subject to price control 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 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: 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 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 determinant 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 (eg exchange lines, certain call services) was limited to the geographical area in which Kingston operated. 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 European Commission 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 Commission 1998 Notice recognises that market definition is an exercise best undertaken in the context of a particular Article 81 or 82 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 B.
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 or operators in question possess market power in the relevant markets, and assessing the level of market power held. 3.2 This section reviews some of the factors that may be taken into account when assessing market power. The approach that is set out here reflects current practice by competition authorities in Europe, North America and elsewhere. The approach to assessing market power is also consistent with that set out in the Competition Act guideline Assessment of market power. Factors relevant to assessing market power 3.3 There are a number of factors that need to be considered when assessing whether a firm is likely to have a level of market power that may be sufficient for it to be determined as having Market Influence. A non-exhaustive list of relevant factors are set out in the Market Influence trigger (as set out in paragraph 1.5). They are:
3.4 These factors 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 the market 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 barrier: absolute advantages; strategic advantages; and exclusionary behaviour. 3.6 In telecommunications markets there may exist regulatory or technological barriers to entry and these barriers 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 currently only four firms are licensed to operate mobile networks. Similarly, prior to December 1996, only BT and CWC were permitted to own and operate international facilities (ie 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 the full liberalisation of international facilities. 3.7 Strategic barriers to entry are often associated with first mover advantage and tend to arise where potential new entrants have to incur a significant level of sunk costs in order to compete with the established incumbent. For example, a potential entrant may have to incur a high level of advertising expenditure to raise customer awareness of its product and to encourage customers to switch from the well-known brand of the incumbent. 3.8 Entry barriers from exclusionary behaviour is considered below in the section on vertical integration. It may also arise when, for example, competing telecommunications operators need to be able to interconnect with other networks in order to provide a full service to their customers. In particular, a small network with only a few subscribers that is competing with a large dominant network operator will need to be able to terminate calls on the latter’s network. This is because the small network is unlikely to be able to attract customers if they are unable to make calls to the large number of subscribers remaining with the dominant operator. By contrast, there is little cost to the dominant operator if its subscribers are unable to call the relatively small number of customers of the small competing network. A dominant operator can exploit this asymmetry in order to exclude rivals by refusing to allow other network operators to interconnect with its network or allowing interconnection only on unfavourable terms. 3.9 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 3.10 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 will form part of the analysis of market power in those telecommunications markets where vertical integration is a feature. 3.11 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 which controlled the network might be able to exclude those competitors by refusing access (either absolutely or for all practicable purposes) 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 3.12 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. 3.13 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 3.14 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 would not be made. 3.15 In the context of the AKZO Article 86 (now Article 82) 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 Competition Act guideline Assessment of market power states "…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." 3.16 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 Influence. 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 generally will not have an appreciable effect on competition for the purposes of the Chapter I ( modelled on Article 81 of the EC Treaty) prohibition of the Competition Act, 1998. 3.17 However, there is no presumption that an operator with a market share in excess of 25% does have Market Influence: 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 82 of the EC Treaty, and the Competition Act 1998 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 mean, therefore, that just because a firm is first into a new market (and hence temporarily has a 100% market share) that that firm would not automatically be presumed to be in a position of Market Influence. 3.18 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 might 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 3.19 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 3.20 In looking at the competitiveness of a market and whether an operator has sufficient market power to 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, as stated in paragraph 1.15 above, the Director will not be seeking to establish what the competitive level of prices should be in any particular market. Furthermore, 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 3.21 Oftel is concerned in particular 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 (eg in the case of mobile networks and their tied service providers) or horizontally related (eg where two services are bundled together as in fixed/mobile packages). 3.22 Examples of how Oftel has in the past approached the issue of assessing market power are given in Annex B.
Effect of a Market Influence determination 4.1 A Market Influence determination triggers additional obligations which would otherwise lay dormant within the operator’s licence. It should be emphasised that the conditions triggered are only relevant insofar as they apply to the licensee’s activities which 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 could 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-subsidising its downstream operations. The conditions triggered 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 conditions are contained in the 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:
4.6 It should be noted that a prohibition on undue discrimination includes implicitly an obligation to supply. If discrimination against a retail or wholesale customer were regarded as undue, so too would be a refusal to supply. The two categories of undue discrimination and undue preference set out above 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 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 verified objectively 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 practise 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 which 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:
Cross Subsidy 4.12 BT and Kingston in the fixed market are subject to a licence condition prohibiting unfair cross subsidy. The condition is also contained in the mobile PTO licences. This condition applies to the Licensees from day one and is not dependent on a determination of Market Influence by the Director. However, it is unlikely that in practice cross-subsidy would be regarded as unfair unless it was practised by an operator with Market Influence. Additional conditions that are triggered for Mobile licensees 4.13 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. These are an obligation to supply mobile Service Providers with wholesale airtime and an obligation to keep separate accounts. These additional conditions are required to ensure that the information is available to ensure that the no unfair cross subsidy rule is adhered to and also because of the structure of the mobile market whereby the network operators provide services to both independent service providers and service providers which are tied to them in some way. 4.14 Due to spectrum scarcity, the mobile operators have privileged access to spectrum. This constitutes a barrier to market entry by new mobile operators for the time being. This 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. 4.15 In relation to the mobile operators with market power at the network level the key point is that they might 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. 4.16 Thus, to prevent mobile operators with market power acting anti-competitively towards ISPs in the downstream market, the 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 4.17 This condition obliges mobile operators 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 4.18 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 to produce separate accounts for the provision of telecommunications services, apparatus supply and 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.
