Telecommunications

Regulation
Handbook
Module 5

Competition Policy

edited by
Hank Intven
 Telecommunications Regulation Handbook
Summary of Contents

Note: Detailed Tables of Contents appear at the beginning of each Module

Module 1 Overview of Telecommunications Regulation 1-1

Module 2 Licensing Telecommunications Services 2-1
Module 3 Interconnection 3-1
Module 4 Price Regulation 4-1
Module 5 Competition Policy 5-1
Module 6 Universal Service 6-1

Appendices

A WTO Regulation Reference Paper A-1

B The Economics of Telecommunications Prices and Costs B-1
C Glossary C-1
D Selected Sources D-1

© 2000 The World Bank

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The modules of this book are distributed on the understanding that if legal or other expert assistance is required in any particular
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necessary advice from competent professionals, on legal or other matters that require expert advice.

First printing November 2000

ISBN 0-9697178-7-3
 Table of Contents

Module 5 – Competition Policy

5.1 General Principles 1
5.1.1 The Rationale for Competition Policy 1
5.1.2 Government Intervention to Implement Competition Policy 2
5.1.3 The Interplay of Competition and Telecommunications Policies 3
5.1.4 The Transition from Monopoly to Competition in
Telecommunications 7

5.2 Basic Concepts of Competition Policy 10

5.2.1 Market Definition 10
5.2.2 Barriers to Entry 11
5.2.3 Market Power and Dominance 11
5.2.4 Essential Facilities 13

5.3 Remedies for Anti-Competitive Conduct 14

5.3.1 Abuse of Dominance 14
5.3.2 Refusal to Supply Essential Facilities 16
5.3.3 Cross-Subsidization 17
5.3.4 Vertical Price Squeezing 24
5.3.5 Predatory Pricing 27
5.3.6 Misuse of Information 28
5.3.7 “Locking-in” Customers 28
5.3.8 Tied Sales and Bundling 29
5.3.9 Other Abuses of Dominance 31
5.3.10 Restrictive Agreements 31

5.4 Mergers, Acquisitions and Other Corporate Combinations 33

5.4.1 Concerns About Mergers 33
5.4.2 Merger Analysis 34
5.4.3 Merger Remedies 36
5.4.4 Joint Ventures 40
 Boxes, Figures and Tables

List of Boxes
Box 5-1: Substantial Lessening of Competition:
Proposed Malaysia Approach 6
Box 5-2: Case Study: Canadian (CRTC) Forbearance Analysis 7
Box 5-3: Case Study: The Telecommunications Mandate of the
Australian Competition and Consumer Commission 8
Box 5-4: Market Dominance: A European Commission Definition 13
Box 5-5: Essential Facilities – WTO Definition 13
Box 5-6: Abuse of Dominance by a Telecommunications Operator:
Common Examples 16
Box 5-7: Some Powers to Remedy Abuse of Dominance 16
Box 5-8: Example of Vertical Price Squeeze by Incumbent Operator 25
Box 5-9: Basic Elements of Wholesale Cost Imputation Requirement 25
Box 5-10: Case Study – The CRTC Imputation Test 26
Box 5-11: What is Predatory Pricing? 27
Box 5-12: Case Study – OFTEL Investigation of BT’s Internet Services 28
Box 5-13: Case Study – DG IV Intervention in “SIM Locking” 29
Box 5-14: Case Study – CRTC Bundled Service Conditions 31
Box 5-15: Some Other Forms of Abuse of Dominant Position 32
Box 5-16: Examples of Restrictive Agreements 33
Box 5-17: Case Study – The Telia/Telenor Merger 37
Box 5-18: Case Study – FCC Review of Bell Atlantic/Nynex and
SBC/Ameritech Mergers 38
Box 5-19: Case Study – The BT/AT&T Joint Venture 40

List of Tables
Table 5-1: Typical Differences Between a Competition Authority and a
Sector-Specific Regulator 4
Table 5-2: Scenario A: No competition in basic telephone services;
competition in cellular and value-added services
(e.g. Internet access, e-commerce services) 20
Table 5-3: Scenario B: No competition in local access services;
competition in long distance, international cellular and
value-added services (e.g. Internet access, e-commerce services) 20
Table 5-4: Scenario C: (same assumptions as Scenario B)
No competition in local access services; competition in
long distance, international cellular and value-added services
(e.g. Internet access and e-commerce) 21
Telecommunications
Regulation
Handbook
Principal authors:

Hank Intven
Jeremy Oliver
Edgardo Sepúlveda

Funding for the preparation of this Handbook was provided

by the infoDev Program of The World Bank

Additional funding was provided by

Telecommunications Lawyers and Consultants

www.mccarthy.ca

The authors gratefully acknowledge the support and assistance provided

in the preparation of this Handbook
by the International Telecommunication Union (ITU)

The modules of this Handbook are available electronically at

www.infodev.org/projects/314regulationhandbook
 MODULE 5

COMPETITION POLICY

5.1 General Principles supplier. There would be no negative external fac-

tors associated with supplier or consumer behaviour.
5.1.1 The Rationale for Competition Policy No single supplier would be able to distort the
efficient operation of the market, or the setting of
When competition exists in market-based econo- prices or supply conditions.
mies, two or more different suppliers contend with
each other to sell their goods or services to However, no markets are perfectly competitive.
customers. Competitive suppliers may offer lower Many markets are not truly competitive, but are
prices, more or better quantities, and packages or dominated by a small number of large or well-
qualities of service to attract customers. Competition established firms. Producers or suppliers in such
serves the public interest by inducing suppliers to markets often have market power that can be exer-
become more efficient and to offer a greater choice cised to the detriment of consumer welfare and
of products and services at lower prices. overall industry performance.

In a competitive market, individual suppliers lack Imperfect competition gives rise to an inefficient
“market power”. They cannot dictate market terms, allocation of resources. Imperfect competition is an
but must respond to the rivalry of their competitors in important source of “market failure”. Market failure
order to stay in business. Market power is generally occurs when resources are misallocated or allocated
defined as the power to unilaterally set and maintain inefficiently. The result is waste or lost value.
prices or other key terms and conditions of sales;
that is without reference to the market or to the Monopoly
actions of competitors.
Monopoly can be the result of market failure. A
Imperfect Competition monopolistic market is often associated with exces-
sively high product prices, reduced supply levels or
In a perfectly competitive market, there would be other behaviour that reduces consumer welfare.
little or no reason for government intervention to Collusive agreements among suppliers are another
implement competition policy. Such a market would example of market failure. Supplier collusion can be
ideally consist of a large number of suppliers of directed to increasing prices or restricting output,
products or services, as well as a large number of behaviour that is similar to the exercise of monopoly
consumers. Consumers would have complete power.
information and freedom to deal with any chosen

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Telecommunications Regulation Handbook

Telecommunications has, in most jurisdictions, Types of Government Intervention

developed in a monopoly environment. As competi-
tion is introduced into telecommunications markets, Competition policy is generally applied through two
there are typically concerns about the continuing different types of government intervention.
exercise of market power by the incumbent opera-
tor. This exercise of market power constitutes a The first type is behavioural. In this type of interven-
special form of market failure that must be tion, a public authority attempts to modify the
addressed by regulators and competition authorities behaviour of a particular firm or group of firms
in many countries. through regulation of their behaviour. Price regula-
tion is an example of behavioural intervention. Other
5.1.2 Government Intervention to Implement examples are orders prohibiting collusive practices
Competition Policy or agreements, and orders requiring interconnection
of competitors’ networks.
Objectives
A second form of intervention is structural. Such
Governments intervene in the operation of a market- intervention affects the market structure of the
based economy for a variety of different reasons. In industry. For example, governments may intervene
the case of competition law and policy, the main to prevent a merger of the two major telecom net-
objectives of government intervention are to respond work operators in a market. Similarly, a dominant
to market failures, to limit abuses of market power supplier might be required to separate its operations
and to improve economic efficiency. This Module will into distinct corporate entities, or to divest itself of
focus on competition laws and policies that are lines of business entirely. The 1984 AT&T divestiture
aimed at achieving those objectives. in the United States provides a well-known example
of the latter.
Public intervention can have other objectives. For
example, a government may adopt rules and Flexibility
policies that limit the participation of foreign capital or
companies in order to create or cultivate a domestic Government intervention in markets generally
industry. Such intervention may deliberately limit requires flexibility and an ability to tailor rules and
competition and compromise economic efficiency in principles to specific circumstances. In some
favour of other public interests. instances, competition rules can be formulated as
outright prohibitions (for example, against price fixing
There is a long history of government intervention to agreements). In many situations, however, pro-
preserve and stimulate the operations of competitive competitive rules are formulated so that there is dis-
markets. Many useful precedents for competition cretion in their application. For example, price
policy have developed in the US, where the term discrimination is not always inappropriate; only anti-
“antitrust policy” is used to refer to what is often competitive or otherwise harmful forms of price dis-
called “competition policy” in other countries. This crimination are generally prohibited.
term “antitrust” comes from an old form of anti-
competitive conduct once engaged in by the owners Competition policy is applied to curb abuses of
of different companies that had the power to jointly market power and to prevent a powerful firm from
dominate a market (e.g. steel or rail transport). forcing competitors out of the market. However,
These owners delivered the majority of their shares there is a tension between the objective of protecting
to a central body, which would hold the shares “in competition and the more problematic practice of
trust” for the owners. The trust’s control of the protecting individual competitors. This tension is
shares was then used to direct the actions of the particularly evident in the regulation of the telecom-
different companies. The objectives of such joint munications industry during the transition period
direction included raising prices across the industry, from the introduction of competition to the time com-
restricting supply and otherwise acting to reduce petition becomes self-sustaining.
competition.

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 Module 5 – Competition Policy

Competition policies generally have no iron-clad The types of policies typically adopted by sector-
rules that must be rigourously applied in all circum- specific regulators can also be contrasted with those
stances. The policies must be applied flexibly to suit of competition authorities. Sector-specific regulation
the circumstances of different markets. is often unrelated to (and even inconsistent with) the
key competition policy goals of facilitating competi-
5.1.3 The Interplay of Competition and tion and improving economic efficiency. Competition
Telecommunications Policies policy is typically directed at preventing market
participants from interfering with the operation of
Some countries have both a general competition competitive markets. Traditional telecommunications
authority and a sector-specific telecommunications regulation, on the other hand, often manipulated
regulator. Where two or more authorities exist, it is competitive market circumstances to achieve other
important that they not subject an industry to dupli- public goals.
cative or inconsistent intervention.
An example is the prices approved by telecommuni-
Not all countries have separate telecommunications cations regulators. Most regulators traditionally
regulators and competition authorities. For example, supported price structures that were very different
New Zealand has long had economy-wide competi- from prices that would prevail in a competitive
tion law, but no sector-specific regulator. While New market. Telecommunications regulators often
Zealand is an anomaly in this regard, other countries supported such price structures in an effort to
have telecommunications sector regulators, but no increase availability of basic telecommunications
economy-wide competition law or authority. Some services. Examples include various types of cross-
countries have neither. In any case, it is important subsidization: local service by long distance serv-
for those involved in the regulation or supervision of ices, residential subscribers by business subscribers
the telecommunications sector to understand and and rural subscribers by urban subscribers. These
have access to the basic tools provided by competi- price structures were typically developed in a period
tion law and policy. of public monopoly supply. These structures are not
sustainable in a competitive market. They require
Sector-Specific Regulators and Competition adjustment as competition develops. (See Module 4
Authorities for a further discussion of telecommunications
pricing.) Table 5-1 sets out the typical difference
The roles of a sector-specific telecommunications between a competition authority and sector-specific
regulator and a general competition law authority regulator.
can be compared and contrasted in several ways.
Rationale for a Telecommunications Sector
Sector-specific regulation typically involves both Regulator
prospective and retrospective activities. A telecom-
munications regulator, for example, will often render An industry-wide competition authority may play a

Competition Policy
Competition Policy
decisions that establish conditions for firms useful role in overseeing the telecommunications
participating in telecommunications service markets, industry. However, there are good reasons to estab-
such as the approval of prices or the terms and con- lish and retain telecommunications sector-specific
ditions for interconnection between operators. Such regulation, at least until the relevant markets are
conditions have forward-looking application. Tele- reasonably competitive. These reasons include:
communications regulators are also typically
authorized to respond to particular complaints, or to ➢ the need for sector-specific technical expertise to
remedy existing or past behaviour which contra- deal with some key issues in the transition from
venes telecommunications policies or laws. monopoly to competition (e.g. network intercon-
Competition authorities, by contrast, tend to exercise nection, anti-competitive cross-subsidization);
their powers on a retrospective basis and with a ➢ the need for advance rules to clearly define an
view to correcting problems which result from environment conducive to the emergence of
actions by particular firms that harm competition. competition, and not just retrospectively apply

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Telecommunications Regulation Handbook

remedies to “punish” anti-competitive behaviour ➢ As a separate matter, it may be efficient to

or restructure the industry; combine, in a single entity, the regulation of the
telecommunications sector and other sectors,
➢ the need to apply policies, other than competi- such as pipelines, electrical power, commercial
tion-related policies, that are perceived important water supply, etc. The advantages and
by national governments (e.g. universal service disadvantages of such a multi-sectoral regulator
policies, national security and control policies); are discussed in Module 1.
and
➢ the need for ongoing supervision and decisions Implementation of Competition Policy by
on issues such as interconnection, quality of
Telecommunications Regulators
service, and the establishment and enforcement
of licence conditions, particularly for dominant
operators. Telecommunications sector regulators often apply
competition law or policy in carrying out their man-
These factors, among others, suggest that, even
dates. Four examples from the UK, Malaysia,
where an economy-wide competition authority
Canada and Australia are set out below.
exists, a telecommunications regulator can play an
important role.

Table 5-1: Typical Differences Between a Competition Authority and a Sector-Specific Regulator

Feature Competition Authority Sector-Specific Regulation

Timing/Process ➢ Typically applies remedies retro- ➢ Prospective as well as retrospective
spectively (i.e. after the fact) ➢ Decisions or other processes of
➢ Specific complaint or investigation general application, as well as spe-
driven cific issue proceedings
➢ Formal investigative, other proce- ➢ Mix of formal and less formal
dures procedures
➢ Narrow scope for public intervention ➢ Typically broader scope for public
intervention
Policy Focus ➢ Objective to reduce conduct which ➢ Typically applies multiple policy
impedes competition objectives
➢ Focus on allocative efficiency/ ➢ Traditional (monopoly) regulation
preventing abuse of market power or likely to pursue social objectives
other misconduct other than allocative efficiency
(universal service for example)
➢ Transitional regulation may focus on
preventing anti-competitive behaviour
as market becomes competitive;
(ultimately, forbearing from regulation
may be a policy objective as
competition becomes sufficient to
protect public)
Scope ➢ Economy wide, multiple industries ➢ Usually industry-specific (usually
➢ Powers of intervention and remedies develops greater sectoral expertise)
tend to be narrowly defined. ➢ Powers tend to be more broadly
defined (correspond to breadth of
policy objectives and procedures).

