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Handling Competition Issues in a Liberalized Telecom Market
Advocacy and Capacity Building on Competition Policy and Law in Asia (7up2 Project)
16-17 August 2005, Hanoi, Vietnam
Advocacy and Capacity Building on Competition Policy and Law in Asia (7up2 Project)
16-17 August 2005, Hanoi, Vietnam
Dong-pyo HongPh.D. in EconomicsKim & Chang, Korea
2
Characteristics of Telecom Markets
Network Economy- A good becomes valuable to a user when the users adopt the same good or compatible ones
- A telephone users benefits when other users are connected to the same network- Fair competition issues : interconnection, network sharing
Economies of Scale- high fixed cost for constructing network- Natural monopoly due to decreasing cost function
- Government has license for telecom business to avoid redundant investment- Generally a few service providers in market
- Fair competition issues : entry barrier, predatory pricing, price regulation, collusion
Economies of Scope and High common costs- Providers can save cost by providing bundling service- Providers can distributing common cost across many services- Fair competition issues : cross subsidy, service bundling
3
Characteristics of Telecom Markets (cont’d) Essential/Bottleneck facility
- Elements of essential facility - (i)Control of the essential facility by a monopolist, (ii) a competitor’s inability practically or reasonably to
duplicate the essential facility, (iii)the denial of the use of the facility to a competitor, (iv)the feasibility of providing the facility
- Examples: local loop network in fixed telephony service (cf. scarcity of spectrum in mobile service)- Fair competition issues : interconnection, network sharing
Switching cost, lock-in and tipping- Cost and welfare loss in changing service providers
- Inconvenience in number change, expenditure on new terminal, abandoning mileage service etc.- Fair competition issues : entry barrier, bundling
Universal service- Telecom service as public utility - Government should guarantee the widespread access to and affordability of basic telecom
services (ex. residential service, emergence call etc.)
4
First-Mover’s AdvantagesFirst-Mover’s AdvantagesInborn (Absolute) Advantages: Holding essential facilities, Preoccupying markets and scarce resources (e.g. high-quality frequency, number etc.)
Derivative (Secondary) Advantages: Economies of scale/scope, Brand power
Fixed Service MarketFixed Service MarketDominant firm retains substantial market share and profits, based on its holding of essential facilities (local loops)Currently, the system of unbundling fixed network elements is not actively utilized
Mobile Service MarketMobile Service MarketDominant firm has accumulated a substantial amount of profits by preoccupying markets and realizing
economies of scale as a first-mover
→ Brand Power established → Consumers ‘locked-in’
Consumer-lock-in effect is deepening by structural entry barriers and consumers’ switching costs
: First-movers maintain their market dominance by combining inborn advantages and derivative
advantages.
First-Mover’s Market Power Sustained/Fortified
5
Leveraging market power in new service markets : First mover’s advantage in investment and marketing → transferred to new service market
Fixed marketFixed market
In Korea, KT invested aggressively in VDSL using excess profits from monopoly markets such as LM (Lan
d to Mobile) call and leased line markets, putting pressure on competitors through strong marketing
In the last year, the number of KT subscribers increased while the number of Hanaro decreased
Limitation of new entrantsLimitation of new entrantsLimitation in facility based competition due to matured market and lack of fund
Mobile marketMobile marketProfits from mobile telephone market invested in wireless Internet → advantage in wireless Internet service market
Worries concerning transfer of market power to the IMT-2000 services in the future
6
Effective Competition
Specific policies are needed to achieve ‘effective competition’ Effective Competition
- Active competition between suppliers- Absence of persistent excess profit- Absence of market power ☞ Market power: Ability to set prices independent of the behaviors of other carriers and the
consumers Benefits of effective competition
- Satisfactory service quality, prices that reflect costs, innovative services, variety of choices, efficient provision of services, sufficient information for the consumers, etc.
Process of effective competition policy- Market definition - Market analysis: Whether the market is, or expected to be, effectively competitive- Examine whether the policy to promote competition is needed- Abolish or modify the existing policy as necessary, or introduce a new policy
8
Local Switch
Toll Switch
International Gateway Switch
Undersea Optical Fiber
Satellite
1
2
3
4
5
4Local Switch
Local Switch
Toll Switch Local Switch
Local Area 1
Local Area 2
Foreign Country
Interconnection Why necessary?
- Telecom networks need to interconnect for social welfare- Essential facility (e.g. local loop) should be accessed by many other carriers for
service provision
9
Interconnection (cont’d)
How to Regulate? Mandate to negotiate interconnection in (upon request) Obligation to treat interconnecting carriers indifferently
For example, a local carrier should treat other long-distance carriers in the same way as it treats its own long-distance subsidiary
Regulate the interconnection charge to be based on costs Collocation of equipments or facilities required for interconnection Obligation to provide information
Other topics Interconnection between data networks (Internet interconnection), Opening of
wireless Internet access
10
Network Sharing
LLU (Local loop unbundling)- Oblige a local carrier to allow other carriers to use its local loop (unbundled)
Unbundling fixed network elements- Oblige a carrier to provide unbundled network elements such as pole, duct and
cable of local loop Roaming
- Sharing of mobile networks MVNO (Mobile Virtual Network Operator)
11
Accounting Separation
Concept Typically a telecom operator provides many services Divide costs between different services to determine the cost of each service (Cost
allocation) Need to allocate joint and common costs
Purposes Use the cost for (ROR) price regulation Check if the cross-subsidies exist between the monopolistic service and the
competitive service, etc.
