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Module 3: Regulation & Competition
Original course & content comes from Washington State University Extension, Center to Bridge the Digital Divide.
At the end of this module, learners should be able to:
Topics
In a market-economy where competition exists, suppliers compete with each other to sell goods and products to their customers. Suppliers contend with each other to offer better service, better packages and use qualities of service to attract consumers. In such market, where competition thrives, individual suppliers lack market power and as such can not dictate the tone and shape of the market. Suppliers can only react to the competitive strategies of their competitors in order to stay in business. This serves the public interest and the consumers benefit from this. In the telecommunications, markets are not usually perfect. They are often dominated by big suppliers who use their position to determine the shape of the market and the form of the sector in general. To evaluate the competitiveness of the telecom market, it is important to identify and briefly analyse some of the various pertinent issues that characterise the discourse of competition in the telecom sector. Some of these issues are barriers to entry, market power and dominance, and series of anti-competitive conducts.
Barrier to Entry
Barrier to entry focuses on the ease or otherwise that a new supplier can get into the market and operate competitively. Prices are often used as tools in this process. If it is easy for a new supplier to enter and provide a substitute product, established supplier will not embark on a long-time price increases. This kind of price increases would encourage market entry and consequently increase competition. In other words, the existence of barrier to market entry limits competition in the sector. Examples of barrier to entry are government restrictive licensing practices; refusal to supply essential facilities and refusal to interconnect networks.
Market Power and Dominance
Market power is the “ability of a firm to raise prices above market levels for a non-transitory period without losing sales to such a degree as to make this behaviour unprofitable” (Intven et al, 2000: 5-11). Most of the attention of regulators with regards to market power is focussed on established telecom companies that have market power. If such operator raises prices of its services, the impact will be felt in the sector, however, firms without market power can not raise prices to the level that it will affect the sector. If they do, they risk the possibilities of losing customers. Some of the factors to consider in determining if a firm has market power are:
Market dominance is an excessive form of market power. Market dominance is when a telecom operator owns a relatively high market share, usually no less than 35%, but often from 50% and above. Market dominance is also noticeable when there is significant barrier to entry into the market occupied by the dominant firm. Below are some common examples of abuse of dominance by a telecommunication operator:
Remedies to abuse of market dominance vary. The central issues are to prevent, correct or punish a firm that abuses dominance. In this regard the competition authority or regulator should have certain powers to investigate such abuse and utilise the power to remedy the abuse. The following are some of the powers to remedy abuse of dominance.
Forms of Abuse of Market Power and Dominance (anti-competitive conducts)
Anti-competitive conducts are basically abuse of market power by entities that strive to entrench their presence in the market. Some of the strategies utilised are: Predatory pricing, bundling, refusal to deal, price discrimination and the various anti-competitive agreements.
Predatory Pricing
This is a form of anti-competitive conduct whereby an operator provides services at low price to drive out competitor and attract more customers. Consequently, in a long time the company recoups the losses and accrues monopoly benefits. Predatory pricing in the short time benefits the consumer due to the fact that prices are low. However, these low prices are tactical moves to eliminate competitions, as soon as this is achieved and the company gains market power, the company will increase its prices even higher than what it was before the predatory pricing. This way the company recoups its initial losses. The problem with this anti-competitive conduct is that, it is difficult to pinpoint empirically that a telecommunications company is employing predatory pricing. This is true because, the low pricing is good for the customer (as the possibility of an increase in price could not be confirmed at the initial stage). This becomes difficult for a competitor to complain of predatory pricing from other competitor and to convince the competition regulator accordingly.
