Basic Concepts of Competition Policy

Market Definition

The definition of a market is a key issue in competition policy and analysis. It is necessary to define a relevant market in order to establish whether a firm has a dominant position in that market. Similarly, in analysing whether a restrictive agreement among firms has an appreciable effect on reducing competition in a market, it is necessary to define the relevant market and then to evaluate the impact of the agreement in that market. Market definition is an initial step in competition analysis. It provides the context in which to evaluate the level of competition and the impact of anti-competitive conduct.

There are two aspects to the definition of a market, the product (including a service), and the geographic area in which the product is sold. In defining the product, close substitutes are normally included. The analysis of substitutability is generally conducted from the demand side, which is from the prospective buyers of the product.

For example, the definition of the market for international telephone service in a country could include IP Telephony services that are available through the public service telephone network (PSTN), by dialling a specific access number or code. However, the definition would generally exclude "computer-to-computer" IP Telephony services that require special software, computers at both ends of a call, and pre-arranged calling times, etc. To the average buyer of international telephone services, such "computer to computer" services would not be a close substitute for international telephone service.

The Product Market

A widely accepted approach to market definition begins with the assumption that there is a monopolist in the relevant product market. The question is then asked: could the hypothetical monopolist raise the price of the product by a small but significant amount and for a non-transitory period? If a sufficient number of buyers would switch to other products so as to make the price increase unprofitable for the monopolist, those substitutes would be included in a new definition of the market. This analysis will be repeated until the boundaries are set so that substitution does not make the price increase an unprofitable strategy.

The Geographic Market

The second dimension is the definition of the geographic scope of the market. In defining the geographic boundaries of a product market, the aim is to identify the extent to which the proximity of rival suppliers can impose competitive constraints on the hypothetical monopolist or actual market participant. Again, the definition of the geographic scope of the market is based on an assessment of substitutability in response to product price changes.

Geographic areas are more important in defining some telecommunications markets than others. For example, the market for local access in Mumbai is not affected by the degree of competition in the Johannesburg local access market. These are clearly separate markets. However, geography is increasingly less important in defining the level of competition in markets for Internet Services Providers (ISPs), E-mail providers or even international long distance services. The markets for these products are rapidly becoming global markets. Consider the substitution test described earlier in this section. It would be difficult, if not impossible, for an E-mail service provider in Mumbai to raise the price of its E-mail service if customers in Mumbai have local access to substitute E-mail Service Providers (e.g. Hotmail) that are based in other geographical areas.

Having said that, the definition of product and geographic markets remains very relevant for the services that remain most subject to market dominance, particularly local and national long distance services.

Barriers to Entry

The evaluation of competitive markets and market behaviour often focuses on the extent to which one or more firms can introduce and sustain price increases. If it is easy for a new supplier to enter a market and provide a substitute product, then established suppliers will be reluctant to implement significant long-term price increases. Such price increases would invite market entry, which will increase competition.

The existence of barriers to market entry will limit this competitive response. There are many types of barriers to entry in different markets. Among the most commonly recognised barriers are:

• Government restrictions such as monopoly franchises or restrictive licensing practices

• Economies of Scale (i.e., where per unit production costs fall as output increases, a large established supplier can produce at a lower per unit cost than new entrants)

• High fixed/capital costs

• Intellectual property rights such as copyright and patent protection (which may affect the availability to a competing supplier of key inputs or outputs)

Multiple barriers to entry may exist in a single telecommunications market. For example, local networks are typically regarded as being characterised by economies of scale. The establishment of a local facilities-based network also requires a large investment in fixed costs. Local telecommunications operators often require government licenses, which may be granted on an exclusive or otherwise restrictive basis. Entry into wireless local networks is also restricted by spectrum scarcity. Certain local telecommunications services may operate on network platforms, which have patent or copyright protection (complicating or preventing the launch of a competing service).

In addition to these barriers to entry, it is also possible for a dominant firm to engage in conduct that establishes additional barriers to entry. Refusal to supply essential facilities and refusal to interconnect networks are two classic examples of anti-competitive conduct that an incumbent operator may engage in to discourage or prevent new entry.