3.2 Competition

Once the authorization process is underway the role of the regulator is to ensure non-discriminatory treatment of all players in the liberalized market. The UN Task Force on Financing ICT has advocated equitable treatment of market players as an essential means towards liberalization by stating: “The explosion of ICT sector investment in most developing countries correlates closely with an improved environment for private investment to take place and the transformation of formerly closed, monopoly ICT markets to allow competitive entry. Where Governments have actively pursued an open, equitable market environment, investors have generally welcomed the opportunity to compete.” [1]

However, at the outset of the liberalization process, the market is unbalanced with the incumbent clearly the dominant, vertically integrated player. It is likely that the tariff structure of the incumbent is unbalanced, where prices charged do not reflect the underlying costs of service provision so that some cross-subsidies are in operation. Market distortions can wrongly discourage or encourage new entrants.  For instance, on the one hand, cross-subsidies can artificially decrease the incumbent’s costs and allow the incumbent to under cut the newcomer’s prices, which leads to under-investment by new entrants.  On the other hand, excessively priced international calls, for example, can lead to over-investment by newcomers.

There are numerous ways in which the incumbent can further distort competition (see Module 2 and Module 6) unless the regulatory authorities take action. These include:

• Failure to deal with the requests of competitors for network interconnection in a timely or serious manner (typical responses are:  “it is not technically possible,” “it will take a very long time,” and “it will be very expensive”);
• Charging its retail arm lower fees than those paid by competitors;
• Reducing retail tariffs to a level where new entrants cannot survive;
• Making the sale of one product (to customers or competitors) conditional upon the purchase of a second product;
• Offering discounts to customers who take a combination of products/services;
• Entering agreements with distributors that preclude them from offering the products/services of competitors; and 
• Providing low-quality products/services to competitors.

These activities are known as price/margin squeeze, predatory pricing, tying, bundling and exclusive arrangements.  Although some of these practices, particularly tying, bundling and exclusive deals, often produce pro-competitive and pro-consumer benefits, these activities may be proscribed in individual authorizations or may be prohibited under the application of ex post competition law. In some cases, the competition agency is responsible for the application of competition law.  In other cases, the sector-specific regulator has the authority or assumes the powers of the competition agency.

Generally, the focus of ICT regulation is on “essential facilities.”  New entrants are certain to require some inputs from the incumbent. Some of these inputs cannot be replicated economically or technologically by new entrants and no substitute can be found for them. These are “essential facilities” for new entrants and the “last mile” and interconnection disputes flow from this characteristic. Many of the above activities are prohibited by law or addressed in detailed ex ante licenses. There is a large body of analyses, case law and remedies concerning anti-competitive behavior provided in the Toolkit that reflects various jurisdictions.

Regulators also need to promote the interests of consumers since the incumbent can set tariffs above costs where it holds a dominant position (e.g., line rental, local calls, and to some extent national calls) since new entrants initially target the international segment. Baskets, sub-basket and associated price caps have been constructed and linked to rates of inflation [2] (i.e., Retail Price Index(RPI)/Consumer Price Index (CPI) minus some “X factor”) to take account of expected efficiency gains. The impact of these price caps is largely felt by new entrants who can rarely set prices above those of the incumbent. Increasingly sophisticated costing models, such as forward-looking or incremental, with significant information requirements have been developed to improve tariff-setting efficiency. Regulatory tariff setting is much less common in competitive mobile markets, especially where three or more operators have been authorized.

The growing availability of the Internet and broadband are changing the tariff landscape with customers frequently paying for access and not usage. For a flat fee, customers can obtain a broad range of services such as Caller ID, conference calling, and call forwarding, plus unlimited national calls and/or free calls to on-net customers, as well as reduced prices for international calls. These practices are both a challenge to the previous principles of tariff setting and to the business models of incumbents.

Poorer consumers, such as those in South and Southeast Asia, have taken advantage of competition in the broadband market through the rise of prepaid mobile broadband access.[3]  Originally emerging in the budget voice telephony market, prepaid cards are now expanding to mobile broadband access and compete with the “always on” broadband access model.  The prepaid mobile broadband market allows poorer consumers, whose incomes are often irregular, to purchase broadband access according to their needs or ability to afford broadband.  A necessary condition of this development is the removal or reduction of barriers to entry in the mobile broadband market and protection of competition. 

Ultimately, competition leads to the erosion of the dominant positions of incumbents. In these circumstances emphasis shifts from ex ante sector specific to ex post competition law-based regulation. Simple market share thresholds (e.g., 35 percent) in broadly defined markets have typically been used as a means of identifying a dominant position.  However, competition policy has developed and become more sophisticated. In today’s ex post regulation, the first step is the “definition of the relevant market.”[4] Where the identified market is considered sufficiently competitive, sector-specific regulation has been lifted. For definitional purposes, markets can be analyzed according to product, geographic location, type of customer, retail, wholesale and time. Market definitions that are too narrow or too broad will fail to accurately identify dominant positions. Certain products in the market display clear signs of dominance, such as call termination on networks and thereby interconnection. For definitional purposes, markets must be analyzed from the point of view of buyers and sellers, particularly in regard to whether a product is a substitute for the one under analysis. Additionally, the presence or absence of barriers to entry (such as essential facilities) is central to defining markets. Once again, there is a substantial body of analyses, methodologies, and ex post competition case law reflecting the experience in different jurisdictions in the Toolkit.

The success of competition and private investment is demonstrated in mobile penetration rates in various countries around the world before and after the introduction of competition in the mobile market, as illustrated in the following Figure 1.[5]

Note: Year 0 in the figure indicates the year of entry of a second mobile operator.

Source: ITU, World Telecommunication/ICT Indicators Database

As the above figure shows, the number of mobile subscribers was relatively stagnant until the entrance of a second mobile operator, at which point the number of mobile phone subscribers typically skyrocketed. In Tunisia, for example, fewer than five percent of the population had mobile phones prior to the introduction of competition in 2001.  By 2005, the mobile penetration rate jumped to more than 57 out of 100 people and reached a penetration rate of 84.6 per cent by end of 2008.[6]    

ENDNOTES

[1] ITU, World Summit on Information Society, The Report of the Task Force on Financial Mechanisms for ICT for Development at http://www.itu.int/wsis/tffm/final-report.pdf.

[2] The X-factor in the price cap formula is an efficiency target chosen to reflect the productivity growth potential of the regulated firm over the (forwards-looking) term of the price cap. See Toolkit Module 2, Section 5.11.3.

[3] OECD, Rohan Samarajiva, How the Developing World May Participate in the Global Internet Economy: Innovation Driven by Competition at http://www.oecd.org/dataoecd/43/30/43603296.pdf.

[4] European Commission, Martin Cave, Ulrich Stumpf and Tommaso Valletti, A Review of Certain Markets Included in the Commission’s Recommendation on Relevant Markets Subject to Ex Ante Regulation (2006) at http://ec.europa.eu/information_society/policy/ecomm/doc/info_centre/studies_ext_consult/review_experts/review_regulation.pdf.

[5] World Bank, David A. Cieslikowski, Naomi J. Halewood, Kaoru Kimura and Christine Zhen-Wei Qiang, Key Trends in ICT Development at http://siteresources.worldbank.org/EXTIC4D/Resources/5870635-1242066347456/IC4D_2009_Key_Trends_in_ICT_Deelopment.pdf.