Guidelines on Market Influence determinations: consultation and responses Consultation background A1 Oftel published a consultation document which set out the draft Guidelines on Market Influence determinations in April, 1999. Comments were invited on any aspect of draft Guidelines. 10 responses were received. List of respondents A2 Responses were received from the following organisations and individuals (in alphabetical order):
Summary of consultation responses received A3 Many of the respondents expressed opposition to the principle of a Market Influence test, holding it to be disproportionate interference in a competitive market. A number felt that a Market Influence test would become redundant as Competition law developed to tackle anti-competitive behaviour. Finally, most respondents expressed confusion about the similarities and differences between dominance, market power, Significant Market Power and Market Influence. Oftel’s response to points raised by respondents. A4 The Guidelines have been amended to clarify points which caused confusion and to fully explain Oftel’s rationale for the contentious measures. The main changes are as follows: 1 The rationale for Market Influence Test. The concept of Market Influence and the rationale for applying additional regulatory rules for operators with Market Influence are set out in paragraphs 1.1 – 1.11 2 The relationship between Market Influence, dominance and market power. Oftel takes market power to be a spectrum – dominance is a substantial amount of market power, Market Influence a lesser amount. It should be noted that Market Power, when used in the context of a Competition Act investigation describes a level of market power equivalent to Oftel’s term ‘Market Influence’. The Guidelines have been redrafted to clarify this distinction (see paragraphs 1.15 – 1.29). 3 Correlation between SMP and Market Influence Market Influence applies to economic markets while SMP applies to geographically based markets as set out in the ONP Directives. SMP is a similar level of market power to Market Influence. The Guidelines have been redrafted to clarify this distinction (see paragraphs 1.25 – 1.28). 4 Overlap between Market Influence and the Competition Act. Market Influence is not intended to be a permanent measure. Oftel will forebear from making Market Influence determinations when UK and EU competition law has developed to effectively deal with anti-competitive behaviour short of dominance. The Guidelines have been redrafted to clarify this point (see paragraph 1.31). 5 Consistency with UK and EU competition law. In defining relevant markets and assessing market power Oftel will adopt the same approach as used for competition Act investigations. The concept of Market Influence is therefore consistent with UK and EU competition law, both as it currently exists and as it is developing. The Guidelines have been redrafted to clarify this point (see paragraph 1.21).
Examples of applied market definitions and assessments of market power Applied market definitions B1 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 consultation document Competition in the mobile market, looks at market definition where mobile telephony is concerned, with further discussion contained in the July 1999 Statement Oftel’s review of the mobile market. International calls market definition (July 1997 and November 1999) B2 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. B3 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. B4 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. B5 Oftel’s recent consultation document Competition in International Markets, which was published in November 1999, also discusses how it approached market definition for international services. Internet access market definition (November 1997) B6 Oftel’s November 1997 Statement, BT Internet Services Investigation, 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 (ie leased line) Internet access. B7 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 eg dial-up access via a modem or a permanent connection via a leased line constituted separate product markets. B8 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. B9 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 ie 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. B10 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. B11 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 B12 For the purposes of these guidelines, the Director believes that it would be useful to give a practical example of how Oftel has approached the assessment of market power in the past. Mercury’s market power in certain international markets (June 1997) B13 Oftel’s June 1997 Statement, Mercury as a Well-Established Operator, set 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. B14 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:
B15 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:
B16 In addition to the above, the November 1999 consultation document Competition in International Markets contains details of how Oftel assessed whether BT has market influence on certain international routes. BT’s position in relation to three main markets were considered: wholesale IDD; retail IDD and IPLCs. Oftel considered a range of factors, including market shares, trends in market shares, the number of competitors, barriers to entry and any evidence of collusion.
Relevant sources European Commission, 1998, Notice on the application of the competition rules to access agreements in the telecommunications sector European Commission, 1997, Notice on the definition of the relevant market for the purposes of Community competition law Office of Fair Trading, September 1999, Competition Act guideline: Assessment of market power Office of Fair Trading, March 1999, Competition Act guideline: Market definition Oftel, January, 2000, Competition Act guideline: Application of the Competition Act in the Telecommunications Sector 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
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 in that market for a non-transitory period without losing sales to such a degree as to make this unprofitable. 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 previously used in licences, equivalent to Market Influence except insofar that it carries with it a service obligation for fixed Public Telecommunications Operators.
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