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 Module 5 – Competition Policy

United Kingdom Under the Canadian Telecommunications Act, the

sector-specific regulator, the CRTC, has a duty to
In the UK, Oftel has concurrent authority to deal with forbear (refrain) from regulation where telecommuni-
matters arising under the Competition Act. Oftel cations services are subject to sufficient competition
must co-ordinate its efforts with the Director General to protect the interests of users. Forbearance is also
of Fair Trading, who is primarily responsible for en- permissible in certain other circumstances. A
forcing the Competition Act. Oftel has also been forbearance order may not be made by the CRTC
responsible for enforcing the Fair Trading Conditions where such an order would likely impair the estab-
of U.K. telecommunications licensees, including BT. lishment or continuance of a competitive market for
a service. The Canadian approach to forbearance is
Oftel has published Guidelines on the Application of described in Box 5-2.
the Competition Act in the Telecommunications
Sector. The guidelines address subjects such as Australia
market definition, measures of market power and
the assessment of individual agreements and A more general example of the interplay of com-
conduct. The guidelines reference conventional petition policy and telecommunications sector
approaches to competition rules from a number of regulation can be found in Australia. In July,1997,
sources and jurisdictions, and anticipate how these the Australian government implemented a package
standard tools will be applied in the tele- of statutory reforms to both its competition and
communications sector. telecommunications laws. These reforms changed
the Trade Practices Act 1974 (the primary
Malaysia competition law) and introduced a new Telecom-
munications Act.
The Malaysian Communications and Multimedia
Commission has prepared similar guidelines. These As a result of these reforms, the Australian Com-
indicate how the Commission will apply competition petition and Consumer Commission (ACCC) was
law concepts such as “substantial lessening of com- given a significantly expanded role in telecommu-
petition” and “dominant position” in exercising its nications regulation. It became responsible for both
authority under the Malaysian Communications and (1) implementation of competition rules and policies
Multimedia Act 1998. The guidelines identify the in the telecommunications sector; and (2) economic
concepts and analytical processes that the Commis- regulation of telecommunications operators,
sion will use in evaluating certain conduct. The including the incumbent operator, Telstra.
guidelines borrow conventional tools and concepts
from competition theory and indicate how they will Box 5-3 provides details on the scope and per-
be applied in the context of the domestic telecom- formance of the telecommunications regulatory
munications industry. responsibilities of the ACCC.

Competition Policy
Competition Policy
Box 5-1 sets out the Malaysian Commission’s These four examples from the experience of differ-
proposed analytical process for evaluating whether ent countries illustrate the overlap of telecommuni-
particular conduct constitutes a substantial lessening cations and competition policy. The examples
of competition. indicate how some telecommunications regulators
apply standard competition policy and analysis, and
Canada how competition authorities must understand sector-
specific telecommunications regulation. The
Canadian law provides for changes in the extent of competition policy concepts used in these examples
sector-specific telecommunications regulation de- are discussed in greater detail below (in Section
pending on the level of competition in specific tele- 5.2).
communications markets.

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Telecommunications Regulation Handbook

Box 5-1: Substantial Lessening of Competition: Proposed Malaysia Approach

Define the Context Define the Market Assessment of Conduct

Objective Ensure that the Commission Define the boundaries of the Determine whether there is
has appropriate powers to relevant market (or may be) a substantial
act. lessening of competition
within the relevant market.
Process Consider which section of Identify all demand substi- Assess the likely changes in
the Act the assessment is tutes for the service. the degree of competitive
being made under. rivalry in the absence of
Identify all supply substitutes Commission intervention in
Identify the circumstances for the service. the light of test criteria.
which initiated the assess-
ment. Determine the relevant prod- Assess the likely changes in
uct market. the degree of competitive
Identify the key stakeholders rivalry in the case of Com-
in the process. Determine the relevant geo-
graphical market. mission intervention in the
light of test criteria.
Determine the relevant tem-
poral market. Assess the difference in the
level of rivalry between the
two cases.
Assess whether the
difference is substantial in
the light of the objects of the
Act and national policy
objectives.

The Regulated Conduct Defence deemed to be in the public interest. Where the
defence applies, a telecommunications operator that
A final point to consider in the interplay of telecom- carries on activities authorized by a telecommunica-
munications sector regulators and industry-wide tions regulator will generally not attract liability under
competition authorities is the regulated conduct competition laws for those activities. Questions can
defence. A number of jurisdictions recognize such a arise, however, as to whether particular anti-
defence. The defence can shield regulated firms competitive activities were subject to active regula-
from the application of competition laws in certain tion. For example, competition laws that are
circumstances. generally inapplicable to the activities of regulated
telecommunications operators may become
The essence of the defence is that activities that are applicable where a regulator decides to forbear from
authorized under a valid scheme of regulation are regulation.

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 Module 5 – Competition Policy

Box 5-2: Case Study: Canadian (CRTC) Forbearance Analysis

The CRTC may withdraw (“forbear”) from regulation of telecommunications markets or services when there
is sufficient competition. In Telecom Decision CRTC 94-19, the CRTC set out the criteria for decisions to
forbear from regulation pursuant to Section 34. The criteria for forbearance reflect standard competition
policy concepts and principles. They can be summarized as follows:
➢ The CRTC should forbear from regulation when a market becomes “workably competitive”.
➢ A market cannot be workably competitive if a dominant firm possesses substantial market power.
➢ Market power is assessed in terms of three factors:
(i) the market share held by the dominant firm;
(ii) demand conditions affecting responses by customers to a change in price of the product or service
in question; and
(iii) supply conditions affecting the ability of other firms in the market to respond to a change in the price
of the product or service.
➢ High market share is a necessary but not a sufficient condition for market power. Other factors must
be present to enable a dominant firm to act anti-competitively.
The CRTC’s method of assessing market competitiveness begins with a definition of the “relevant market”.
The CRTC defines the relevant market as “the smallest group of products and geographic area in which a
firm with market power can profitably impose a sustainable price increase”
The CRTC then proceeds to an assessment of the market share held by the largest and other firms in the
relevant market. In addition to an assessment of market share, the CRTC assesses other aspects of market
power, including the availability of substitutes, whether a particular product or service is an essential input or
bottleneck and the extent of barriers to entry. Among the other indicators of competition highlighted by the
CRTC is evidence of rivalrous behaviour (price competition and effective marketing activities for example).
The CRTC decided in Decision 94-19 to refrain from regulating the sale, lease and maintenance of certain
forms of customer premises equipment. The CRTC subsequently applied Section 34 to forbear from the
regulation of a number of other services, including wireless services, services provided by non-dominant
long distance operators and certain of the long distance services provided by the incumbent telephone
companies. The CRTC has also forborne from the regulation of other services, including retail services
provided by competitive local exchange operators and the supply of retail Internet services.

Competition Policy
Competition Policy
5.1.4 The Transition from Monopoly to It is generally desirable to minimize government
Competition in Telecommunications intervention in competitive markets. However,
there is a general consensus that regulatory
An effective competition policy must take into intervention is required to implement a successful
account the specific characteristics of the market transition from monopoly to competitive
to which it is applied. Telecommunications network telecommunications markets. The introduction of
service markets raise unique challenges for the effective competition into telecommunications
application of competition policy. These challenges markets around the world has generally been
arise from the specific manner in which some more difficult and intrusive than in the case of most
incumbent network operators are able to continue other markets.
to dominate their markets after the introduction of
competition.

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Telecommunications Regulation Handbook

Box 5-3: Case Study: The Telecommunications Mandate of the Australian Competition and
Consumer Commission

The ACCC’s telecommunications mandate is performed by the Telecommunications Group, which is

considered a part of both the ACCC’s Regulatory Affairs Division (for economic regulation) and the
Compliance Division (for competition enforcement).
The revised Trade Practices Act 1974 (TPA) includes two parts which address telecommunications matters
specifically. Part XIB gives the ACCC authority to issue competition notices in cases of anti-competitive con-
duct. Competition notices are enforceable in the Federal Court. Part XIB also governs tariff filing and record
keeping requirements (the latter reinforce the ACCC’s implementation of accounting separation in appropriate
cases).
Part XIC of the TPA establishes a framework for access to the networks of competing operators. The ACCC
has power to declare a body to be a recognized “telecommunications access forum” or “TAF” (a facilitator of
access arrangements); to approve any “access code” prepared by the TAF; to approve “access undertakings”
or model terms and conditions submitted by individual operators; and to arbitrate access disputes.
The ACCC has complementary authority under the Telecommunications Act, the Radiocommunication Act
1992 and the Telstra Act 1991. Specifically, the ACCC has regulatory authority:
➢ to oversee the conduct of international telecommunications operators;.
➢ to issue directions on technical issues such as the implementation of number portability and intercon-
nection:
➢ to arbitrate a range of operator disputes (i.e., in addition to interconnection disputes);
➢ to administer price regulation, such as price caps, for those services of Telstra which remain subject to
price regulation; and
➢ to assess the acquisition of radio-frequency spectrum by incumbent operators to determine whether
such acquisition is likely to have anti-competitive effects.
The ACCC also has authority to monitor telecommunications markets and activity in order to determine
whether the general provisions of the TPA should be applied to promote competition and fair trading

Advantages of Incumbent Operators Some major advantages of incumbent operators are

listed below. Technical terms used in this list are
The nature of telecommunications networks discussed in greater detail in the following sections
provides strong advantages to well-established net- of this Module.
work operators. These advantages often call for pro-
competitive measures that are relatively unique to Control of Essential Facilities – Incumbent
the telecommunications sector. Such measures are operators often own “essential facilities” that were
discussed throughout this Module and in Module 3 – built and paid for under a regime of government
Interconnection. Without such measures, new ownership or guaranteed rate-of-return regulation.
entrants may never overcome the “incumbency The concept of essential facilities is discussed in
advantages” of established operators. Incumbents in detail in Section 5.2.4 below. In telecommunications
other types of markets (e.g. steel, chemicals, and network markets, essential facilities may include
food products) generally do not enjoy similar public rights-of-ways, support structures such as
advantages and, therefore, those types of markets poles and conduits, local loops, telephone numbers
typically require less detailed sector-specific regula- and frequency spectrum. New entrants typically re-
tion. quire access to these facilities in order for
competition to be feasible. Duplication of these

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 Module 5 – Competition Policy

facilities may be either technically difficult, or more service” incremental cost than new entrants, and
often, economically inefficient. spreads its “joint and common costs” across a large
established customer base. A new entrant must
Control of essential facilities can give an incumbent often cover a much higher long-run total-service in-
numerous advantages over new entrants, particu- cremental cost, since this must be recovered from a
larly in the absence of strong pro-competitive smaller customer base.
regulation. For example, an incumbent can use its
control over essential facilities to increase a Vertical Economies – Many incumbents have
competitor’s costs, and make its services less “vertically integrated” upstream and downstream
attractive to customers. The competitors' costs can production facilities. For example, they may operate
be increased by increased prices of essential facili- local access networks, national long-distance net-
ties. The incumbent may be able to shield its own works and international networks. These incumbents
customers from the impacts of such higher essential would usually enjoy vertical economies. For exam-
facility prices, either by not “charging itself” those ple, it is less expensive to co-ordinate local, long
price increases, or offsetting them with cross- distance and international telecommunications within
subsidies from its monopoly or less-competitive a single firm than through arm’s-length negotiations
services. and transactions with different (often competing)
operators. Incumbents may also enjoy vertical
An incumbent can also discriminate in the provision economies related to integrated network planning,
of essential facilities to make its competitors’ construction, operations (e.g. traffic aggregation)
services less attractive to end-customers. In the ex- and maintenance.
treme case, it can simply refuse to supply essential
facilities to competitors. It can also discriminate by Control Over Network Standards and
providing inferior quality essential facilities to Development – An incumbent usually has a signifi-
competitors, as compared to itself. For example, it cant advantage in that its existing technologies and
can provision local loops to its own customers within network architecture have become de facto network
a week, but delay provisioning of local loops to cus- standards to which all competitors must adapt their
tomers of competitors for months. Anti-competitive networks. Unless competitors are notified well in
discrimination in the provisioning of essential advance, the incumbent may obtain a substantial
facilities can take many forms, some of which are head-start in the deployment of new network
difficult to detect. services or features that rely on switching, transmis-
sion or software upgrades installed by the
Economies of Established National Networks – incumbents.
As a related matter, incumbent network operators
might enjoy “economies of scale and scope” that Cross-subsidies – Incumbent operators are often
cannot be matched by new entrants for many years able to cross-subsidize some services from others.
(or decades). For some network elements (e.g. a Many different forms of cross-subsidy are possible.