12
Price regulation which sets the price ceiling for the market dominant firm after considering price level, productivity, yet providing some degree of freedom for the firms to set price
In the US and the UK, administrative(regulatory) costs have fallen, price have fallen and productivity increased
- Cost reduction and incentive to rationalize management - Prevent cross-subsidization - Remove uncertainty by enhancing transparency of regulation - Reduce regulatory costs such as verifying production cost - Promote stable investment by regulating for a limited period
Price Cap RegulationPrice Cap Regulation
13
Price Regulations
Objectives and Principles of Price Regulation
Ex-ante vs Ex-post Regulation
ROR Regulation
Price Cap Regulation
14
Universal Service: Concepts
Universal service - In Korea, universal service is defined as “’basic (fundamental)’ telecom services tha
t every user can be provided anytime and anywhere at affordable rates”- Currently, local telephony, local payphone service, insular service, emergency servi
ces, discount services of telephony to handicapped and low-income (See below for other countries)
Universal service policy- Promoting or maintaining universal availability of connections by individual househo
lds to public telecom networks (Source: Hank Intven (ed.), Telecommunications Regulatory Handbook)
15
Universal Service: Backgrounds
Access to telecommunications as basic rights of all citizens - Increasing need to solve ‘digital divide’ problems as the informatization of the societ
y progresses
Network externality and universal service- Network externality: Benefit enjoyed by a network user increases as more users are
added to the network- As the socially optimal network size may not be achieved through market functions,
some subsidies for universal service may be welfare-enhancing
16
USO (Universal Service Obligations)
USO: Requirement on operators to provide universal service - The revenues from providing services, say, to uneconomic areas (at the same
affordable price) may not cover corresponding costs- A regulator might decide to, or not to, set up specific mechanisms to recover the
‘costs’ from USO In monopolistic era, USO was only implicitly imposed on the monopolist
- The ‘costs’ were usually financed by cross-subsidies (i.e., high prices of long-distance services subsidized low prices of local telephony)
Since the introduction of competition, USO needed to be more specified - Cross-subsidies may distort competition- Clearer definition of universal service- How to finance the associated ‘costs’- Competitive and technological neutrality
17
Universal Service : Funding Mechanisms
Mandatory service obligations General taxes Cross subsidies
- Traditional approach- May entail inefficient price structure and distort competition
Access deficit charges- May lead to inefficient interconnection and distort competition
USF (Universal service fund) - Potential to improve efficiency and transparency- Administrative complexity
18
Universal Service Fund
Good USF (Intven) - Independent administration, transparent financing, market-neutral, targeted fundin
g, subsidies should be relatively small, competitive bidding - Good collection mechanism needs to be designed (who should contribute to the fun
d on what basis, how to determine the amount of USF, who collects the contributions, etc.)
Cost models for USF- Subsidies to uneconomic areas- LRIC for improved efficiency- Competitive bidding process
19
Price cap regulation Non-price regualtion Role Sharing between Regulatory and Competition Authorities
Regulations in telecom industry in Korea
20
Only KT’s local call and SKT’s mobile phone tariffs are liable to prior approval and other providers only notify their tariffs
※ Market Share: Local(KT,95.6%), Mobile(SKT, 57%)
- Purport : to regulate consumer predation or predatory price to exclude competitors
↔ Need to allow more freedom in terms of means of competition (lift price regulation) - less price competition - too much competition in non-price area - less incentive for price reduction - price rigidity and incentive for cartel ※ price cap regulation
Price cap regulationPrice cap regulation
21
Local loop unbundling introduced in 2002 for local loop networks and broadband Networks
Number portability Local Telephony : Implementing stage-wise from Jun 2003 to Dec 2004 Mobile : Implementing in 6 months intervals in order of SKT(1st), KTF(2nd), and LGT(3rd) from Jan
2004 Obligatory interconnection and provision of facility
Essential facility owners are required to provide interconnection Long-Run Incremental Cost: Assess the connection charge most effectively
Universal service obligation Universal Service Fund was Introduced in Jan 2000. Review the possibility of including the broadband in universal service after 2005
Obligatory donation and accounting regulation Ban on cross subsidy of facility-based service operator
Differentiated frequency use cost Advertisement, standardized contract, membership service and subsidy on phones
Non-price RegulationNon-price Regulation
22
Strengthened role of Korea Communication Commission(1995)- Power to approve dominant player’s tariffs, power to recommend business permit, enact notification on regulatory procedures
- Examine the agreement regarding provision of facilities and interconnection
- Investigate unfair practices and arbitrate consumer loss and damage
- Authorize the agreement between telecom operators
- Arbitrate disputes of network sharing and interconnection between operators
Agreed on general principle for role division - General abuse of dominant position, unfair trade practices, cartels KFTC - Industry specific, technical areas reducing consumer welfare MIT
※ OECD conducted an analysis on role division of competition and technical issues in 1998 - Often, regulatory agency deals with technological and economic issues and competition agency
exclusively deals with competition law enforcement
Role Sharing between Regulatory and Competition AuthoritiesRole Sharing between Regulatory and Competition Authorities