Session 12: Conducting a
market review toolkit
Training on Competition and Changing Market
Conditions: Impact on ICT Regulation
Addis Ababa, 6th – 9th November, 2007
By
Dr Chris Doyle
chris.doyle@cdoyle.com
www.cdoyle.com
Warwick Business School &
Consultant World Bank
1
Assessing relevant markets
„
Step 1
„
Identify functional
characteristics of products
and services offered in the
communications sector
Step 2
Describe the functions
provided by the service
(e.g. local voice telephony
to and from a fixed location)
2
Assessing relevant markets
„
Step 2
„
Identify retail and wholesale
products
Retail products are sold to end
users directly by service
providers
Step 3
Wholesale products are sold
by network and service
operators to other network
and service operators
3
Assessing relevant markets
„
Step 3
„
For each identified product
apply the hypothetical
monopolist test (HMT)
The HMT supposes that a
monopoly provides the
product in question
„
Step 3 continued
„
For each identified product
apply the HMT in a
geographic region where
conditions are similar
Conditions are similar where
price offers are broadly the
same
Can this hypothetical
monopolist profitably increase
price by 5-10%?
4
Assessing relevant markets
Step 4
5
Assessing relevant markets
„
Step 4
„
To perform the HMT evidence
on the market will be helpful
Step 5
Collect data about the market
– demand and supply-side
conditions should be assessed
6
Assessing relevant markets
„
Step 5
„
Applying the HMT (i)
„
Step 5 continued
„
Applying the HMT (ii)
Start by looking at the
demand-side of the market
Use competitive prices in
HMT
Would an hypothetical
monopolist be constrained by
providers of similar products?
If prices are regulated,
assume that they are
equivalent to competitive
prices
7
Assessing relevant markets
„
Step 5 continued
„
Applying the HMT (iii)
Apply a 10% price increase
Using information and data
assembled on demand
determine to what extent
demand would fall following
such a price increase
„
Step 5 continued
„
Applying the HMT (iv)
If demand falls significantly
(elasticity is high), the firm
would not be able to make
profitable increase in price
Demand falls significantly
where there are products
offering very similar functional
characteristics and their prices
are similar
8
Example of Step 5
„
„
„
„
We commence with a product defined as domestic
voice telephony services provided to and from a fixed
location to residential users
If this product is offered by a monopolist (in reality it
is offered by competing fixed and wireless local loop
operators), could it profitably increase price 5-10%?
A close substitute is mobile voice telephony services
provided to residential users
Test whether mobile services would constrain the
hypothetical monopolist – this depends on how
willing end users are to substitute fixed with mobile
9
Assessing relevant markets
„
Step 6
„
If the HMT shows that the
monopolist cannot succeed in
sustaining higher profits from
a price change, widen the
market to include the products
which constrain the firm
Step 7
Example, fixed services may
be constrained by mobile –
market may need to include
both
10
Assessing relevant markets
„
Step 7
„
When the hypothetical
monopolist can succeed in
sustaining higher profits from
a price increase, this will
determine the candidate
relevant market
Step 8
It is a candidate relevant
market because we have not
finished applying the test, go
to step 8
11
Assessing relevant markets
„
Step 8
„
For a candidate relevant
market assess whether a firm
supplying similar products
may easily switch production
and compete with the
monopolist
Step 9
If supply-side substitution is
possible, this negates the
power of the monopolist
12
Assessing relevant markets
„
Step 9
„
At the point where both
demand and supplysubstitution does not constrain
the hypothetical monopolist
this defines the market
boundaries
Step 10
End HMT, relevant market
identified
13
The relevant market and ex
ante regulation
„
Step 10
„
In the relevant market assess:
(i) Entry barriers
Step 11
If legal and/or structural
barriers to entry exist, move
to next step
If legal and/or structural
barriers to entry do not exist –
market does not require ex
ante regulation
14
The relevant market and ex
ante regulation
„
Step 11
„
In the relevant market assess:
(ii) Dynamic effects
Step 12
If innovation is limited, move
to next step
If innovation is likely to
present opportunities for new
entry – market does not
require ex ante regulation
15
The relevant market and ex
ante regulation
„
Step 12
„
In the relevant market assess:
(iii) whether competition law
would be sufficient to deal
with market failings
Step 13
If there is no competition law
OR if the law is regarded as
an inadequate instrument to
protect end users, the
relevant market should be
subject to ex ante regulation
16
Relevant market, ex ante
regulation and market analysis
„
Step 13
„
Start analysis of relevant
market:
Examine structural
characteristics of market
Step 14
Examine recent conduct of
firms in market
Requires empirical analysis
and application of economic
reasoning
17
Relevant market, ex ante
regulation and market analysis
„
Step 14
„
Determine on the basis of the
evidence appraised whether
there is effective competition
in the market
Step 15
If the market is effectively
competitive, no need for the
regulatory intervention
If the market is not effectively
competitive, determine source
of market failure (those
operators who are dominant)
18
Relevant market, ex ante
regulation and market analysis
„
Step 15
„
For those operators
designated as dominant,
determine the least
burdensome set of remedies
that would solve the identified
problem(s)
„
Step 15 continued
„
Typical list of remedies
„
„
„
„
„
„
„
Transparency
Non-discrimination
Accounting separation
Access to facilities
Price controls and cost
accounting obligations
Functional separation
Structural separation
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End Session 12
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