Competition Policy
Competition Policy
national local access (loop) network), the cost of In most countries, local access services have tradi-
duplicating an incumbent’s facility may be prohibi- tionally been cross-subsidized by international
tively high. At the same time, the facility may have a services. Profits from the latter were used to
large enough capacity that one or more competitors maintain below-cost tariffs in the former. New
may be able to share use of the facility with the entrants typically do not have a similar range of
incumbent without imposing any congestion costs. services to cross-subsidize. Some incumbents have
engaged in anti-competitive practices by which
In addition, many established telecommunications competitive services (e.g. mobile telephone services
operators have a long history of providing local or Internet access services) are priced below costs
access service at subsidized rates. This provides the and effectively subsidized by monopoly or less-
incumbent with advantages in terms of economies of competitive services, such as international services.
density, scale and scope. In competing for a new
customer, an incumbent can often set a relatively Customer Inertia – Telecommunications network
low price, which reflects a lower long-run “total- markets are often characterized by a high degree of

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Telecommunications Regulation Handbook

customer inertia. New entrants may find it very diffi- from the demand side, that is from the perspective of
cult to persuade customers to switch from an buyers of the product.
incumbent that has served them for many years.
This is particularly true for lower-volume users (e.g. For example, the definition of the market for interna-
residential customers) when marketing costs and tional telephone service in a country could include IP
customer-switching costs and inconveniences can Telephony services that are available through the
be high (e.g. dialing extra digits to reach a new PSTN, by dialing a specific access number or code.
entrant’s network, dealing with two telephone bills, However, the definition would generally exclude
changing telephone numbers, etc.). In some cases, “computer-to-computer” IP Telephony services that
incumbents may intentionally take actions to “lock in” require special software, computers at both ends of
their customers, and to make switching to competi- a call, and pre-arranged calling times, etc. to the
tors more difficult and costly. average buyer of international telephone services,
such “computer to computer” services would not be
The “natural” advantages of incumbent operators a close substitute for international telephone service.
(e.g. economies of scale and scope and customer
inertia) can be augmented by anti-competitive The Product Market
conduct on the part of such operators. This is where
telecommunications regulators (and competition A widely accepted approach to market definition
authorities) often face difficult challenges. Their goal begins with the assumption that there is a monopo-
is to promote competition without unfairly “handicap- list in the relevant product market. The question is
ping” incumbents. then asked: could the hypothetical monopolist raise
the price of the product by a small but significant
Before dealing with specific types of anti-competitive amount and for a non-transitory period? If a suffi-
conduct, we will describe some of the basic con- cient number of buyers would switch to other
cepts that are widely used in competition law and products so as to make the price increase
policy. unprofitable for the monopolist, those substitutes
would be included in a new definition of the market.
5.2 Basic Concepts of Competition This analysis will be repeated until the boundaries
are set so that substitution does not make the price
Policy
increase an unprofitable strategy.
5.2.1 Market Definition
The Geographic Market
The definition of a market is a key issue in competi-
The second dimension is the definition of the geo-
tion policy and analysis. It is necessary to define a
graphic scope of the market. In defining the
“relevant market” in order to establish whether a firm
geographic boundaries of a product market, the aim
has a dominant position in that market. Similarly, in
is to identify the extent to which the proximity of rival
analyzing whether a restrictive agreement among
suppliers can impose competitive constraints on the
firms has an appreciable effect on reducing compe-
hypothetical monopolist or actual market participant.
tition in a market, it is necessary to define the
Again, the definition of the geographic scope of the
relevant market and then to evaluate the impact of
market is based on an assessment of substitutability
the agreement in that market. Market definition is an
in response to product price changes.
initial step in competition analysis. It provides the
context in which to evaluate the level of competition
Geographic areas are more important in defining
and the impact of anti-competitive conduct.
some telecommunications markets than others. For
example, the market for local access in Mumbai is
There are two aspects to the definition of a market –
not affected by the degree of competition in the
the product, including a service, and the geographic
Johannesburg local access market. These are
area in which the product is sold. In defining the
clearly separate markets. However, geography is
product, close substitutes are normally included. The
increasingly less important in defining the level of
analysis of substitutability is generally conducted
competition in markets for Internet Service Providers

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 Module 5 – Competition Policy

(ISPs), E-mail providers or even international long characterized by economies of scale. The
distance services. The markets for these products establishment of a local facilities-based network also
are rapidly becoming global markets. Consider the requires a large investment in fixed costs. Local
substitution test described earlier in this Section. It telecommunications operators often require
would be difficult, if not impossible, for an E-mail government licences, which may be granted on an
service provider in Mumbai to raise the price of its E- exclusive or otherwise restrictive basis. Entry into
mail service if customers in Mumbai have local wireless local networks is also restricted by
access to substitute E-mail service providers (e.g. spectrum scarcity. Certain local telecommunications
Hotmail) that are based in other geographic areas. services may operate on network platforms which
have patent or copyright protection (complicating or
Having said that, the definition of product and geo- preventing the launch of a competing service).
graphic markets remains very relevant for the
services that remain most subject to market In addition to these barriers to entry, it is also possi-
dominance, particularly local and national long- ble for a dominant firm to engage in conduct that
distance services. establishes additional barriers to entry. Refusal to
supply essential facilities and refusal to interconnect
5.2.2 Barriers to Entry networks are two classic examples of anti-competi-
tive conduct that an incumbent operator may
The evaluation of competitive markets and market engage in to discourage or prevent new entry.
behaviour often focuses on the extent to which one These and other examples of anti-competitive
or more firms can introduce and sustain price conduct are discussed in Section 5.3.
increases. If it is easy for a new supplier to enter a
market and provide a substitute product, then estab- 5.2.3 Market Power and Dominance
lished suppliers will be reluctant to implement
significant long-term price increases. Such price As a practical matter, most of the concern of compe-
increases would invite market entry, which will tition authorities (and telecommunications regulators
increase competition. promoting competitive markets) is focussed on
established telecommunications operators that have
The existence of barriers to market entry will limit market power. Firms without market power are sim-
this competitive response. There are many types of ply not able to cause serious problems in the
barriers to entry in different markets. Among the economy or in the sector. If they raise their prices
most commonly recognized barriers are: above market levels, for example, they will simply
lose customers and profits.
➢ government restrictions such as monopoly fran-
chises or restrictive licensing practices; This Section discusses the related concepts of
market power, significant market power and market
➢ economies of scale (i.e., where per unit produc- dominance.

Competition Policy
Competition Policy
tion costs fall as output increases, a large
established supplier can produce at a lower per Market Power Defined
unit cost than new entrants);
In general, market power is defined as the ability of a
➢ high fixed/capital costs; and firm to independently raise prices above market
levels for a non-transitory period without losing sales
➢ intellectual property rights such as copyright and to such a degree as to make this behaviour unprofit-
patent protection (which may affect the availabil- able.
ity to a competing supplier of key inputs or
outputs). Factors frequently considered in determining
whether a firm has market power include:
Multiple barriers to entry may exist in a single tele-
communications market. For example, local ➢ market share;
networks are typically regarded as being

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Telecommunications Regulation Handbook

➢ barriers to market entry; Significant Market Power

➢ pricing behaviour; A related concept is that of “Significant Market

Power” (or SMP). This is a relatively arbitrary meas-
➢ profitability; and ure of market power utilized in European
Commission competition analysis. A number of the
➢ vertical integration. European Commission’s Open Network Provision
(ONP) directives permit the imposition of additional
Market share can be measured in several ways, obligations on operators that have SMP. In its July
including monetary value, units of sales, units of 2000 package of proposed policy reforms, the
production and production capacity. Market share Commission proposed to change its approach, and
alone can be an inaccurate measure of market to focus more on traditional measures of market
power. However, it is unlikely that a firm without sig- dominance. Nevertheless, since the SMP approach
nificant market share will have sufficient market is frequently referred to, we will discuss it here.
power to behave anti-competitively on its own.
Therefore, market share is usually a starting point in Article 4 of the European Commission’s
determining market power. Interconnection Directive states that “an organization
shall be presumed to have significant market power
Assessment of barriers to entry is also important. when it has a share of more than 25% of a particular
The extent to which established suppliers are con- telecommunications market”. The article imposes an
strained by the prospect of new market entry is a obligation on organizations with SMP to “meet all
key factor in whether the established suppliers have reasonable requests for access to the network
market power. including access at points other than the network
termination points offered to the majority of end-
Pricing and profitability are other factors relevant to a users”.
determination of market power. The existence of
true price rivalry is inconsistent with a finding of mar- The 25% SMP threshold is not fixed in stone. The
ket power. Price competition, which consists of Directive permits national regulatory authorities to
“follow the leader” behaviour is consistent with the determine that organizations with less than 25%
exercise of market power by the price leader. market share have significant market power; and to
determine that organizations with market share
The profitability of existing suppliers in a market can greater than 25% do not have significant market
also be indicative of the extent of true price competi- power. In making such determinations, regulators
tion. Excessive profitability typically indicates are directed to take into account factors such as:
insufficient price competition and the exercise of
market power in setting prices. ➢ the organization’s ability to influence market
conditions;
Finally, vertical integration is relevant to an assess-
ment of whether a firm which enjoys market power ➢ turnover relative to the size of the market;
in one market is able to extend its power into
upstream or downstream markets. In telecommuni- ➢ control of means of access to end-users;
cations, incumbent operators that are vertically
integrated (e.g. that provide local access as well as ➢ access to financial resources; and
long distance or international services) can often use
their market power in the local access market to ➢ experience in providing products and services in
competitive advantage in the long distance and the market.
international markets. They may abuse their market
power, for example, by inflating local access prices Characterization of an organization as having SMP
(including interconnection prices) and using the does not necessarily lead to a finding of market
surplus revenues to subsidize rate cuts to their power or dominance on the part of that organization.
competitive long distance or international services. The SMP designation is simply a trigger for the ap-

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 Module 5 – Competition Policy

plication of additional obligations under the various

ONP Directives. Box 5-4: Market Dominance: A European
Commission Definition
Market Dominance
“A position of economic strength enjoyed by an
Market dominance is a more extreme form of market undertaking which enables it to prevent
power. The definition of market dominance varies effective competition being maintained in the
significantly in the laws and jurisprudence of different relevant market by affording it the power to
countries. In general, however, two factors are key behave, to an appreciable extent,
in the determination of market dominance. First independently of its competitors, customers
there must usually be a relatively high market share and ultimately consumers.”
(usually no less than 35%, often 50% or more). (United Brands v. Commission, ECR 207).
Second, there must normally be significant barriers
to entry into the relevant markets occupied by the
dominant firm.

Some definitions are more qualitative than quantita- Definitions of essential facilities have been devel-
tive. Consider Box 5-4, which sets out the definition oped by a number of national regulations and
established in European Commission jurisprudence. multilateral agencies. Box 5-5 includes a benchmark
definition of essential facilities was included in the
Other definitions exist. The U.K. Office of Fair WTO Regulation Reference Paper:
Trading has said that describing an operator as
dominant raises the implication that it possesses The complete WTO Regulation Reference Paper is
more market power than any of its competitors. The reproduced in Appendix A. The Reference Paper
European Court of Justice has found that there is a indicates when and how signatory countries must
presumption of market dominance, in the absence of ensure essential facilities are provided to competi-
evidence to the contrary, if a firm has a market share tors.
consistently above 50%. As is the case for market
power generally, market dominance is not a matter The phrase “bottleneck facility” is sometimes used
of market share alone. However, some commenta- as a synonym for “essential facility”. However, the
tors have suggested that a market share in excess term “bottleneck” puts the emphasis on the facility
of 65% is likely to support a finding of dominance. being a necessary part of a communications link, the
supply of which is restricted, rather than on the
5.2.4 Essential Facilities ability of competitors to replicate the facility.

The concept of essential facilities is important to the

application of competition law in the telecommunica- Box 5-5: Essential Facilities - WTO

Competition Policy
Competition Policy
tions sector. In the sector, an essential facility is Definition
generally defined as one which has the following
characteristics:
Essential facilities mean facilities of a public
➢ it is supplied on a monopoly basis or is subject telecommunications transport network or
to some degree of monopoly control; service that:
(a) are exclusively or predominantly provided
➢ it is required by competitors (e.g. interconnect- by a single or limited number of suppliers;
ing operators) in order to compete; and and
(b) cannot feasibly be economically or
➢ it cannot be practically duplicated by competitors technically substituted in order to provide
for technical or economic reasons. a service

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Telecommunications Regulation Handbook

Common examples of essential facilities are network from being able to obtain necessary network com-
access lines (local loops) and local exchange ponents on appropriate terms. Too broad a definition
switching. Local loops are the circuits between a can stimulate uneconomic entry or provide
customer’s premises and the first “node” or insufficient incentives for competitors to invest in and
exchange which connects the customer with the develop alternative network infrastructure.
PSTN. It can be seen that in many countries, local
loops fall within the definition of essential facilities Various approaches to defining essential facilities
because they are: are discussed in Section 3.4.5 of Module 3. That
Section considers which facilities an incumbent
(1) required by competitors in order to compete for operator should be required to unbundle and provide
the business of end customers; to competitors, The balance of this Module 5 illus-
trates the use of the concept of essential facilities in
(2) predominantly supplied by the incumbent, and competition policy as it applies to the telecommuni-
cations sector.
(3) technically or economically difficult to substitute,
at least on a widespread basis. 5.3 Remedies for Anti-Competitive
Conduct
Accordingly, regulators in the US, Canada, Europe
and elsewhere have required incumbents to facilitate
5.3.1 Abuse of Dominance
competition by providing local loops to competitors.
If alternative sources of fixed and wireless local
The concept of abuse of dominance includes a
loops become available, they may no longer be
broad range of anti-competitive conduct recognized
designated as essential facilities.
in the laws and policies of many countries. It is
similar to, but broader than the concept of “monopo-
More examples of essential facilities, and a more
lization” that is found in some laws.
detailed discussion of the concept are set out in
Section 3.4.5 of Module 3 under the heading
While there are different definitions of abuse of
“Access to Unbundled Network Components”.
dominance, there are common themes in the defini-
tions. The essential characteristics of abuse of
A telecommunications operator that controls an es-
dominance include:
sential facility often has both the incentive and the
means to limit access to the facility by competitors. It
(i) A firm has a dominant market position in the
becomes a matter of public interest to ensure that
relevant market; and
essential facilities are available to competitors on
reasonable terms. Without such access, competition
(ii) The firm uses that position to engage in
will suffer, and the sector will operate less efficiently
“abusive” conduct which is or is likely to be
than it could.
harmful to competition.
Consider, for example, how much more efficient it is
The concept of abuse of dominance covers many
to have a variety of different ISPs, international
specific types of conduct. New forms of abusive
operators and other telecommunications service
conduct are being recognized today. Recent exam-
providers use the same network access lines and
ples can be found in the Microsoft litigation in the
local switches to reach subscribers in a locality. This
US, or in other areas of intellectual property
is far more efficient than having each operator
licensing. Other actions that were once considered
construct network access lines to serve the same
abusive are considered acceptable today, depend-
locality.
ing on the circumstances. This Section and
subsequent sections describe some specific types of
The determination of which telecommunications
conduct that have been considered abuses of domi-
network resources constitute essential facilities has
nance in the telecommunications industry. These
great practical importance. Too narrow a definition
descriptions should not be considered exhaustive.
can impede competition by preventing competitors

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 Module 5 – Competition Policy

Before discussing different types of abusive conduct, ways. Box 5-6 sets out common examples of the
we will review the concept of market dominance. types of behaviour that are seen as abusive, if
carried out by a dominant telecommunications
When Does a Firm Dominate a Market? operator.

