Basic notions of the competition regulation. Introdution I- Basic concepts II- Competition in telecommunications market (Why regulate the competition

Basic notions of the competition regulation

CoE/ARB WorkshopOn

Development ICT Competition Policies Rabat – Morocco, 9 – 11 May 2012

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IntrodutionI- Basic conceptsII- Competition in telecommunications market (Why regulate the competition ?)III- Forms of competition IV- Distortion of competition V- Managing anticompetitive conductsVI- Regulatory Key factors for a good regulation of the competition VII- Regulatory policies : challenges to effective competitionConclusion

AGENDA

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Introduction

Market economy is a system of allocating resources based only on the interaction of market forces, such as supply and demand . A true market economy is free of governmental influence, collusion and other external interference.

Market : is the process by which the prices of goods and services are established.

Source : www.wikinvest.com

“Competition is the most efficient and equitable mechanism available for organizing, operating, and disciplining economic market”

Source : Telecommunications regulation handbook

http://www.wikinvest.com/

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Neo-classical economic theory largely dominates main-stream thinking on competition which is the most efficient mode of organizing production in society.

A competitive market is a market with a sufficient number of both buyers and sellers such than no one buyer or seller is able to exercise control over the market or the price. (concentration lead to higher price if incumbents are protected by barriers of entry).

The key impact of the neo-classical economic theory on telecom regulation is the adoption and development of competition policies whose central goal is to reduce levels of concentration thus preventing monopoly abuse.

Basic concepts 1/4

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Basic concepts 2/4

Competition has become a global phenomenon because of the globalization and because of the benefits it brings ?

Competition can be divided into many categories. : social competition ; political competition ; economic competition; cultural competition

These benefits could be lost if competition is unfair or non existant.

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The purpose of competition policy is to improve economic welfare by regulating those business practices that restrict competition, and limiting the ability of firms to combine in such a way as to enable them to restrict competition.

It includes :• Rules and procedures related to anti-competitive behavior• Reducing barriers of entry and exit from geographic market• Setting competitive conditions.

Competition law or antitrust law in the United States, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies.

Basic concepts 3/4

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Basic concepts 4/4

Monopoly : where there is only one provider of a product or service.

Monopolistic competition :also called competitive market, where there are a large number

of firms, each having a small proportion of the market share and slightly differentiated products.

Oligopoly : in which a market is dominated by a small number of firms that together control the majority of the market share.

Duopoly : a special case of an oligopoly with two firms.

Oligopsony : a market where many sellers can be present but meet only a few buyers.

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Forms of competition 1/4

Perfect competition : more an ideal than a reality

It describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product and it requires :

• A large number of buyers and sellers, such that no single buyer or seller is able to influence the price or control any other aspect of the market ;

• Homogeneous product ;• Buyers perfectly informed ;• No economies of scale and scope ;• No externalities ;• No regulation of the market ;• No restriction on capital ;• No barrier to enter or exit the market.

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Effective competition :

Majors market conditions :

• Buyers have access to alternative sellers for the product they desire at price they are willing to pay ;

• Sellers have access to buyers for their products without restriction from other firms, interest groups, government agencies, or exiting laws or regulations ;

• The market price of a product is determined by the interaction of consumers and firms ;

• Difference in prices charged by different firms and paid by different consumers reflect only differences in cost or product quality / attributes,

• In effectively competitive markets, consumers are protected to some degree from exploitive prices that firms could charge.

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Market contestability :

Barriers of entry and exit are so low that the threat of potential entry prevents the incumbent from exercising market power, it will contrain the behavior of incumbent, contestability requires that there no sunk costs for market entry.


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Sustainable competition : the aim of competition policy

Regulators are faced with a complex balancing exercise, individual regulatory decisions need to balance:• The long term objective of ongoing, sustainable competition,• The resolution of immediate short-term concerns, and• Conformance with the regulatory and legislative provisions under which

regulators operate.

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Why regulate the competition ?

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Why regulate the competition ?