Price Discrimination
Still on the use of pricing as an anti-competitive strategy and closely link to predatory pricing is price discrimination. Price discrimination as an anti-competitive act could be seen when an incumbent supplier keeps prices of services high for those that do not have choice but to use the incumbent services, this could be due to geographical location. In a situation where a telecommunication company owns a large percentage of the telecommunications market, the company could use price discrimination strategies or discount services in those areas where it is facing competition. Price discrimination is closely linked to predatory pricing and it could be used to fund predatory pricing strategies. Telkom South Africa has been criticised for using price discrimination by subsidising international call and increasing the prices of local calls. This process is related to explicit subsidies (Hudson 1997), where a dominant carrier can cross subsidise competitive services with profits from monopoly services to drive out competition. The government and the regulator should ensure that reasonable prices exist in the market place, especially when competition is introduced
Bundling
Another form of the abuse of market power is bundling. This is the process of tying one product or service to the other. Two forms of bundling can be identified: First line and third line bundling. First line bundling occurs when one company creates a package of its goods and services and refuses to sell the component of its package individually. This way the company refuses to sell a single product to a customer unless the customer buys another product from the same company. Third line bundling is when a company refuses to sell a product to a customer unless the customer buys another product from another company. For example, first line bundling in telecommunications is when a telecommunication company offers call services to customers and the customers are expected to buy the equipment such as the telephone from the same company to be connected to the call service. Third line bundling is quite rampant in the mobile telecommunication sector in South Africa. This is when a service provider through a retail shop ties its services with a phone. This way the phone could not be used with other competing service provider. It is difficult in certain instances to say clearly that this kind of bundling is anti-competitive, because there is no monopoly of telephone equipment. Customers are free to get other brands of phone. Bundled sales are not really an anti-competitive conduct, as the sale of one product or service maybe tied to another for consumer safety or for technical interdependence. However the bundling of services with a particular phone is done at a subsidised rate for the customer, which is beneficial to the customer. This sort of bundling could be anticompetitive, if the service provider is a monopoly or if the phone is a monopoly product.
Refusal to Deal
The refusal of a telecommunication company to supply services to another could be an anti-competitive conduct. This refusal could be damaging to competition and could exclude the competitor from the market totally. An example of such dealing in telecommunication is interconnection. In some cases new entrant to the market operate using existing network facilities of the incumbent monopoly. Introducing competition in telecommunications involves much more preparation than simply opening the doors to anyone who intends to get in to business. Competition will be hampered if the new entrants are forced to build entire end-to-end networks before getting into business. Rather, they will need to interconnect with existing networks. (Hudson, 1997). Hudson (1997: 77) notes that “monopoly carriers may attempt to protect their monopoly by refusing to interconnect or by pricing access beyond the reach of the new carriers”. In South Africa, the second national operator would be expected to use the existing facilities of the incumbent monopoly, the third cellular provider, Cell C is currently using some facilities of Vodacom. So a refusal to deal in such circumstance is an abuse of market power, which is detrimental to competition. Government through its agencies and bodies should set policies that create incentives to utilise existing capacity rather than encouraging new carriers to duplicate facilities.The above anti-competitive conducts are rampant amongst company with high level of market power. For competing companies with relatively equal market power or who operate on the same level, they usually go in to horizontal agreements. There are several forms of horizontal agreement amongst competitosr:
These are some of the dynamics of competition in every industry and the telecommunications industry is no exception.