The concepts of market power and dominance are Different approaches are used to define conduct that
discussed earlier in this Module. The first step in amounts to an abuse of dominance. These
evaluating whether a firm dominates a market approaches all focus on conduct that is harmful to
involves the definition of the relevant market in which competition in a market.
the possible abuse occurs. As discussed earlier,
once the relevant product and geographic market Abusive conduct is sometimes divided into “exploita-
must be considered. Then the degree of dominance tive abuses” and “exclusionary abuses”. Conduct
exercised by the firm in the relevant market can be such as charging excessive prices or offering poor
evaluated. service to subscribers can be characterized as ex-
ploitative abuses. This type of conduct exploits the
A narrow definition of the relevant market will gener- dominant position a firm enjoys in a market and
ally suggest a higher market share for a particular reduces consumer welfare. Predatory pricing or
firm, and an appearance of greater dominance. refusal to supply essential facilities, on the other
Conversely, a broad definition of the market will hand, can be characterized as exclusionary abuses.
suggest lower market shares and less dominance. These forms of conduct are aimed at foreclosing
The definition of the relevant market will, therefore, market entry or forcing market exit. Other ap-
often be critical to an assessment of market proaches to classifying abuses of dominance exist in
dominance. various laws as well as in the legal and economic
literature.
Once the relevant market has been defined, the
evaluation of whether a firm occupies a dominant The main types of abuse of dominance encountered
position will typically depend on two main factors: (i) in the telecommunications industry are discussed in
the market share of the particular firm; and (ii) the greater detail below. They include refusal to supply
extent of barriers to market. essential facilities, anti-competitive cross-subsidiza-
tion, vertical price squeezing, predatory pricing, tied
A finding of dominance must be based on the sales and bundling.
context and circumstances of the relevant market. It
is difficult to provide general guidelines to determine Legal Prohibitions Against Abuse of Dominance
the particular measure of market share which will
support a finding of dominance. Many commentators National and international laws and treaties include
suggest that a market share of less than 35% is prohibitions against abuse of dominance. Some
unlikely to be associated with a dominant position; prohibitions are broad and general; others more

Competition Policy
Competition Policy
while a market share of greater than 65% is likely to specific.
be. It is widely observed that even a very large
market share may not result in market dominance. A good example of a broad prohibition against
This is particularly the case when barriers to entry abuse of dominance is found in Article 82 of the EC
are so low that price increases or output decreases Treaty (formerly Article 86). It provides a general
by a firm with a large market share will stimulate new prohibition at the level of European Union law.
entry and additional competition. Article 82 states that:

When is a Firm Abusing its Dominant Position? “Any abuse by one or more undertakings of a
dominant position within the common market or
If it is determined that a firm has a dominant position any substantial part of it shall be prohibited as
in a relevant market, the next question is: Is the firm incompatible with the common market insofar as
abusing this position? In telecommunications it may affect trade between member states.”
markets, abuse of dominance can occur in many

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Telecommunications Regulation Handbook

The broad prohibitions of the EC Treaty have been

incorporated into the laws of member countries of Box 5-7: Some Powers to Remedy Abuse
the European Union. In addition to being bound by of Dominance
the requirements of the EC Treaty, public telecom-
munications operators in EC member countries are ➢ Power to issue enforceable orders
generally subject to additional and more specific against the dominant entity,
national legal prohibitions against abuse of domi-
nance. (a) to cease abusive behaviour; or
(b) to prescribe specific changes in its
Abuse of Dominance – Remedies behaviour to limit the abusive aspects
➢ Power to revoke the licence of the
Different approaches are taken to prevent, correct or dominant entity (NB. In practice, this has
punish abuse of dominance. To properly investigate limited applications since no regulator
and remedy abuse of dominance complaints, a wants to deny service to the public)
regulator or competition authority must have
➢ Power to fine the dominant entity and
sufficient powers to conduct a proper investigation. the individual persons responsible for
At a minimum, investigative powers typically include the abusive conduct
the ability to compel the dominant entity to disclose
information and documents. ➢ Power to order compensation
(damages) to be paid to subscribers or
competitors injured by the abusive
If an investigation indicates that abusive conduct has conduct
occurred, an effective legal framework generally
provides powers to remedy the situation. Examples ➢ Power to restructure the dominant entity
of the types of powers that are granted to remedy (such as the divestiture of some lines of
business or structural separation of
abuse of dominance are set out in Box 5-7. Some of
those lines into a separate but affiliated
these powers may be granted to a telecommunica company)
tions regulator, some to a general competition
authority, and some to the courts. ➢ Power to facilitate and approve informal
settlements in cases of abuse of
dominance (e.g. to pay compensation,
restructure, voluntarily cease or change
Box 5-6: Abuse of Dominance by a conduct)
Telecommunications Operator: Common
Examples

➢ Refusal or delay in providing essential

facilities to competitors; The question of establishing an effective regulatory
➢ Providing services or facilities to
framework, including investigative and remedial
competitors at excessive prices or on powers, is discussed in Module 1 – Overview of
discriminatory terms; Telecommunications Regulation. Specific remedies
for different types of abuse of dominance and other
➢ Predatory pricing and/or cross- forms of anti-competitive conduct are set out in the
subsidization of competitive services
following sections.
with revenues obtained from services
which are subject to less competition;
5.3.2 Refusal to Supply Essential Facilities
➢ Bundling of services designed to provide
the dominant firm with exclusive
The concept of “essential facilities” is introduced in
advantages in subscriber markets or
require a competitor to obtain services or Section 5.2.4. above, and discussed in greater detail
facilities which it does not truly need. in Section 3.4.5. of Module 3. We will only deal with
the matter briefly here.

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 Module 5 – Competition Policy

The competition policies of a number of countries ii) overlapping authority between national and EU
require dominant firms to provide competitors with institutions, and between competition and sector-
access to essential facilities controlled by dominant specific regulatory authorities. The Access Notice
firms. The so-called “essential facilities doctrine” is builds on earlier Commission guidelines on the
closely related to the concept of “refusing to deal” application of competition rules in the telecommuni-
with competitors, which is an offence under compe- cations sector.
tition law in some, but not all circumstances.
The Notice adopts a conventional approach to
Some experts have discouraged telecommunica- market definition. It uses the concepts of demand
tions regulators and competition authorities from substitutability and non-transitory price increases as
developing excessively broad principles requiring the main tools for defining separate product markets.
incumbent operators to provide network facilities to Based on its analysis, the Commission concludes
their competitors. They point out that such principles that telecommunications network access constitutes
would discourage competitors from building their a distinct market from the market for end user serv-
own competitive facilities. ices.

However, most telecommunications experts agree Much of the Notice is directed toward an evaluation
that the introduction of competition can be greatly of market dominance and the application of
accelerated by requiring incumbents to provide principles of abuse of dominance to the network
access to a broadly defined range of essential access market. The first principle is that a company
facilities to new entrants. For the provision of controlling access to an essential network facility is
telecommunications services to the general public, in a dominant position within the meaning of EU law
for example, interconnection to the incumbents’ on abuse of dominance (specifically, Article 82 of the
PSTN and related switching, signaling, Operational EC Treaty – formerly Article 86).
Support Systems (OSS) and database systems can
significantly speed up the introduction of competitive The Commission concludes that abuse of domi-
new services. nance can be made out where a network operator
refuses access to its network, withdraws access or
Most of the debate about essential facilities in the provides access subject to unjustifiable delays or
telecommunications context relates to interconnec- excessive prices. The Commission identifies other
tion facilities. The issues related to the supply and conduct which may be abusive, including tying or
unbundling of essential facilities are discussed in bundling network elements without adequate justifi-
more detail in Module 3 – Interconnection. cation, configuring a network so that access by
competitors becomes more difficult, unjustly
Abuse of Dominance and Essential Local discriminating in the terms of access offered to
Network Facilities – The EU Example competing operators or pricing access so as to
“squeeze” competitors’ profit margins. These con-

Competition Policy
Competition Policy
The European Commission’s 1998 “Access Notice” cepts are discussed later in this Module.
provides a good example of the treatment of essen-
tial network facilities in current competition and 5.3.3 Cross-Subsidization
telecommunications law and policy (Notice on the
Application of the Competition Rules to Access In some key telecommunications markets, there is a
Agreements in the Telecommunications Sector). concern that incumbent telecommunications opera-
tors will abuse their dominant position by engaging
The Access Notice illustrates how an established in anti-competitive cross-subsidization. The concern
telecommunications network operator can abuse its is that an operator that dominates one market may
dominant position in controlling network access increase or maintain its prices above costs in that
facilities. The Notice sets out how competition rules market. It can then use its excess revenues from the
are to be applied to telecommunications network dominant market to subsidize lower prices in other
access agreements in the context of: i) specific tele- more competitive markets. As a result, a dispropor-
communications market liberalization directives; and tionately large share of the costs of the operator’s

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Telecommunications Regulation Handbook

entire business can be recovered from the markets Prohibitions Against Cross-Subsidies
the operator dominates.
Prohibitions against anti-competitive cross-subsidy
This results in a “cross-subsidy” between services have been incorporated into the laws and regulatory
and subscriber groups. The more competitive framework of many countries. Many countries that
services are subsidized by the less competitive did not do so before have established such prohibi-
services. Such cross-subsidies can be significant tions as part of their obligations under the 1998
barriers to competition. WTO Agreement on Basic Telecommunications.

Without the ability to cross-subsidize its own com- The WTO’s Regulation Reference Paper (see
petitive services, a new entrant may not be able to Appendix A) requires signatory countries to maintain
match the incumbent’s low prices in competitive appropriate measures to prevent major suppliers
markets. This may prevent new entry into the from engaging in or continuing anti-competitive
incumbent’s less competitive markets. Alternatively, practices. The list of anti-competitive practices spe-
it may drive new entrants out of business or prevent cifically includes “engaging in anti-competitive cross-
them from raising enough capital to expand into the subsidization”.
incumbent’s dominant markets.
National prohibitions against cross subsidies can be
Regulatory treatment of anti-competitive cross- found at various levels, including laws, regulations,
subsidies in telecommunications markets is regulatory guidelines, rules, orders or licences.
complicated due to the patterns of “social” cross-
subsidies which characterized the monopoly era of Licence conditions are often used to prohibit cross-
telecommunications services in many jurisdictions. subsidy. One example of a licensing prohibition can
be found in the General Telecommunications
In the monopoly era, governments typically author- Licence granted by the Office of the Director of
ized the cross-subsidization of local, residential and Telecommunications Regulation in Ireland. Condi-
rural services by other services, such as interna- tion 14 of the Licence permits the Director to enquire
tional, long distance and business services. into complaints of cross-subsidization by the
Whatever the benefits of social cross-subsidies in licensee, and to issue a binding direction requiring
the monopoly era, there is now a widespread the licensee to cease such cross-subsidization. This
recognition that they should be abolished. These condition is found in Part 3 of the Licence, which
cross-subsidies are gradually being eliminated by includes the conditions applicable to any licensee
the implementation of rate rebalancing policies. Rate with Significant Market Power (see definition in
rebalancing policies are aimed at aligning prices of Section 5.2.1). This licence also requires licensees
different services more closely with their costs. to keep appropriate accounting records in order to
Rebalanced rates are closer to the types of permit the Director to evaluate whether conduct
“efficient” pricing found in competitive markets. amounts to unfair cross-subsidization.

That is not to say that social objectives, such as Another example of a broad prohibition can be found
maintenance of affordable access for poor or remote in the licence issued to the Jordan Telecommunica-
subscribers, are being ignored today. However, tions Corporation by the Telecommunications
most telecommunications policy-makers, regulators Regulatory Commission of Jordan. The prohibition
and sector experts agree that implicit cross- reads as follows:
subsidies between services should be replaced by
explicit subsidies aimed at meeting specific social “The Licensee will not, alone or together with
objectives. The issues surrounding targeted subsi- others, engage in or continue or knowingly
dies to meet social objectives are discussed in acquiesce in any anti-competitive practices and,
greater detail in Module 6. in particular, the Licensee shall: … not engage in
anti-competitive cross-subsidization;”

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 Module 5 – Competition Policy

Such broad prohibitions are included in licences or or loses money. Services that do not cover their
in other regulatory conditions imposed on incumbent costs are considered to be subsidized by other
operators in many other countries. While these services with revenues that exceed their costs.
broad prohibitions send a strong signal to incum-
bents, they are not generally effective unless they In effect, accounting separations require an operator
are accompanied by more specific measures to to account for different services as if they were
identify and prevent anti-competitive cross- stand-alone operations. Since telecommunications
subsidies. We will now consider several specific operators provide a wide range of services, many
measures: accounting separations, structural sepa- accounting separations undertaken for regulatory
rations and imputation tests. purposes do not attempt to separate the costs of
each individual service. Rather, they separate the
Accounting Separations costs of broad categories of service.

Accounting separations can be used to determine The focus of regulators is usually on separating the
the existence of cross-subsidization. Regulators costs of the categories of services in which an
have developed accounting separations, or have operator is dominant, from the costs of providing the
required incumbents to do so, in a number of juris- more competitive services. Such a separation per-
dictions. mits the regulator to determine whether the monop-
oly (or less competitive) services are generating
An example is provided by Article 8 of the EU’s excess revenues – and whether these costs are
Interconnection Directive. It imposes an obligation being used to subsidize the more competitive
on EU member states to ensure that public tele- services. Accounting separations can add
communications network operators that have transparency to the costing and pricing process of
significant market power keep separate accounts for the incumbent operator.
their interconnection-related activities and their other
commercial activities. This obligation applies if such Accounting Separations – Cost & Revenue
incumbents provide both end user services and Categories
interconnection services to new entrants. In addition,
the record of interconnection-related activities must Determination of which accounting categories
include both interconnection services provided inter- should be established will depend on the state of
nally and interconnection services provided to competition in a national telecommunications mar-
others. The new Interconnection Directive proposed ket. In general, the more competitive the market, the
by the European Commission in July 2000 provides more difficult the accounting separation process.
that regulators should have the authority to impose
accounting separations in relation to specified Once all segments of a market become workably
activities related to interconnection and/or network competitive, it will no longer be necessary to estab-
access (Article 11). lish accounting separations, or worry about cross-

Competition Policy
Competition Policy
subsidies. At that point, no firm would retain a
More detailed accounting separation approaches dominant position in any market segment.
are required by several national regulators. In some Accordingly, it could not raise prices above
cases, accounts must be separated for a range of competitive levels and use the excess profits to
different services. The most detailed approaches cross-subsidize more competitive areas.
have been developed in Canada and the United
States. The following are simplified illustrations of possible
accounting separations that could be used in
The goal of accounting separations is to divide the emerging markets that are subject to a limited
costs of an operator between the different services it degree of competition. Three simplified scenarios
offers in order to determine the costs of providing are considered in Table 5-2, Table 5-3 and Table 5-
each service. The costs of each service are then 4.
compared to the revenues generated by that service
to determine whether the service recovers its costs

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Telecommunications Regulation Handbook

Several observations can be made about these sim- introducing a new service, and if the deficit for
plified scenarios. In Scenario A, the operator Category 2 competitive services is short lived, there
appears to be cross-subsidizing its entry into may not be a serious anti-competitive problem.
competitive services with revenues from its monop- However, if the cross-subsidy persists, or increases,
oly services. Several factors are relevant in that would make it very difficult for new entrants in
determining the extent of this cross-subsidy. Any the cellular and value-added services markets to
firm will incur start up costs in the early years of compete. They may be driven out of business.

