Remedies for Anti-Competitive Conduct

Abuse of Dominance

The concept of abuse of dominance includes a broad range of anti-competitive conduct recognised in the laws and policies of many countries. It is similar to, but broader than the concept of "monopolisation" that is found in some laws.

While there are different definitions of abuse of dominance, there are common themes in the definitions. The essential characteristics of abuse of dominance include:

• A firm has a dominance market position in the relevant market; and
  
• The firm uses that position to engage in "abusive" conduct which is or likely to be harmful to competition.

When Does a Firm Dominate a Market?

The concepts of market power and dominance are discussed earlier in this Module. The first step in evaluating whether a firm dominates a market involves the definition of the relevant market in which the possible abuse occurs. As discussed earlier, once the relevant product and geographic market must be considered. Then the degree of dominance exercised by the firm in the relevant market can be evaluated.

A narrow definition of the relevant market will generally suggests a higher market share for a particular firm, and an appearance of greater dominance. Conversely, a broad definition of the market will suggest lower market shares and less dominance. The definition of the relevant market will, therefore, often be critical to an assessment of market dominance.

Once the relevant market has been defined, the evaluation of whether a firm occupies a dominant position will typically depend on two main factors:

• the market share of the particular firm
  
• the extent of barriers to market.

When is a Firm Abusing its Dominant Position?

If it is determined that a firm has a dominant position in a relevant market, the next question is: is the firm abusing this position? IN telecommunications markets, abuse of dominance can occur in many ways

Box 1- 6:
Abuse of Dominance by a Telecommunications Operator:
Common Examples

Different approaches are used to define conduct that amounts to an abuse of dominance. These approaches all focus on conduct that is harmful to competition in a market.

Abusive conduct is sometimes divided into “exploitative abuses" and "exclusionary abuses". Conduct such as charging excessive prices or offering poor service to subscribers can be characterised as exploitative abuses. This type of conduct exploits the dominant position a firm enjoys in a market and reduces consumer welfare. Predatory pricing or refusal to supply essential facilities, on the other hand, can be characterised as exclusionary abuses. These forms of conduct are aimed at foreclosing market entry or forcing exit. Other approaches to classifying abuses of dominance exist in various laws as well as in the legal and economic literature.

The main types of abuse of dominance encountered in the telecommunications industry are discussed in greater detail below. They include refusal to supply essential facilities, anti-competitive cross-subsidisation, vertical price squeezing, predatory pricing, tied sales and bundling.

Legal Prohibitions Against Abusive of Dominance

National and international laws and treaties include prohibitions against abuse of dominance. Some prohibitions are broad and general; others more specific.

A good example of a broad prohibition against abuse of dominance is found in Article 82 of the EC Treaty (formerly Article 86). It provides a general prohibition at the level of European Union law. Article 82 states that:

“Any abuse by one or more undertakings of a dominant position within the common market or any substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between member states.”

The broad prohibitions of the EC Treaty have been incorporated into the laws of members’ countries of the European Union. In addition to being bound by the requirements of the EC Treaty, public telecommunications operators in EC member countries are generally subject to additional and more specific national legal prohibitions against abuse of dominance.

Abuse of Dominance - Remedies

Different approaches are taken to prevent, correct or punish abuse of dominance. To properly investigate and remedy abuse of dominance complaints, a regulator or competition authority must have sufficient powers to conduct a proper investigation. At a minimum, investigative powers typically include the ability to compel the dominant entity to disclose information and documents.

If an investigation indicates that abusive conduct has occurred, an effective legal framework generally provides powers to remedy the situation. Examples of the types of powers that are granted to remedy abuse of dominance are set out in Box 1 -7. Some of these powers may be granted to a telecommunications regulator, some to a general competition authority, and some to the courts.

Box 1- 7:
Powers to Remedy Abuse of Dominance

The question of establishing an effective regulatory framework, including investigation and remedial powers, is discussed in the overview of Telecommunications Regulation. Specific remedies for different types of abuse of dominance and other forms of anti-competitive conduct are set out in the following sections.

Refusal to Supply Essential Facilities

The concept of "essential facilities" is introduced above, and discussed in greater detail in later in the course . We will only deal with the matter briefly here.

The competition policies of a number of countries require dominant firms to prove competitors with access to essential facilities controlled by dominant firms. The so-called "essential facilities doctrine" is closely related to the concept of "refusing to deal" with competitors, which is an offence under competition law in some, but not all circumstances.

Some experts have discouraged telecommunications regulators and competition authorities from developing excessively broad principles requiring incumbent operators to provide network facilities to their competitors. They point out that such principles would discourage competitors from building their own competitive facilities.

However, most telecommunications experts agree that the introduction of competition can be greatly accelerated by requiring incumbents to provide access to a broadly defined range of essential facilities to new entrants. For the provision of telecommunications services to the general public, for example, interconnection to the incumbents' PSTN and related switching, signalling, Operational Support System (OSS) and database systems can significantly speed up the introduction of competitive new services.

Most of the debate about essential facilities in the telecommunications context relates to interconnection facilities. The issues related to the supply and unbundling of essential facilities are discussed in more detail in Unit 3 - Interconnection.