Managing Anti-Competitive Conducts
Monopolies and entities with market power will always endeavour to entrench a market presence and in doing so, they employ tactics that are anti-competitive. In most cases, it is difficult to prove convincingly that an entity is employing anti-competitive strategies, for instance in the case of predatory pricing. One way of resolving, avoiding or basically managing this, is for the government to put in place policies that provide legal framework for managing anti-competitive conducts. The establishment of an independent statutory body to regulate competition will also be applicable to managing competition. With regard to telecommunications, we shall look at Hudson’s (1997; 78-79) recommendation of the functions of a telecommunications regulator and the role it can play in managing competition in telecommunications:
Module 3: The Role of Regulation in Competition
Learning OutcomesAt the end of this module, learners should be able to:
- Describe a framework for competition policy in telecommunications
- Discuss the rationale for regulatory intervention in a competitive environment
- Explain the different types and forms of regulations
- Explain the link between competition and regulation
Topics
- The Basic concepts in telecomm competition
-Barrier to entry
-Market power and dominance - Forms of abuse of market power and dominance (anti-competitive conducts)
-Predatory pricing
-Price discrimination
-Bundling
-Refusal to deal - Managing anti-competitive conducts
- The basic principle of competition policy
- Case study: Competition and policy
- Regulatory intervention in the telecom/ICT sector
-The economy-wide regulator
-The telecom-specific regulator
-Good governance by regulator - Regulatory structures in the telecom/ICT sector
- Regulatory processes in the telecom/ICT sector
-Licensing processes:
-Bidding process
-Auctions
-Beauty context - Case studies of regulatory processes
- International telecom/ICT regulation
- Models/types of regulation in the telecom/ICT
Basic Concepts in Telecomm Competition
In a market-economy where competition exists, suppliers compete with each other to sell goods and products to their customers. Suppliers contend with each other to offer better service, better packages and use qualities of service to attract consumers. In such market, where competition thrives, individual suppliers lack market power and as such can not dictate the tone and shape of the market. Suppliers can only react to the competitive strategies of their competitors in order to stay in business. This serves the public interest and the consumers benefit from this. In the telecommunications, markets are not usually perfect. They are often dominated by big suppliers who use their position to determine the shape of the market and the form of the sector in general. To evaluate the competitiveness of the telecom market, it is important to identify and briefly analyse some of the various pertinent issues that characterise the discourse of competition in the telecom sector. Some of these issues are barriers to entry, market power and dominance, and series of anti-competitive conducts.
Barrier to Entry
Barrier to entry focuses on the ease or otherwise that a new supplier can get into the market and operate competitively. Prices are often used as tools in this process. If it is easy for a new supplier to enter and provide a substitute product, established supplier will not embark on a long-time price increases. This kind of price increases would encourage market entry and consequently increase competition. In other words, the existence of barrier to market entry limits competition in the sector. Examples of barrier to entry are government restrictive licensing practices; refusal to supply essential facilities and refusal to interconnect networks.
Market Power and Dominance
Market power is the “ability of a firm to raise prices above market levels for a non-transitory period without losing sales to such a degree as to make this behaviour unprofitable” (Intven et al, 2000: 5-11). Most of the attention of regulators with regards to market power is focussed on established telecom companies that have market power. If such operator raises prices of its services, the impact will be felt in the sector, however, firms without market power can not raise prices to the level that it will affect the sector. If they do, they risk the possibilities of losing customers. Some of the factors to consider in determining if a firm has market power are:
- Market share: This can be measured in many ways, such as monetary value, units of sales, units production and production capacity
- Pricing: price competition in which a firm sets a price and the rest follows the price or shadows this is evident of a market power
- Profitability: Closely related to price is excessive profitability which indicates insufficient price competition and the exercise of market power
- Vertical integration: in telecommunications, incumbent operator that can extend its market vertically indicates the operator enjoys market power. Example of such integration is a telecom operator that is providing local access, long distance as well as international services. Such operator may use its market power in the local access to a competitive advantage in the long distance service. It may raise price of local access to subsidize the long distance and international service.
Market dominance is an excessive form of market power. Market dominance is when a telecom operator owns a relatively high market share, usually no less than 35%, but often from 50% and above. Market dominance is also noticeable when there is significant barrier to entry into the market occupied by the dominant firm. Below are some common examples of abuse of dominance by a telecommunication operator:
- Refusal or delay in providing essential facilities to competitor
- Providing services or facilities to competitor at excessive prices or on discriminatory terms
- Predatory pricing and /or cross subsidization of competitive services with revenues obtained from services which are subject to less competition
- Bundling of services designed to provide the dominant firm with exclusive advantage in subscriber markets or require a competitor to obtain services or facilities which it does not truly needs (Intven et al, 2000: 5-11).
Remedies to abuse of market dominance vary. The central issues are to prevent, correct or punish a firm that abuses dominance. In this regard the competition authority or regulator should have certain powers to investigate such abuse and utilise the power to remedy the abuse. The following are some of the powers to remedy abuse of dominance.