Table 5-2: Scenario A: No competition in basic telephone services; competition in cellular and
value-added services (e.g. Internet access, e-commerce services)

Accounting Category 1 – Monopoly Services Accounting Category 2 – Competitive Services

Revenues 5000 Revenues 100
Costs Costs
Local Access Network Services 2500 Cellular Telecommunications Services 300
Long Distance Network Services 1000 Value-added Services (including Internet 200
Access, e-commerce)
International Network Services 400
Total Costs 3900 Total Costs 500
Surplus 1100 Deficit (400)

Table 5-3: Scenario B: No competition in local access services; competition in long distance,
international cellular and value-added services (e.g. Internet access, e-commerce services)

Accounting Category 1 – Monopoly Services Accounting Category 2 – Competitive Services

Revenues 2500 Revenues 2600
Costs Costs
Local Access Network Services 2500 Cellular Telecommunications Services 300
Value-added Services (including Internet 200
Access, e-commerce)
Long Distance Network Services 1000
International Network Services 400
Total Costs 2500 Total Costs 1900
Surplus/Deficit 0 Surplus 700

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 Module 5 – Competition Policy

Table 5-4: Scenario C: (same assumptions as Scenario B) No competition in local access services;
competition in long distance, international cellular and value-added services (e.g. Internet access
and e-commerce)

Accounting Category 1 – Monopoly Services Accounting Category 2 – Competitive Services

Revenues from End Users 1700 Revenues 2600
Local Access Revenues from Competitors 800
Total Revenues 2500
Costs Costs
Local Access Network Services 2400 Cellular Telecommunications Services 300
Cost of Providing Local Access Services 100 Value-added Services (including Internet 200
to Competitors Access, e-commerce)
Long Distance Network Services 1000
International Network Services 400
Total Costs 2500 Total Costs 1900
Surplus/Deficit 0 Surplus 700

Scenario B illustrates a hypothetical accounting competitors are 800, costs are 100). This could
separation for an incumbent operator that has increase the costs of competitors to a level where
rebalanced its local access prices. Its local access they would find it very difficult to compete with the
prices are sufficient to cover associated local access incumbent. The more detailed level of accounting
costs – and no more. Based on these data, the firm separation provided in Scenario C illustrates what
cannot be said to be cross-subsidizing its seems to be a large cross-subsidy from one cate-
competitive services from its monopoly services. gory of monopoly services, i.e. local access services
provided to competitors, to other monopoly services.
However, a further degree of accounting separation
may illustrate a form of anti-competitive cross sub- Scenario C indicates other potential problems that
sidization that is potentially damaging to competition. merit further investigation. For example, it is possible

Competition Policy
Competition Policy
This is illustrated in Scenario C. that the incumbent is implicitly charging its own
competitive services at lower prices for local access
The total costs and revenues illustrated in Scenario services than it is to competitors. This problem is
C are the same as in Scenario B. However, discussed later in this Section.
Scenario C separates out the costs and revenues of
the incumbent in providing local access services A comparison of Scenarios A, B and C indicates that
(e.g. call termination) to competitors. In so doing, it is important to design accounting separation cate-
Scenario C illustrates what appear to be anti- gories to meet different market circumstances, and
competitive cross-subsidization practices on the part to take into account the type of cross-subsidy that is
of the operator. being investigated or monitored.

It appears that the operator is charging competitors

8 times as much as it costs to provide them with
local access services (local access revenues from

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Telecommunications Regulation Handbook

Accounting Separations - Cost Allocation Issues pricing the competitive services below cost, and
subsidizing them from excess basic service
In practice, it is sometimes difficult to separate the revenues.
costs to telecommunications operators. Cost
accounting approaches are well developed in some There is no simple solution to the accounting
highly competitive industries, where business separation problems identified above. If there are
managers carefully monitor the financial serious concerns about anti-competitive cross-
performance of different services or “profit centres”. subsidies, the regulator will have to “roll up its
However, the same has not generally been true of sleeves”, and work to understand the cost structure
incumbent telecommunications operators. of the incumbent. The help of experienced telecom-
munications accounting or economic consultants will
Identifying the costs of different services was simply be useful, if not essential, in most cases.
not required in the monopoly era. Telecommunica-
tions managers and regulators typically focussed on International benchmarks can assist in some cases.
the overall profitability of the firm, not on the For example, consider two services: (1) local
profitability of individual services. If some services termination services provided by an incumbent to
lost money, these losses were covered by profits in interconnecting competitors, and (2) cellular
other services. Detailed cost separation approaches telephone services provided to end users in compe-
were never required or developed. tition with the same competitor. A benchmarking
study may show that the incumbent charges twice
Some difficult issues of cost separation are rooted in as much for service (1) in comparable countries, and
the nature of telecommunications costs. Many of the only half as much for service (2). In such a case, the
costs of operating a multi-service telecommunica- regulator will want to take a closer look at the costs
tions operator can be characterized as joint or com- and pricing of the incumbent to ensure it is not
mon costs. These concepts are defined and engaging in anti-competitive cross-subsidization.
discussed in detail in Appendix B.
In conclusion, accounting separations can be chal-
As discussed in Appendix B, it is difficult to assign lenging for both the regulator and regulated opera-
joint and common costs directly to a service. tors. However, some simplifying assumptions and
Accordingly, such costs are often “allocated” or benchmarking can assist in providing “order of
“distributed” among the different services. Various magnitude” indications of possible cross-subsidies.
approaches can be used for such cost allocations. Whatever techniques are used, accounting
Most involve some degree of judgment. separations remain a valuable tool for regulators.

Given the arbitrary nature of some cost allocations, The accounting separations approach does have
incumbent operators will often have the opportunity drawbacks. These include the discretionary nature
to allocate more costs to their less competitive serv- of some cost allocations and the large amount of
ice offerings. This “shifting” of costs will make the resources required for detailed cost separations. For
more competitive services appear less costly and example, the Canadian regulator spent the better
more profitable. For example, an incumbent might part of a decade to develop its “Phase III” category-
allocate 95% of its head office expenses to its basic wide cost separations process. These drawbacks
telephone services, because those services account suggest that detailed accounting separations should
for 95% of its revenues. However, in reality, over not be relied on exclusively as a tool to identify and
30% of the time of head office staff may be devoted prevent anti-competitive cross-subsidies. In
to competition with new entrants in value-added, countries with limited resources, it may be more
Internet and e-commerce services, which accounts efficient to use a combination of benchmarking and
for only 5% of its revenues. By shifting its head- very high level cost separations.
quarters’ costs away from the more competitive
services, the incumbent could justify charging a very
low price for these services. The incumbent might
thus be able to convince the regulator that it was not

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 Module 5 – Competition Policy

Structural Separation and Divestiture For example, there may be efficiencies (economies
of scale and scope) inherent in providing common
Two other approaches, namely structural separation administrative services to both companies. On the
and divestiture, have been used by competition other hand, the sharing of administrative services,
authorities and telecommunications regulators in such as accounting services, provides potential for
cases of serious anti-competitive cross- anti-competitive conduct and for developing covert
subsidization. Both approaches tend to be used only cross-subsidies. Similarly, sharing head office space
where there is evidence of significant anti- can lead to efficiencies. On the other hand, it
competitive conduct. This usually involves not only provides opportunities for collusive conduct between
cross-subsidization, but related conduct such as managers of the two companies. If structural
predatory pricing, anti-competitive use of information separation is to be required, there should be a real
and discriminatory practices. separation of the two lines of business, including
their management, premises, customer data bases,
Structural separation generally refers to the separa- accounts and operations. Otherwise, the structural
tion of different lines of business of a telecommuni- separation may be a sham.
cations operator into separate corporate entities.
The initial question, however, is not whether there
As an example, a cellular business can be operated should be structural separation between the compa-
by a separate company from a wireline telephone nies, but whether the advantages of separation
business. Both may be owned by the same outweigh the disadvantages given the realities of a
shareholders. However, existence of a separate particular market. Other disadvantages of structural
cellular company makes it easier to ensure that the separation include high transaction costs (the costs
incumbent operator with which it is affiliated does not of creating the separate companies) and the distrac-
discriminate unfairly against cellular competitors as tion for employees and customers as they work
compared to its own cellular operations. Rules can through the separation. Despite those
be established to ensure that both cellular disadvantages, structural separation may be the
companies are treated the same, for example, with only way to ensure a level playing field for
respect to interconnection charges. Other examples competition in some markets.
of telecommunications lines of business that are
frequently separated include ISPs and various types Structurally separate companies can often continue
of mobile operators. to operate under common ownership. Divestiture
refers to a situation where a company, such as an
When structural separation is mandated by regula- incumbent, not only runs a particular line of business
tion, the different companies must typically be run on through a separate company, but divests (i.e. sells)
an “arm’s length” basis. In that case, the companies some or all of the ownership of that separate
must deal with each other on the same terms and company to independent parties.
conditions as they deal with third parties, such as

Competition Policy
Competition Policy
competitors. The separate companies must normally Some competition advocates argue that only dives-
not only have separate accounting records, but also titure of ownership can ensure that a separate
separate management, offices, facilities, etc. company is run in the interests of its separate
shareholders, rather than merely as an operating
Regulatory conditions normally determine the arm of its parent company (e.g. the incumbent).
degree of separation required in the companies’ Without divestiture, it is argued, a great deal of
operations. Development of these conditions can regulatory effort will be expended to detect anti-
pose challenges. Regulators must balance two competitive dealings between affiliated companies.
competing objectives. One is to create sufficient Once there are separate shareholders, the man-
separation to minimize the potential for cross- agement of the separate companies must act in the
subsidization, collusion or other anti-competitive interests of those shareholders. It will be safer to
actions between the separated companies. The assume that the companies are actually run on an
other is to minimize the inefficiencies that will almost arms-length basis.
inevitably be created by structural separation.

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Telecommunications Regulation Handbook

Structural Separation – The EU Cable Directive Divestiture is generally viewed as an extreme

remedy that is only appropriate in cases of over-
An example of a structural separation directive can whelming dominance by very large operators in
be found in the EU’s 1999 Cable Ownership large economies such as the US. Policy-makers in
Directive. This Directive requires dominant tele- other countries have been reluctant to consider
communications operators to place their cable dismembering incumbents, which are often seen as
television operations in a structurally separate “national champions”.
company. The Directive builds on the EU’s ONP
Directives and other efforts to implement a However, this view may be changing. The EU Cable
competitive framework for telecommunications. It is Ownership Directive indicates a willingness by the
intended to address specific problems which the EU EU to consider divestiture of at least some types of
Commission has concluded result from the joint business lines. Consideration of the divestiture
operation of cable television networks and conven- option may increase as more incumbents around the
tional telecommunication networks. world become fully privatized. The changing market,
economics and financing of the telecommunications
The Cable Ownership Directive makes it clear that sector suggest that there are advantages as well as
the Commission views structural separation as the disadvantages in divesting some lines of telecom-
minimum corrective measure required at this time, munications business from others. For example, it is
and that it may impose further measures, including often easier to finance an e-commerce or GSM
divestiture of cable interests to third parties, in cellular business on a stand-alone basis than as part
specific cases. The Commission also appears to be of a large multi-service operator. Finally, in countries
adopting a practice of requiring dominant companies with limited competition, divestiture may provide the
to divest their cable interests as a precondition to means to create other strong players with the critical
securing Commission approval for new mergers mass to become successful telecommunications
among telephone companies. (See, for example, the service providers.
discussion of the Commission’s approval of the
merger of Telia AB of Sweden and Telenor AS of 5.3.4 Vertical Price Squeezing
Norway in Section 5.4.2 below.)
Vertical price squeezing is a particular type of anti-
Divestiture – The AT&T Model competitive conduct that may be engaged in by
incumbent operators. This form of conduct can
The most famous example of a telecommunications occur if the incumbent provides services in two or
divestiture involved the separation of AT&T from the more “vertical” markets. Vertical markets are some-
Regional Bell Operating Companies (RBOCs) in the times labelled “upstream” and “downstream”
United States in 1984. Not only were the local markets. For example, the oil production market is
operations of AT&T structurally separated from its upstream of the oil refining market, which in turn is
long distance and international operations, but own- upstream of the gasoline sales market. Instead of
ership of the two groups of companies was upstream and downstream, the terms “wholesale”
separated by means of a share swap. The and “retail” are often used.
divestiture was, by most accounts, a great success.
Vertical price squeezing can occur when an operator
With their ownership separate from AT&T, the with market power controls certain services that are
RBOCs no longer had an incentive to favour AT&T key inputs for competitors in downstream markets,
over its long distance competitors, such as MCI and and where those same key inputs are used by the
Sprint. Therefore, all long distance competitors operator or its affiliates to compete in the same
obtained access to local telecommunications serv- downstream market.
ices from the RBOCs on similar, non-discriminatory
terms. More relevant to this Section, the divestiture To take an example, in telecommunications
eliminated concerns about anti-competitive cross- markets, incumbents often control local access and
subsidies between AT&T’s local and long distance switching services. Consider one such service – the
operations. provision of dedicated local circuits from customer

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 Module 5 – Competition Policy

premises to local exchanges. Dedicated local In this example, it is evident that there is no margin
circuits can be viewed as “upstream” services. available for the competitor. The competitor must
These services are used as an input by the buy the upstream service, a dedicated loop, from the
incumbents in providing “downstream” services, incumbent at $120. Assume that it will incur $20 in
such as dedicated Internet access services. Dedi- additional costs before it can provide retail services.
cated local circuits are also a key input for Thus, it must spend $140 to provide the retail
competitors who provide dedicated Internet access service to end-users. Since the incumbent provides
services. In other words, both the incumbent and the same retail service for $130, it is unlikely that the
other suppliers compete in the downstream market competitor could attract any customers away from
for dedicated Internet access services. the incumbent.