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Monopoly

Liberalisation :

Market opening Competition

Need of regulation : Intevention of the public

athorities is relevantTo ensure the transition to an

effective competition, mainly by reducing risks of anti-competitive pratices and facilitating access to

the market

A scheme of transition in telecom market

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The introduction of competition is not a simple process, especially in telecoms where the incumbent who provide services and where many barriers exist :

anti-competitive behaviour by existing players, especially by the previous monopoly supplier, markets are dominated by big suppliers who use their position to determine the shape of the market and the form of sector in general.

To evaluate the competitiveness of the telecom market, it’s important to identify and analyse some of the various pertinent issues that caracterise the discourse of competition in the telecoms sector.

How to regulate competition in telecoms market

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Barriers to entry : It means obstacles that make it difficulte to enter a given market, in

terms of prices :

• Legal barriers : prohibit entry into telecommunications markets ( no liberaliszation or privatisation ;

• Economies of scale and scope that benefits to incumbents ; • High fixed or sunk costs : a new entrant incurs high sunk costs to enter

the the market, then the entrant must be prepared to absorb those sunk costs.

Distortion of competition 1/4

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Essential facilities :

Are resources or facilities that have the following properties : • They are located at the wholesale level of the production chain and are

essential inputs in the prodcution or supply of the retail product or service ;• Critical inputs to retail production : if an entrant needs access to an

essential facility that is controlled by one of its competitors or the only the incumbent : the entrant must incur the cost of purchasing access to the facility, costs not faced by the operators that owns the essential facilities ;

• They are fully owned and controlled by vertically integrated incumbent firms : the owner of the facility particpates in the retail as well as the wholesale stage of the market ;

• They are a monopoly, retail competitors only acquire an essential facility from the incumbent firm that owns and controls it ;

• It is not feasable, either economically or technologically, for retail competitors to duplicate the essential facility or develop a substitute for it.


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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 behavior unprofitable”

Most of the attention of regulators with regards to market power is focused 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.


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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:

Market dominance is not prohibited . abuse of dominance is


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Predatory Pricing Price Discrimination Bundling and tying Refusal to Deal / supply regulations prohibit agreements between operators or a concerted practice

having as an object or effect the prevention, restriction or distortion of competition in the telecommunications sector .

Horizontal Agreements

Persons engaged in identical or similar goods or services enter into an agreement : to determine purchase or sales prices to limit / control production, supply, technological developments, etc. to share the market, allocate geographical markets or number of customers

Vertical Agreements

Is an agreement for co-operation between two or more competing businesses operating at different levels of production or distribution chain in the market.

Forms of Abuse of Market Power and Dominance (anti-competitive conducts)

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Mergers and acquisitions

Mergers, where two independent enterprises combine as one, can be horizontal, vertical or conglomerate.

1. Horizontal mergers involve enterprises that are actual or potential competitors, vertical mergers involve enterprises at different levels in the chain of production, and conglomerate mergers involve firms that have diverse or unrelated interests. Generally speaking horizontal mergers cause the most concern for competition.

2. vertical and conglomerate mergers may raise competition issues in smaller countries where highly concentrated ownership can inhibit market competition despite lack of market power.

Mergers and acquisitions

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Monopolies and entities with market power try to maintain their presence in the market by using anti-competitive practices.

A legal framework is necessary for managing anti-competitive behaviour : ex ante and ex post framework

The establishment of an independant statury body to regulate competition and to manage anti-competitive conducts are the key for success : with the convergence diffrents models exist.

Managing Anti-Competitive Conducts

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Generic competition law

Co-regulator

y approach

with balance between sector-specific

regulation and

generic competiti

on law

Single sector regula

tor

Converged regula

tor

Multi sector

regula

tor

Approaches of telecommunications regulation

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Transparency :

Ensure that regulatory authorities publish relevant information, exercise their powers impartially, and give interested parties the opportunity to comment on and to shape the telecom sector.

Efficiency :

Lay down measures that prevent unnecessary barriers to trade in services, disciplines that are not overly burdensome, rules that justify requests for information, and most important, efficient means of applying and enforcing regulatory decisions.