- Power to issue enforceable orders against the dominant entity,
a.) to cease abusive behaviour; or
b.) to prescribe specific changes in its behaviour to limit the abusive aspects. - Power to revoke the licence of the dominant entity (NB. In practice, this has limited applications since no regulator wants to deny service to the public).
- Power to fine the dominant entity and the individual persons responsible for the abusive conduct
- Power to order compensation (damages) to be paid to subscribers or competitors injured by the abusive conduct.
- Power to restructure the dominant entity (such as the divestiture of some line of some of business or structural separation of those lines into separate but affiliated company)
- Power to facilitate and approve informal settlements in cases of abuse of dominance (e.g. to pay compensation, restructure, voluntarily cease or change conduct). (Intven et al, 2000: 5-11).
Forms of Abuse of Market Power and Dominance (anti-competitive conducts)
Anti-competitive conducts are basically abuse of market power by entities that strive to entrench their presence in the market. Some of the strategies utilised are: Predatory pricing, bundling, refusal to deal, price discrimination and the various anti-competitive agreements.
Predatory Pricing
This is a form of anti-competitive conduct whereby an operator provides services at low price to drive out competitor and attract more customers. Consequently, in a long time the company recoups the losses and accrues monopoly benefits. Predatory pricing in the short time benefits the consumer due to the fact that prices are low. However, these low prices are tactical moves to eliminate competitions, as soon as this is achieved and the company gains market power, the company will increase its prices even higher than what it was before the predatory pricing. This way the company recoups its initial losses. The problem with this anti-competitive conduct is that, it is difficult to pinpoint empirically that a telecommunications company is employing predatory pricing. This is true because, the low pricing is good for the customer (as the possibility of an increase in price could not be confirmed at the initial stage). This becomes difficult for a competitor to complain of predatory pricing from other competitor and to convince the competition regulator accordingly.
Price Discrimination
Still on the use of pricing as an anti-competitive strategy and closely link to predatory pricing is price discrimination. Price discrimination as an anti-competitive act could be seen when an incumbent supplier keeps prices of services high for those that do not have choice but to use the incumbent services, this could be due to geographical location. In a situation where a telecommunication company owns a large percentage of the telecommunications market, the company could use price discrimination strategies or discount services in those areas where it is facing competition. Price discrimination is closely linked to predatory pricing and it could be used to fund predatory pricing strategies. Telkom South Africa has been criticised for using price discrimination by subsidising international call and increasing the prices of local calls. This process is related to explicit subsidies (Hudson 1997), where a dominant carrier can cross subsidise competitive services with profits from monopoly services to drive out competition. The government and the regulator should ensure that reasonable prices exist in the market place, especially when competition is introduced
Bundling
Another form of the abuse of market power is bundling. This is the process of tying one product or service to the other. Two forms of bundling can be identified: First line and third line bundling. First line bundling occurs when one company creates a package of its goods and services and refuses to sell the component of its package individually. This way the company refuses to sell a single product to a customer unless the customer buys another product from the same company. Third line bundling is when a company refuses to sell a product to a customer unless the customer buys another product from another company. For example, first line bundling in telecommunications is when a telecommunication company offers call services to customers and the customers are expected to buy the equipment such as the telephone from the same company to be connected to the call service. Third line bundling is quite rampant in the mobile telecommunication sector in South Africa. This is when a service provider through a retail shop ties its services with a phone. This way the phone could not be used with other competing service provider. It is difficult in certain instances to say clearly that this kind of bundling is anti-competitive, because there is no monopoly of telephone equipment. Customers are free to get other brands of phone. Bundled sales are not really an anti-competitive conduct, as the sale of one product or service maybe tied to another for consumer safety or for technical interdependence. However the bundling of services with a particular phone is done at a subsidised rate for the customer, which is beneficial to the customer. This sort of bundling could be anticompetitive, if the service provider is a monopoly or if the phone is a monopoly product.