If the incumbent decided to engage in vertical price Wholesale Cost Imputation Requirement
squeezing, it could increase the price to competitors
for the upstream input (i.e. dedicated local circuit To prevent vertical price squeezing, a telecommuni-
rates) – while leaving its downstream prices the cations regulator may impose a wholesale cost
same (i.e. prices for its dedicated Internet access imputation requirement, along the lines set out in
services). The effect would be to reduce or eliminate Box 5-9.
the profits (or “margins”) of competitors. Their
margins would be “squeezed”. To increase the
squeezing effect, the incumbent could also reduce Box 5-9: Basic Elements of Wholesale
its downstream prices for Internet access. This Cost Imputation Requirement
would be a “two-way” or margin squeeze.
Conditions for Application:
Put another way, an incumbent can often squeeze
the margins of competitors by raising wholesale 1. Applies to a monopoly or dominant
prices paid by competitors, while at the same time provider of “wholesale services”
lowering retail prices on competitive services. 2. Where the dominant provider also
competes in market for “retail services”
A simplified numerical example of a vertical price that require the wholesale services as
squeeze is included in Box 5-8. inputs.
Basic Rules:
Dominant provider must provide evidence to
Box 5-8: Example of Vertical Price
the regulator that its retail prices are no lower
Squeeze by Incumbent Operator
than the sum of the following:
A. The price it is charging competitors for the
Cost to incumbent of upstream $ 90 wholesale services that form part of the
facility (e.g. dedicated loop)

Competition Policy
Competition Policy
retail service (this price is said to be
“imputed” in the cost of the dominant
Price charged by incumbent to $ 120
provider whether it actually incurs this cost
competitor for loop
or not); plus
Cost of providing retail services to B. The actual incremental costs (above the
end users (e.g. dedicated Internet imputed wholesale costs) that are incurred
access service) in addition to loop $ 20
by the dominant supplier in providing the
cost (e.g. marketing, billing) retail service. For example, marketing,
Price charged by incumbent to $ 130 billing, etc. costs.
end users for dedicated Internet
access services

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Telecommunications Regulation Handbook

Variations on this type of imputation approach have All long distance operators, including new entrants,
been used by various regulators and competition are required to make “contribution” payments to
authorities. It is relatively simple to use (compared to subsidize the deficit described above. However, as
detailed accounting separations or cost allocations). noted in our detailed discussion of the Canadian
To return to the margin squeezing example in Box 5- example in Module 6, incumbent local operators
8, it does not matter whether the actual cost of the continue to receive the vast majority of contribution
wholesale service is $90, $120 or some other payments. Initially, the CRTC did not specifically
number. What the imputation requirement assures is require the incumbent operators to account for their
that the same cost for essential wholesale services own use of the local access network in providing
is imputed to the dominant operator’s retail services competitive services. That is, it did not require
as is passed on to its competitors. incumbents to make contribution payments to
themselves. This led to the potential for vertical price
Imputation – A Canadian Example squeezing by incumbents. The CRTC’s response to
this situation is described in Box 5-10 below.
A form of the wholesale cost imputation requirement
has been applied by the Canadian regulator in This imputation test is similar to the one described in
response to complaints of targeted retail price dis- Box 5-9. The main difference is that the CRTC
counting by incumbent operators. The CRTC’s imputes “contribution” subsidies, as well as
approach was tailored to the rather unique wholesale facilities costs, as costs that must be
circumstances of the Canadian market. In that covered in the incumbents’ retail prices. The CRTC
market, the CRTC established a universal service took the position that so long as a service recovers
program in the form of a subsidy for the access these imputed costs, plus the direct causal costs of
deficit incurred by operators in higher-cost areas. the retail service, targeted pricing would not be anti-
competitive.

Box 5-10: Case Study - The CRTC Imputation Test

In 1994 (Decision 94-13), the CRTC described the targeted price cutting responses of incumbent operators to
new entrants as follows:
“Under a scenario of unrestrained targeted pricing by the telephone companies, competitors could be faced
with the situation in which they must compete against telephone company prices that embody a contribu-
tion amount that is lower than the competitor contribution cost in that market segment…The Commission
considers that, due to their previous status as monopoly toll providers, the telephone companies have an
established and generally predominant share in all market segments. As a result, their traffic mix, the
presence of barriers to entry and the existence of customer inertia would permit them, on a sustained
basis, to recover contribution from the most highly contested market segments at a level below the
contribution amount [payable by competitors].”
As a result of these concerns, the CRTC implemented an “imputation test” to ensure that incumbents’ prices in
competitive networks were subject to similar cost recovery requirements as competitors. This imputation test,
as modified in a later CRTC decision (Telecom Decision CRTC 94-19), has the following requirements:
Revenues for each service offered by an incumbent must equal or exceed the sum of--
(a) the costs for “bottleneck services” used by the company in the provision of the services in question, using
tariffed rates for those bottleneck services (the “Operator Access Tariff”);
(b) the causal costs specifically attributed to the services, which are additional to the costs covered in (a)
above; and
(c) any applicable contribution payments.

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 Module 5 – Competition Policy

5.3.5 Predatory Pricing deter predatory behaviour. Wholesale cost imputa-

tion requirements, which are discussed in the
Predatory pricing is the practice of providing services previous Section, provide an example of this
at prices that are low enough to drive competitors approach.
out of a market, so as to monopolize the market.
There is considerable debate about what prices and Predatory pricing is a particularly difficult type of
what conduct constitute predatory pricing. While the conduct to prove in the telecommunications industry.
competition laws of various countries differ, it is As previously discussed, the industry is character-
generally agreed that a number of elements must ized by substantial joint and common costs which
exist to constitute predatory pricing. Typical ele- are difficult to assign to particular services. The
ments for the definition of predatory pricing are set economic cost tests used to determine predatory
out in Box 5-11. pricing, such as Average Variable Costs and Long
Run Incremental Costs are difficult to apply to many
Predatory pricing is often prohibited under national types of telecommunications prices. Again, these
competition laws. It may also be prohibited under the tests and related costing issues are discussed in
laws or policies applied by a telecommunications Appendix B.
regulator. Either way, it will be necessary for the
regulator to have the means to investigate and stop Predatory Pricing – Example of a Complaint
instances of predatory pricing and to implement
suitable penalties or remedies. The case study provided in Box 5-12 summarizes
Oftel’s investigation into certain of BT’s Internet
Remedies vary. Predators may be penalized, services after a competitor raised predatory pricing
competitors which have been the victims of concerns. It illustrates some of the problems of
predatory pricing may be compensated, or both. establishing that low pricing amounts to predatory
Another regulatory approach is to anticipate pricing.
predatory pricing by implementing price regulation to

Box 5-11: What is Predatory Pricing?

Generally, the following elements must exist to constitute predatory pricing:

➢ The predator must have market power (power to unilaterally increase its prices, etc.).
➢ The predator must charge prices that fall below a predatory price standard. This standard varies
somewhat between countries. Generally, in competition law, prices in this sector must be below
Average Total Costs, and near or below Average Variable Costs. In the telecommunications sector,

Competition Policy
Competition Policy
prices must usually be below Long Run Incremental Costs (LRIC) or Total Service Long Run
Incremental Costs (TSLRIC). (See Appendix B for a discussion of these cost standards).
➢ There must be evidence of a clear policy of selling at predatory prices, not just sporadic or reactive
price cutting.
➢ Normally, there must be a reasonable expectation that the predator will be able to recoup its losses
after its predation ends (e.g. after competitors are driven out of the market).

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Telecommunications Regulation Handbook

Box 5-12: Case Study - Oftel Investigation of BT's Internet Services

The complaint:
A competing Internet service provider complained to Oftel that BT was engaging in predatory pricing. The
complaint was that BT was offering its BTNet services at a price 9 times less than other comparable BT
services (X.25 packet services). Other elements of the complaint were that BTNet was not recovering an
appropriate measure of costs and that BT was offering a free initial period of subscription.
The analysis:
Oftel observed that barriers to entry were low in the Internet services market, and so predatory behaviour
was not feasible (BT would not be able to raise prices and recoup early losses in the longer run). Oftel also
noted that the BTNet service was distinguishable from the X.25 packet service, which the complainant
relied on to demonstrate unreasonably low pricing. Oftel looked at the business plan for BTNet and
performance against plan, and concluded that early losses were consistent with being a start up business
and that projected results indicated a move into profitability. Finally, Oftel observed that free subscription
periods were common in the industry and that BTNet had limited these offers to its initial launch.
The conclusion:
Oftel concluded that BT was not engaged in predatory pricing in its BTNet offers. Oftel did state its
intention to continue to monitor the situation closely (given BT’s potential influence over the market).

5.3.6 Misuse of Information 5.3.7 “Locking-in” Customers

Dominant providers of local telephone services and Telecommunications network operators may attempt
certain other monopoly services are in a position to to “capture” particular subscribers through agree-
collect competitively valuable information on their ments that make it difficult or impossible for a
interconnecting competitors. For example, a com- customer to move to another network operator or
petitor might require a local access circuit from an service provider. Examples include long term
incumbent operator in order to provide a dedicated contracts and discounts for exclusive dealing, as
Internet service to a business customer. The well as agreements which tie a customer to a
competitor would order the circuit from the incum- particular technology or hardware platform.
bent.
Not all agreements that lock-in customers are anti-
An incumbent should not be able to misuse the competitive. Most do not warrant regulatory interfer-
information obtained in its capacity as a supplier of ence. However, there are cases, particularly where a
essential facilities to the competitor. For example, dominant competitor locks in customers in advance
the incumbent should not be permitted to approach of the introduction of competition, that merit regula-
the competitor’s prospective customer to induce the tory review. Dominant firms certainly can injure the
customer to switch to (or remain with) the prospects for competition in a market by locking
incumbent’s own dedicated Internet services. customers into exclusive arrangements. These
arrangements can amount to an abuse of
Most of the information received by an incumbent dominance.
which is subject to competitive misuse, is received in
the course of interconnection arrangements. One clear form of abuse involves a requirement by a
Therefore, the types of potential anti-competitive monopoly operator that a customer enter into a long-
abuse, and the remedies for such abuse are term exclusive contract in advance of the introduc-
discussed in Module 3, Sections 3.4.2 and 3.4.3. tion of competition, as a condition of receiving
continued service. Regulators should prohibit such

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 Module 5 – Competition Policy

practices. Clearly, monopoly services should not be A practical example of the approach taken by a
discontinued if customers refuse to enter into long- competition authority to a case of locking-in tele-
term contracts that would undermine the introduction communications customers can be found in the EU’s
of competition. Such a practice clearly involves an “SIM Lock” case. The approach taken by the EU’s
abuse of dominance. This is a form of anti- Director-General for Competition (DG IV) in this
competitive tied sale, as well as a form of locking-in case is illustrated in Box 5-13.
customers.
5.3.8 Tied Sales and Bundling
Other cases of locking-in customers are less clear.
Much will depend on the degree of competition in A tied sale is the sale of one product or service on
the market and the effect of the locking in- condition that the buyer purchases another product
arrangements on competition in the market. The or service. Bundling is the practice of assembling
more dominant a telecommunications operator, and multiple products or services (or multiple product /
the more injurious to competition the locking-in service elements) together in an integrated offer.
arrangement is, the stronger the case for interven-
tion by the regulator or competition authority. Some Tied or bundled sales are not necessarily abusive or
regulators and competition authorities will be more anti-competitive. The sale of one product or service
vigilant than others regarding the potential harm may be tied to another for reasons of consumer
through locking-in arrangements. safety or technical interdependence. Bundled sales
may also be provided to respond to consumer pref-
erence or convenience.

Box 5-13: Case Study – DG IV Intervention in "SIM Locking"

The following approach was taken by the Director-General for Competition (DG IV) of the European
Commission in the case of the “SIM Lock” feature on mobile phone handsets. This feature was, at one time,
common on European handsets.
The SIM Lock feature had at least two characteristics:
(i) It could be used as a theft deterrent (since the “subscriber identification module” – or “SIM” –
integrated circuit card was uniquely associated with a particular handset); and
(ii) It effectively locked a particular handset and subscriber to a single mobile telephone service
operator. The SIM card authorized a particular handset and subscriber to use a particular service
provider’s network. Locking the SIM card and preventing its replacement in the handset prevented
subscribers from changing their service provider. The SIM Lock feature could be “unlocked”.
However, service providers tended to impose significant charges for overriding the SIM Lock feature.

Competition Policy
Competition Policy
On 30 May 1996, DG IV wrote a letter to the manufacturers of the handsets and to network operators
notifying them that it considered the SIM Lock feature as having anti-competitive effects. Further consultations
and correspondence ensued. As a result, manufacturers agreed to modify their handsets and include the
ability for subscribers to unlock the SIM Lock feature.
DG IV also set out a number of additional restrictions on the use of the SIM Lock feature. These included full
disclosure to consumers that they could unlock the handsets. Where service providers had subsidized
handset prices, the amount of the subsidy and specific commercial terms for recovering that subsidy had to
be disclosed. Providers also had to disclose any effect that this subsidy might have on the subscriber’s ability
to unlock the feature. DG IV permitted service providers to keep the handsets locked until such time as the
subsidy had been recovered.