Independence :

Set directives to ensure that the regulatory body is separate from and accountable to all telecom market participants and that it functions in an impartial manner.

Nondiscrimination :

Administer directives and obligations in a transparent, nondiscriminatory, and competitively neutral manner and develop an effective appeal mechanism.

Regulatory Key factors to a good regulation of the competition

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Regulation of Interconnection : The main tool to facilitate the entry of new players to a telecom market is

interconnection with existing operators. Interconnection regimes are known to require extensive regulatory intervention

There are three modes of regulation of interconnection :1. Detailed regulation of interconnection which includes the regulator setting the

prices and cheking compliance by parties;2. The regulator set the rules and requirements, but the incumbent prepares an

interconnection offer according to the requirements and if the regulator accepts if, it will be standard basis for individual interconnection agreements with any party who ask for it ;

3. The regulator doesn’t intervene and leave the the decision to the operators, however accounting separation should be guaranted and audited independently to avoid vertical integration and to ensure that the network business is charging new operators as its retail business and to prevent unfair cross subsidies or discrimination.

Regulatory policies : challenges to effective competition

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Market analsysis : Market definition : define the relevant market to determine the

boundries of a given market ; Analyse market and determine the SMP : the abuse is damaging

competition ; Market dominance is not prohibited, abuse of dominance is Obligations for firms with SMP.


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Access Regulation : Access regulation is created mainly to support entrants to the fixed

telecom market and to regulate the unbundling of an incumbent’s local loop. It includes also access the right to access to essential facilities, numbering and roaming.

Access regulation has created a significant number of disputes, as it has sometimes been seen as undermining an incumbent’s place in the market.


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Infrastructure-sharing regulation : Encourage the sharing of infrustructure is a key to foster competition :

the regulator should adopt a economic and commercial regulatory policy to ensure successful infrastructure sharing, Telecom regulatory authorities should issue a policy encouraging infrastructure sharing and should collaborate with local authorities and municipalities to support and facilitate the deployment of shared infrastructure which should be based on cost-based prices.

Forms of infrustructure-sharing : co-location and site sharing, national raoming, network sharing, spectrum sharing, etc…


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Rights of way : Sharing rights of way can be an important means of promoting the

rollout of national fibre core networks. Obtaining the rights of way necessary to lay fibre and to construct physical ducts and conduits is often very expensive and can involve a complex process.

There are several ways to overcome the barriers to gaining access to rights of way and other passive infrastructure. National governments can persuade or insist that local authorities grant access to rights of way for a nominal charge.

Ex. :The Canadian Telecommunications Act, for example, contains provisions designed to facilitate the ability of carriers to access public property where necessary for the construction, maintenance, and operation of transmission facilities. Section 43(2) of the Canadian Telecommunications Act provides that a Canadian carrier “may enter on and break up any highway or other public place for the purpose of constructing, maintaining or operating its transmission lines and may remain there for as long as is necessary for that purpose, but shall not unduly interfere with the public use and enjoyment of the highway or other public place.”


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Governments can simplify the ground rules for obtaining rights of way and mandate sharing of passive infrastructure;

set guidelines or prescribe the prices for access to rights of way, which constitute a significant part of the cost of creating national infrastructure; and governments or regulators can establish a one-stop-shop to facilitate the coordination of trenching and ducting works in view of infrastructure sharing between telecommunications service providers as well as between telecommunications service providers and those of other utilities.

Lower access costs, combined with easier access to rights of way, may encourage operators to consider laying fiber on routes that were previously considered uneconomical.

Regulators may not have the power to make these changes unilaterally, but they can bring them to the attention of elected officials and highlight their importance.

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A referal to a competition authority /

regulator to resolve disputes on

interconnection and access, infrastructure

sharing, anti-competitive bahvior,

etc….

Dispute resolution process :

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Thank you

ABDELALI MADANI

Head of Analysis and Dispute Inquiry

[email protected]

mailto:[email protected]

Documents

Basic notions of the competition regulation. Introdution I- Basic concepts II- Competition in telecommunications market (Why regulate the competition