Refusal to Deal
The refusal of a telecommunication company to supply services to another could be an anti-competitive conduct. This refusal could be damaging to competition and could exclude the competitor from the market totally. An example of such dealing in telecommunication is interconnection. In some cases new entrant to the market operate using existing network facilities of the incumbent monopoly. Introducing competition in telecommunications involves much more preparation than simply opening the doors to anyone who intends to get in to business. Competition will be hampered if the new entrants are forced to build entire end-to-end networks before getting into business. Rather, they will need to interconnect with existing networks. (Hudson, 1997). Hudson (1997: 77) notes that “monopoly carriers may attempt to protect their monopoly by refusing to interconnect or by pricing access beyond the reach of the new carriers”. In South Africa, the second national operator would be expected to use the existing facilities of the incumbent monopoly, the third cellular provider, Cell C is currently using some facilities of Vodacom. So a refusal to deal in such circumstance is an abuse of market power, which is detrimental to competition. Government through its agencies and bodies should set policies that create incentives to utilise existing capacity rather than encouraging new carriers to duplicate facilities.The above anti-competitive conducts are rampant amongst company with high level of market power. For competing companies with relatively equal market power or who operate on the same level, they usually go in to horizontal agreements. There are several forms of horizontal agreement amongst competitosr:
- Price fixing- This is when the competing firms agree on a certain set price to put on their services. Price fixing has damaging effect on competition; consumers will not be able to choice services and products based on price. Competing firms have to monitor competitors to avoid ‘cheating’, a situation where one competing firm will change price of its product from the already fixed one. Another issue with reference to price is the issue of price signalling. This is when a competitor changes its prices, the other competitor will be aware of this and also change its prices. Furthermore, weaker competitor could ‘shadow’ the prices of the stronger competitor by keeping its prices slightly lower than the stronger competitor’s. On the other hand a stronger competitor could ‘discipline’ a weaker competitor to ensure that it does not set prices far too below the strong competitor’s price. This is done by undercutting prices of the competitor.
- Mergers and acquisition is another way of reducing competition in the market, this is done by buying the competitor. However, regulators monitor this process and intervene accordingly.
- Exclusionary provision- this is a situation where two or more competing firms agree not to supply or buy from a particular competitor with the intention of pushing the competitor out of the market.
- Another form of horizontal agreement is market sharing. This is an agreement by competing firms to respect each other’s market share. This could be bad for the consumer as the two firms could agree on a high parity price for their services.
These are some of the dynamics of competition in every industry and the telecommunications industry is no exception.
Managing Anti-Competitive Conducts
Monopolies and entities with market power will always endeavour to entrench a market presence and in doing so, they employ tactics that are anti-competitive. In most cases, it is difficult to prove convincingly that an entity is employing anti-competitive strategies, for instance in the case of predatory pricing. One way of resolving, avoiding or basically managing this, is for the government to put in place policies that provide legal framework for managing anti-competitive conducts. The establishment of an independent statutory body to regulate competition will also be applicable to managing competition. With regard to telecommunications, we shall look at Hudson’s (1997; 78-79) recommendation of the functions of a telecommunications regulator and the role it can play in managing competition in telecommunications:
- Pricing: Where competition exists, the marketplace may ensure that prices are reasonable. However, where one carrier dominates the market, or where demand far exceeds capacity, regulatory intervention may be necessary
- Explicit Subsidies: Internal cross-subsidies are often used to provide affordable services in less profitable areas. With the introduction of competition, it is important to make such subsidies explicit where they remain necessary, so that a dominant carrier cannot cross-subsidise competitive services with profits from monopoly services to drive out competition.
- Quality of service: Monitoring of service quality is particularly important in developing countries, where one of the main objectives of restructuring the sector is to improve quality of service
- Criteria for Access by Multiple Providers: Where service competition is allowed, oversight is necessary to ensure that all have equal access to the network. Moreover, a provider of facilities must not gain an unfair advantage if it also offers services by restricting access to its network or charging inflated prices to other service providers who want to use it.
- Standards: Uniform standards are needed to ensure that equipment is compatible and of acceptable quality. An impartial standard agency can also ensure that a dominant carrier or suppliers does not introduce standards that unreasonably discriminate against other vendors.
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