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Telecommunications Regulation Handbook

Anti-competitive Aspects situation are discussed above under the title Vertical
Price Squeezing.
Tied sales can be abusive when they have signifi-
cant adverse effects on consumers or competitors. A related concern arises where the dominant
An example of an abusive form of tied sales is tying operator chooses to provide the upstream service to
a product or service offered in a highly competitive competitors on a bundled basis. In other words, the
market to another product in a monopolistic or less dominant operator may require competitors to
competitive market. The first product would typically acquire not only the minimum upstream service
have low prices and profit margins; the latter, higher elements they require, but also other services. Such
prices and profit margins. Another example is tying a bundling would impair the competitors’ efficiency. It
requirement to buy a maintenance service contract would also inflate revenue flows from competitors to
with the sale of the product itself, where the service the dominant operators.
market is highly competitive but the product market
is not. The issues related to the bundling of services pro-
vided by incumbents to their competitors are
Bundling has become a popular marketing approach discussed in detail in Section 3.4.5 of Module 3,
in the telecommunications industry. Many incumbent under the title Access to Unbundled Network Com-
operators and competitors are offering bundled ponents.
packages of services. A popular bundle in Canada,
for example, includes wireless telephone service, Unbundling Conditions
Internet access service and cable TV service, sold
together for a price which is 10% lower than the Dealing more generally with the issue of bundling of
combined price of the individual services. Like tied retail packages by incumbents, a number of regula-
sales, bundling can be convenient to customers. tory approaches are possible to prevent anti-
Among other things, it cuts down on the number of competitive conduct. Outright prohibition should
bills to pay. However, regulators have been asked to generally be seen as a last resort. Other approaches
deal with anti-competitive aspects of bundling in can often be used.
various countries.
Steps can often be taken to level the playing field
Regulatory Intervention between dominant operators and new entrants,
even when monopoly services are part of a bundle.
Regulatory intervention is usually focussed on a few Where this is the case, regulators can impose resale
types of bundling activity. One type occurs where an requirements on the dominant operator. In other
incumbent offers bundles of products or services on words, the dominant operator may be permitted to
terms which cannot possibly be met by competitors. sell monopoly services as part of a service bundle,
This concern is particularly serious where the but only if it makes the monopoly services available
operator includes a service in the bundle, such as to competitors on reasonable terms to resell as part
basic local telephone service, of which it is the of their own competing bundles.
monopoly or dominant supplier.
Box 5-14 provides an example of conditions im-
Another area where regulatory intervention may be posed by one regulator on dominant operators that
required occurs where a dominant operator supplies want to provide bundles of services that include
services to a competitor which the competitor needs monopoly service elements. The conditions estab-
as an input to its own services in order to compete lished in this example include a resale requirement,
with the incumbent. In other words, the dominant a cost imputation test and a general requirement
operator provides both the upstream and down- that competitors must be able to offer similar
stream services, but the competitor only provides bundles in competition with the dominant operators.
downstream services. Some concerns about this

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 Module 5 – Competition Policy

Box 5-14: Case Study - CRTC Bundled Service Conditions

In 1994, when local services were offered on a monopoly basis in the Canadian market, the CRTC
established the following bundling conditions (in Telecom Decision CRTC 94-19). These conditions applied
to dominant operators that proposed to offer a bundled service, including monopoly service elements and
competitive service elements:
➢ The bundled service must cover all applicable costs including:
(a) Tariffed rates for bottleneck network components;
(b) Bundled service start-up costs; and
(c) Contribution payments (access deficit subsidies similar to those paid by competitors);
➢ Competitors must be able to offer their own service bundles by combining network or service elements
acquired from the dominant operator at tariffed rates and the competitor’s own network or service
elements; and
The dominant operator must permit resale of the bundled service by its competitors.

Regulatory conditions of this type can be 5.3.10 Restrictive Agreements

incorporated into the regulatory framework to permit
provision of bundled services, while safeguarding Types of Restrictive Agreements
against anti-competitive conduct. Such conditions
can be included in licences or specific guidelines, Most telecommunications regulators and virtually all
decisions or directions of regulators. competition authorities are called upon, from time to
time, to review potentially anti-competitive agree-
5.3.9 Other Abuses of Dominance ments involving telecommunications operators.
Some types of regulatory review are ex ante, such
When the concept was introduced in Section 5.3, it as where laws or licence conditions require prior
was indicated that abuse of dominance involved two approval of some types of agreements entered into
factors: (1) existence of market dominance, and (2) by regulated operators. Other reviews are ex post,
conduct by the dominant firm that is harmful to com- such as in cases where a competitor complains
petition. The most common types of abuse of about the anti-competitive effect of an existing
dominance in the telecommunications industry have contract.
already been reviewed.

Competition Policy
Competition Policy
Some types of telecommunications agreements,
However, various other abuses of dominance are such as interconnection agreements, are routinely
possible. If conduct by a dominant firm exploits reviewed by regulators. Interconnection agreements
consumers, excludes competitors, or otherwise are discussed in Module 3. The following discussion
harms competition, it should be reviewed by tele- focuses on other types of agreements between tele-
communications regulators or competition authori- communications operators.
ties. Box 5-15 lists some other types of abuses of
dominance that are found in telecommunications Two categories of agreements may raise concerns
and other industries. of anti-competitive conduct. “Horizontal agree-
ments” are agreements among competitors. They
will cause concern to the extent that they restrict the
competitors’ ability to compete independently.

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Telecommunications Regulation Handbook

Box 5-15: Some Other Forms of Abuse of Dominant Position

The following list includes common types of abuses not discussed in detail elsewhere in this Module. This
list is not exhaustive.
➢ Excessive Prices – This is perhaps the most common form of “exploitative” abuse of a dominant or
monopoly position in the telecommunications sector. It is not an anti-competitive abuse but an
exploitation of consumers. (It is discussed in Module 4 and Appendix B.)
➢ Restriction of Supply - A monopolist or dominant firm may refuse to invest in network infrastructure
and supply new customers, preferring to serve a limited range of customers. This limited range of
customers may provide a secure stream of profits, and requires less additional capital.
➢ Refusal to Deal – Refusal by a telecommunications operator to deal with a competitor is not always
anti-competitive. Refusal by a dominant operator to do so may be anti-competitive, where the effect is
injurious to competition. The most common example involves refusal by an incumbent operator to
provide essential facilities, such as local loops required by competitors to compete (see discussion in
this Module and in Module 3). However, other forms of anti-competitive refusal to deal occur in
telecommunications markets.
➢ Unjust Discrimination – A dominant firm may discriminate unjustly or unfairly between customers, or
between competitors (including itself). Discrimination may involve prices or other conditions of
service. Regulators have traditionally prohibited such discrimination where it is exploitative,
exclusionary of competition or otherwise harms competition or consumer welfare. Regulators
generally do not prohibit all forms of discrimination, particularly those that have no harmful effects.
Rules on which forms of discrimination are “unjust” vary from country to country.
➢ Abuses Involving Intellectual Property – Anti-competitive abuses of dominance may occur, for
example in exclusionary IP licensing arrangements, and in attempts to monopolize adjacent markets.

“Vertical agreements” are agreements between difficult new market. Exclusive arrangements can
upstream and downstream participants in the same also be used to maintain high levels of customer
or related markets. These agreements can exclude support.
or restrict competition or harm consumer welfare.
Problematic vertical agreements include some Box 5-16 deals with three types of problematic
agreements that fix retail prices or grant exclusive agreements found in telecommunications and other
distribution rights in a given geographic market. industries: price-fixing, bid-rigging and market
allocation agreements. The first two are generally
Only horizontal or vertical agreements that have horizontal agreements. Market allocation
anti-competitive effects should be prohibited. There agreements can be horizontal or vertical.
are many useful forms of horizontal agreements.
These include some agreements to adopt common Other types of agreements can have anti-
standards, or other product specifications or design competitive effects, depending on the circum-
features. Such industry standardization may result in stances. Some are subject to legal prohibitions and
greater production efficiency. It can also promote remedies in different countries. Remedies and sanc-
competitive entry by establishing an “open” market tions for restrictive agreements are generally similar
with increased product interoperability. to those for abuse of dominance. They can include
fines, awards of damages or other compensation,
Certain vertical agreements can also benefit the orders rescinding agreements and other corrective
public, such as exclusive marketing agreements that orders.
induce a distributor to invest in the development of a

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 Module 5 – Competition Policy

Box 5-16: Examples of Restrictive Agreements

➢ Price Fixing price fixing agreements among competitors are designed to manipulate pricing. The
simplest example is an agreement on the prices to be charged to consumers. Variations include
agreements to jointly implement price increases, resist price decreases, establish a formula to
generate uniform prices, or remove lower price products from the market in order to shift demand to
higher price products.
➢ Bid-rigging - is collusion among bidders in order to determine who will win or what the winning price
or conditions will be. Various forms of bid-rigging can occur. Some bidders may agree not to submit a
bid in response to a particular tender. They may agree to submit tenders at higher prices or
incorporate conditions that are deliberately inferior. Another variation involves competitors agreeing to
take turns as to which of them is to succeed in a particular tender, a practice often referred to as “bid
rotation”. This can inflate prices for all bidders.
➢ Market Allocation – can be implemented by horizontal or vertical agreements. Market allocation
reduces competitive entry. In horizontal agreements, competitors allocate geographic or product
markets amongst themselves. They will agree not to compete in each other’s markets. Such
agreements are anti-competitive, and should almost always be prohibited. In vertical market
allocation agreements, it may be acceptable to support a period of territorial exclusivity. This may be
required to induce investment to develop a market properly. Competition from suppliers of substitute
products or services may also reduce the anti-competitive impact of such agreements.

Evidence of Anti-competitive Effect A different approach is taken in Canada. There, only

agreements among competitors that lessen compe-
Legal and regulatory approaches to restrictive tition “unduly” are prohibited. Accordingly, in
agreements vary. In some countries, some forms of Canada, it is necessary to prove: (1) the existence of
restrictive agreements are prohibited outright. In a prohibited agreement; and (2) that the agreement
other jurisdictions, prohibitions incorporate a lessens competition unduly. This additional require-
reasonableness test. ment is a major reason why there have been few
successful prosecutions in Canada for agreements
In the US, for example, collusive arrangements that would be recognized as anti-competitive in other
among competitors, such as price-fixing and market jurisdictions.
allocation, are illegal regardless of whether the
agreed restrictions are considered reasonable or 5.4 Mergers, Acquisitions and Other

Competition Policy
Competition Policy
not. Participants to a restrictive agreement can be Corporate Combinations
punished if it is proven that: (1) such an agreement
exists, and (2) it could have anti-competitive conse-
5.4.1 Concerns About Mergers
quences.
The review and approval of mergers, acquisitions
Similarly, Article 81 (formerly Article 85) of the EC
and other corporate combinations (all referred to as
Treaty prohibits all agreements between undertak-
“mergers” for convenience here) is normally
ings “which may affect trade between Member
entrusted to competition authorities or other
States and which have as their object or effect the
branches of government rather than to telecommu-
prevention, restriction or distortion of competition
nications regulators. However, there has been a
within the common market”. Article 81 specifically
high level of merger and acquisition activity in the
prohibits price-fixing and production allocation
global telecommunications industry in recent years.
agreements which prevent, restrict or distort
Consequently, the analysis of mergers and
competition.
acquisitions can be expected to become a more

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Telecommunications Regulation Handbook

important part of competition policy in the telecom- particular market and another which is a potential
munications sector. competitor.

Many mergers will have little or no negative impact In the telecommunications industry, vertical mergers
on competition. Some mergers may be pro- can also be of concern. The merger of a firm that
competitive, for example, by enhancing production provides essential inputs to other firms can be
efficiencies resulting from economies of scale or problematic if the supply of those inputs to other
scope. Mergers may also create new synergies, firms is threatened. For example, the merger of a
lead to innovation by combining talents of different dominant local access provider with a major Internet
firms, and provide additional resources to develop Service Provider can raise concerns about whether
new products and services. other ISPs will obtain local access services on fair
and non-discriminatory terms. Such a merger might
Concerns about mergers, acquisitions and other be reviewed in order to ensure that adequate safe-
corporate combinations are generally based on the guards are in place to protect competing ISPs.
same concerns about anti-competitive behaviour as
discussed earlier in this Module. The main concern 5.4.2 Merger Analysis
is that a larger merged firm may increase its market
power. To the extent a merged firm becomes more Large mergers, acquisitions and some other
dominant in a market, there is a greater potential to corporate combinations require prior review and
abuse this dominance. Merger controls aim to approval in some jurisdictions. As part of their
prevent the accumulation and exercise of market review, competition authorities may prohibit mergers
power to the detriment of competitors and consum- or approve them subject to conditions. Mergers are
ers. usually only prohibited or subjected to conditions if
the authority concludes that the merger will substan-
The basic rationale for merger control is that it is tially harm competition. Given the discretion inherent
better to prevent firms from gaining excessive in the interpretation of this threshold, various
market power than to attempt to regulate abuses of competition authorities have published merger
their market power once such power exists. In guidelines. These are intended to assist firms and
practice, merger reviews and the exercise of related their advisers to anticipate the procedures and crite-
powers by competition authorities are usually based ria which will be applied in assessing a merger.
on an evaluation of the impact of a specific merger
on competition in the relevant markets. An example of such guidelines is contained in the
Horizontal Merger Guidelines published in 1997 by
Types of Mergers and Acquisitions the US Department of Justice and the Federal Trade
Commission. The Guidelines set out a five-stage
Mergers can be characterized according to three analysis of the following subject areas:
categories: horizontal mergers, which take place
between firms that are actual or potential competi- ➢ market definition;
tors occupying similar positions in the chain of
production; vertical mergers, which take place ➢ identification of firms participating in the relevant
between firms at different levels in the chain of market and their market shares;
production (such as between manufacturers and
retailers); and other mergers, such as those which ➢ identification of potential adverse effects of the
take place between unrelated businesses or merger;
conglomerates with different types of businesses.
➢ analysis of barriers to market entry; and
Merger reviews typically focus on horizontal mergers
since, by definition, they reduce the number of com- ➢ evaluation of any efficiencies arising from the
petitors in the relevant markets. Also of concern are merger.
mergers between a firm which is active in a

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 Module 5 – Competition Policy

The importance of market definition was discussed ity to quantify the positive and negative aspects of
in Section 5.2.1. In the context of a merger review, the transaction and arrive at any verifiable net effect.
market definition is often the key factor in determin- It may also prove difficult to determine how any effi-
ing whether a merger is anti-competitive. If a market ciency or other welfare gains will be distributed
is defined broadly, the merging firms may be between the producing firm and its customers.
considered to be competitors. A more narrow market Similarly difficult is the development of any means to
definition may result in a determination that the firms ensure redistribution of efficiency gains to broader
operate in different markets. On the other hand, a public advantage.
broad market definition could lead to a conclusion
that the merged entity will face sufficient competition In exceptional circumstances, a merger which would
from other firms in the market. A narrower definition have anti-competitive effects may be permitted
could lead to a conclusion that the merged entity where one of the merging entities is in severe
would have excessive market power in a smaller financial distress. The competition authority may be
market. persuaded that the public interest is better served by
a merger than by the failure of one of the merging
The second stage of the analysis is the identification entities. However, transactions of this sort should be
of firms competing in the relevant market and their carefully evaluated. Sometimes the merger is not the
market shares. The determination of market share best solution. For instance, it may be that another
will have a direct bearing on an assessment of firm could expand productive capacity using the
market power and the potential for abuse of market assets of the failing firm and that public welfare
power by the merged entity. The evaluation of would be better served by this alternative solution.
market participants includes not only firms which Bankruptcy is painful for shareholders, but does not
actually participate in the relevant market, but also always have a long-term negative effect on the
firms which could be expected to enter it. economy.

In assessing the potential adverse effects of a Information in Merger Reviews

proposed merger, attention will typically focus on the
establishment or increase of the dominant position As part of the merger review process, the merging
by the merged entity. There may also be concerns firms must normally provide information to the
that the merger, by reducing the number of firms reviewing authority. It is standard practice in jurisdic-
participating in a market, will create conditions which tions which impose merger review to require parties
make anti-competitive agreements among them to the merger to submit advance notice of the
more likely. proposed transaction. The information disclosed in
the pre-merger notification will normally be used by
The evaluation of barriers to entry is an important a competition authority in the first stage of merger
aspect of merger review. A finding that there are low review (i.e., to determine if any anti-competitive
barriers to entry can help justify a merger. concerns are present and whether to proceed with a

Competition Policy
Competition Policy
more detailed review of the proposed transaction).
Finally, the five-stage analysis concludes with an
assessment of any efficiencies to be realized as a The contents of pre-merger notifications are
result of the merger. In this stage, the objective is to generally defined by law or regulation. Required in-
assess efficiency or other welfare gains which can formation typically includes:
be projected to result from the merger. These will be
balanced against any anti-competitive effects which ➢ the identity of the firms involved in the proposed
have been identified in the earlier stages of the transaction;
review.
➢ a description of the nature and commercial
Theoretically, substantial efficiency gains or other terms of the transaction;
public welfare gains could support approval of a
merger even where anti-competitive risks are identi- ➢ the timing of the transaction;
fied. In practice, it is difficult for a competition author-

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Telecommunications Regulation Handbook

➢ financial information on the firms involved The quality of a merger review will depend heavily
(including revenue, assets and copies of annual on the quality and range of information available to
or other financial reports); the reviewing authority.

➢ identification of related ownership interests and 5.4.3 Merger Remedies

the organizational structure of the firms involved,
and The goal of merger control laws is to prevent or
remove anti-competitive effects of mergers. Three
➢ a description of the relevant product and service types of remedies are typically used to achieve this
markets in which the firms operate. goal:

The initial information filing typically triggers a ➢ Prohibition or Dissolution - The first remedy
waiting period, during which the reviewing authority involves preventing the merger in its entirety, or
will be entitled to request further information. This if the merger has been previously
process concludes with a determination by the consummated, requiring dissolution of the
reviewing authority whether to proceed with a more merged entity.
detailed investigation.
➢ Partial Divestiture – A second remedy is partial
If the competition authority decides to proceed with a divestiture. The merged firm might be required
further investigation, it will obtain more information to divest assets or operations sufficient to elimi-
from the merger participants. Additional information nate identified anti-competitive effects, with
is usually gathered from third parties such as com- permission to proceed with the merger in other
petitors and customers. Commercially sensitive respects.
information is also generally protected from public
disclosure. ➢ Regulation/Conditional Approval - A third
remedy is regulation or modification of the
During a more detailed review, a competition behaviour of the merged firm in order to prevent
authority will normally seek information about or reduce anti-competitive effects. This can be
matters such as the following: achieved through a variety of one-time condi-
tions and on-going requirements.
➢ products, customers, suppliers, market shares,
financial performance; The first two remedies are structural, and the third
remedy is behavioural. Behavioural remedies
➢ activity of competitors and competitors’ market require ongoing regulatory oversight and interven-
shares; tion. Structural remedies are often more likely to be
effective in the long run and require less ongoing
➢ availability of substitute products; government intervention.

➢ influence of potential competition (including Partial divestiture or behavioural constraints are less
foreign competition); intrusive in the operation of markets than preventing
a merger from proceeding or requiring dissolution of
➢ pace of technological or other change in the a previously completed merger. Partial divestiture
relevant markets, and its impact on competition; can reduce or eliminate anti-competitive effects
and while preserving some of the commercial
advantages of a merger. Partial divestiture is
➢ nature and degree of regulation in the relevant emerging as a preferred remedy in many jurisdic-
markets. tions. Although it has since been abandoned, the
proposed Telia/Telenor merger, which is described
in Box 5-17 provides a good illustration of the use of
this remedy.

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 Module 5 – Competition Policy

Box 5-17: Case Study - The Telia / Telenor Merger

On 13 October 1999, the European Commission approved the merger of Swedish telecommunications
operator, Telia AB and Norwegian operator, Telenor AS into a new company to be jointly controlled by the
Swedish and the Norwegian governments.
On its initial review, the Commission identified a number of concerns due to the breadth of operations and
market presence of Telia and Telenor, in their respective domestic markets. In addition, the Commission
expressed concern with certain overlapping interests, such as the interest of each operator in competing
mobile companies in Ireland. In addition, a significant concern was raised about Telia and Telenor’s
ownership of cable TV networks in each of their domestic markets.
To secure Commission approval of the proposed merger, Telia and Telenor volunteered the following
commitments:
➢ each of Telia and Telenor would divest its cable television operations;
➢ each company would divest overlapping operations in the Swedish and Norwegian markets;
➢ one of Telia or Telenor would divest its Irish mobile telephone interests; and
➢ each of Telia and Telenor would implement local loop unbundling in its domestic market to facilitate
the development of local competition.
The divestiture of cable assets is consistent with the Commission’s Cable Ownership Directive. The commit-
ments made to secure Commission approval for the merger represent a mix of structural and behavioural
remedies to address identified anti-competitive effects. The commitments to divest operations are structural
remedies. The commitment to implement local loop unbundling is a behavioural remedy requiring ongoing
regulatory oversight.
Note: Although the merger was conditionally approved, it was later abandoned due to inability to agree on
certain implementation matters.

We will now move to behavioural remedies. Some the prevention of anti-competitive pricing practices
proposed mergers raise concerns about the poten- by the merged entity.
tial for ongoing anti-competitive behaviour by the
merged firm. Remedial orders issued in response to A merger may impact existing regulatory treatment
these concerns are generally similar to the remedies of one or more of the merged firms in a number of
for abuse of dominance discussed earlier in this ways. For example, if a merger significantly

Competition Policy
Competition Policy
Module. Box 5-18 describes the US FCC’s decisions increases a firm’s market share or market power, the
in recent Bell Operating Company mergers in the regulator may review earlier decisions to forbear
US. It illustrates the types of behavioural remedies from regulation. Similarly, it may review an earlier
that may be imposed in telecommunications industry determination that an entity involved in the merger
mergers. These orders are likely to focus on the was not dominant in its market, and was thus enti-
supply of products or services to competitors and tled to a lighter degree of regulation.

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Telecommunications Regulation Handbook

Box 5-18: Case Study - FCC Review of Bell Atlantic/Nynex and SBC/Ameritech Mergers

The Bell Atlantic/Nynex Merger

On 14 August 1997, the FCC approved the merger of Nynex Corporation into Bell Atlantic Corporation.
The FCC’s review was conducted pursuant to sections of the Communications Act of 1934, which requires
FCC approval for transfers of operating licences and other authorizations. These sections required a
demonstration that the merger is in the public interest. Accordingly, the parties to a proposed merger have
the onus of proving that the transaction will enhance competition or that it will otherwise be in the public
interest. The merger was also subject to approval of the US Department of Justice (DOJ).
In this and other merger reviews, the FCC applied the 1997 DOJ/FTC Horizontal Merger Guidelines. The
FCC also evaluated the proposed merger on the assumption that the market opening initiatives introduced
by the Telecommunications Act of 1996 had been implemented. Applying this framework, the FCC
concluded that the merger would have significant anti-competitive effects.
The first concern was that the merger would remove Bell Atlantic as a potential Nynex competitor in the
New York market. The second concern was that continuing Bell Operating Company consolidation
increased the likelihood of co-ordinated action among the remaining market participants.
The FCC reviewed claims of merger-related efficiencies put forward by the parties (including cost savings,
accelerated broadband deployment and service quality improvements), and concluded that these fell far
short of overcoming anti-competitive effects and of demonstrating a net public benefit. The FCC concluded
that substantial barriers to entry would remain and that, without the benefit of additional measures, market
entry could not be relied upon to constrain the exercise of market power.
Ultimately, the FCC decided to approve the proposed merger based on the following market opening
commitments volunteered by Bell Atlantic. These commitments were to be made enforceable conditions for
approval of the merger:
➢ the provision of detailed performance monitoring reports to competitors and regulators regarding
performance of Bell Atlantic’s networks and operational support systems (OSS);
➢ negotiated performance standards and enforcement mechanisms covering all major aspects of OSS
operation and network performance;
➢ development and implementation of uniform OSS interfaces for the combined Bell Atlantic / Nynex
region;
➢ operator-to-operator OSS testing in response to competitor requests, with a further obligation of
providing evidence to the FCC that OSS functions could meet demand for resold services and
unbundled network elements;
➢ offering interconnection, unbundled network elements and transport and termination services at
rates based on forward-looking economic cost;
➢ offering unbundled switching and shared transport services priced on a per minute of use basis,
routed in the same manner as Bell Atlantic’s phone traffic and without the imposition of access
charges; and
➢ optional payment plans permitting new entrants to pay recurring charges for what would otherwise
be non-recurring charges, an installment payment plan for co-location and other large non-recurring
charges and alternative payment mechanisms for common construction costs and competitor-
specific construction and equipment costs (with cost apportionment consistent with earlier FCC
orders).
These conditions were subject to a sunset limitation. They were due to expire 48 months following the
release of the merger approval order.

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Box 5-18: Case Study - FCC Review of Bell Atlantic/Nynex and SBC/Ameritech Mergers (cont’d)

The SBC / Ameritech Merger

On 6 October 1999, the FCC approved the merger of Ameritech Corp. into SBC Communications Inc. FCC
approval was required and proceeded under the same statutory framework as the Nynex / Bell Atlantic
merger. As a result of the merger, SBC will control three of the original seven Regional Bell Operating
Companies (Southwestern Bell Telephone, Pacific Telesis and Ameritech). Perhaps because of this
greater degree of consolidation, the FCC appears to have required a more onerous set of conditions in
order to approve the merger.
In its review, the FCC was primarily concerned about the effects of the merger in removing a significant
potential competitor from each of the participating firms’ local markets. Concerns were also expressed
about impeding the implementation of the market-opening requirements of the Telecommunications Act of
1996. Again, the FCC concluded that claimed efficiencies and other merger benefits were insufficient to
overcome the identified anti-competitive effects.
Both the DOJ and FCC reviews of the SBC / Ameritech merger concluded that the merged entity would
have to divest itself of cellular telephone licences in identified service markets (14 in all). This would
eliminate overlapping operations by the two merged firms in those markets. The FCC concluded that the
transfer of Ameritech’s international authorizations to SBC would be approved subject to the SBC
subsidiaries being classified as dominant international operators on US-South Africa and US-Denmark
routes.
The most striking aspect of the FCC Decision is the range of conditions to be imposed on the merged
entity. The conditions (30 in all) include:
➢ establishing a separate affiliate for the deployment of advanced services (which must obtain facilities
and services from SBC companies on the same terms as competitors and be subject to a
“comprehensive” annual audit);
➢ enhanced OSS loop information and loop conditioning to facilitate competition in advance services;
➢ enhanced OSS and performance measurement data to improve and monitor interconnection and
other competitor provisioning (with identified “incentive payments” to be made by SBC if
performance measures are not met);
➢ interconnection agreements to be made available on a multiple state and “most-favoured-nation”
basis;
➢ identified operator-to-operator “promotions”, including a loop discount of 25% off the otherwise
lowest monthly loop charge (subject to “state-specific quantity limits”);
➢

Competition Policy
Competition Policy
a commitment to enter at least 30 out of territory, major markets as a facilities-based competitive
local service provider (to business and residential customers) within 30 months of the merger closing
(and subject to an “incentive payment” of up to $1.2 billion U.S if the entry requirements are not met
in all 30 markets); and
➢ a number of residential service enhancements, including “life line plans” for low-income subscribers
and additional quality of service and network reliability reporting requirements.
These conditions are of limited duration. SBC undertook that each of the conditions would remain in effect
for a period of 36 months from first implementation.

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Telecommunications Regulation Handbook

5.4.4 Joint Ventures competition or result in the exercise of market power

to the detriment of competitors or consumers. Joint
In some cases, telecommunications competitors ventures can become vehicles for anti-competitive
may enter into joint ventures. The competition collusion between firms that would otherwise be
analysis of joint ventures generally raises similar competitors. Such ventures can also result in the
issues to those discussed under the title Restrictive creation or reinforcement of a dominant position.
Agreements earlier in this Module. The process and
information requirements for review of a joint venture Box 5-19 illustrates some of the considerations
will resemble those discussed earlier under the title taken into account in a large-scale telecommunica-
Merger Analysis and Remedies. tions joint venture recently reviewed by the
European Commission.
Questions will be raised about whether a joint
venture will bring about a significant reduction in

Box 5-19: Case Study - The BT/AT&T Joint Venture

On 30 March 1999, the European Commission approved the creation of a joint venture between British
Telecommunications plc and AT&T Corp. to create a global telecommunications services company. The
final decision marked the conclusion of an in-depth inquiry commenced in December 1998. This inquiry was
prompted by concerns that:
➢ The joint venture would create or reinforce a dominant position in the supply of international
telecommunications services to large corporations and other telecommunications operators;
➢ the joint venture would create or reinforce a dominant position for certain telecommunications
services in the U.K.; and
➢ the joint venture would result in anti-competitive co-ordination in the U.K. market given AT&T’s
ownership interests in competitors to BT (ACC and Telewest).
The joint venture was assessed with a view to determine whether it would create or strengthen a dominant
position and significantly impede competition contrary to Article 2 of the European Community Merger
Regulation and Article 85 (now 81) of the EC Treaty.
The Commission concluded that the presence of substantial competition in the international services
markets, as well as “plentiful additional capacity” supported the conclusion that the joint venture did not
create or strengthen a dominant position. Although the Commission found that AT&T and BT had about half
the traffic volume on the U.K./US route, it also found that the parties controlled only about 20% of capacity
with planned additional capacity and falling prices for new capacity supporting competitive entry.
However, the Commission expressed a number of “co-ordination concerns” regarding U.K. markets. These
included concerns about AT&T’s interests in BT competitors ACC and Telewest (the former a competitive
long distance telephone services provider, the latter a major operator of telephony enabled cable TV
systems). The Commission was also concerned about the distribution of AT&T /Unisource international
telecommunications services in the U.K. To overcome these concerns, AT&T volunteered undertakings to:
➢ divest its interests in ACC U.K.,
➢ reinforce the structural separation between AT&T and its Telewest holdings, and
➢ facilitate the appointment of another Unisource services distributor in the U.K. (since the existing U.K.
distributor, AT&T U.K., would be wound up).
The Commission granted approval for the joint venture subject to compliance with these undertakings.

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