Abuse of Dominance and Essential Local Network Facilities - The EU Example

The European Commission's 1998 "Access Notice" provides a good example of the treatment of essential network facilities in current competition and telecommunications law and policy (Notice on the Application of the Competition Rules to Access Agreements in the Telecommunications Sector).

The Access Notice illustrates how an established telecommunications network operator can abuse its dominant position in controlling network access facilities. The Notice sets out how competition rules are to be applied to telecommunications network access agreements in the contexts of: 1) specific telecommunications market liberalisation directives; and 2) overlapping authority between national and EU institutions, and between competition and sector-specific regulatory authorities. The Access Notice builds on earlier Commission guidelines on the application of competition rules in the telecommunications sector.

The Notice adopts a conventional approach to market definition. It uses the concepts of demand substitutability and non-transitory price increases as the main tools for defining separate product markets. Based on its analysis, the commission concludes that telecommunications network access constitutes a distinct market from the market for end user services.

The Commission concludes that abuse of dominance can be made out where a network operator refuses access to its network, withdraws access or provides access subject to unjustifiable delays or excessive prices. The Commission identifies other conduct which may be abusive, including tying or bundling network elements without adequate justification, configuring a network so that aces b competitors becomes more difficult, unjustly discriminating in the terms of access offered to competing operators or pricing access so as to "squeeze" competitors' profit margins. These concepts are discussed later in this Module.

Cross- Subsidisation

In some key telecommunications market, there is a concern that incumbent telecommunications operators will abuse their dominant position by engaging in anti-competitive cross-subsidisation. The concern is that an operator that dominates one market may increase or maintain its prices above costs in that market. It can then use its excess revenues from the dominant market to subsidise lower prices in other more competitive markets. As a result, a disproportionately large share of the costs of the operators' entire business can be recovered from the markets the operator dominates.

This results in a "cross-subsidy" between services and subscriber groups. The more competitive services are subsidised by the less competitive services. Such cross-subsidies can be significant barriers to competition.

Without the ability to cross-subsidise its own competitive services, a new entrant may not be able to match the incumbent's low prices in competitive markets. This may prevent new entry into the incumbent's less competitive markets. Alternatively, it may drive new entrants out of business or prevent them from raising enough capital to expand into the incumbent's dominant markets.

Regulatory treatment of anti-competitive cross subsidies in telecommunications markets is complicated due to the patterns of "social" cross subsidies which characterised the monopoly era of telecommunications services in many jurisdictions.

In the monopoly era, governments typically authorised the cross-subsidisation of local, residential and rural services by other services, such as international, long distance and business services. Whatever the benefits of social cross-subsidies in the monopoly era, there is now a widespread recognition that they should be abolished. Theses cross-subsidies are gradually being eliminated by the implementations of rate balancing policies. Rate rebalancing policies are aimed at aligning prices of different services more closely with their costs. Rebalanced rates are closer to the types of "efficient" pricing found in competitive markets.

That is not to say that social objectives, such as maintenance of affordable access for poor or remote subscribers, are being ignored today. However, most telecommunications policy-makers, regulators and sector experts agree that implicit cross-subsidies between services should be replaced by explicit subsides aimed at meeting specific social objectives. The issues surrounding targeted subsidies to meet social objectives are discussed in greater detail in TR 506.

Prohibitions against Cross-Subsidies

Prohibitions against anti-competitive cross-subsidy have been incorporated into the laws and regulatory framework of many countries. Many countries that did not do so before have established such prohibitions as part of their obligations under the 1998 WTO Agreement on Basic Telecommunications.

National prohibitions against cross subsidies can be found at various levels, including laws, regulations, regulatory guidelines, rules, orders or licences.

Licence conditions are often used to prohibit cross subsidy. One example of a licensing prohibition can be found in the General Telecommunications Licence granted by the Office of the Director of Telecommunications Regulation in Ireland. Condition 14 of the Licence permits the Director to enquire into complaints of cross-subsidisation by the licensee to cease such cross-subsidisation. This condition is found in Part 3 of the Licence, which includes the conditions applicable to any licensee with significant Market Power. The licence also requires licensees to keep appropriate accounting records in order to permit the Director to evaluate whether conduct amounts to unfair cross-subsidisation.

Another example of a broad prohibition can be found in the licence issued to the Jordan Telecommunications Corporation by the Telecommunications Regulatory Commission of Jordan. The prohibition reads as follows:

“The Licensee will not, alone or together with others, engage in or continue or knowingly acquiesce in any anti-competitive practices and, in particular, the Licensees shall . . . Not engage in anti-competitive cross-subsidisation.”

Such broad prohibitions are included in licences or in other regulatory conditions imposed on incumbent operators in many others countries. While these broad prohibitions send a strong signal to incumbents, they are not generally effective unless they are accompanied by more specific measures: accounting separations, structural separations and imputation tests.

Accounting Separations

Accounting separations can be used to determine the existence of cross-subsidisation. Regulators have developed accounting separations, or have required incumbents to do so, in a number of jurisdictions.

The goal of accounting separations is to divide the costs of an operator between the different services it offers in order to determine the costs of providing each service. The costs of each service are then compared to the revenues generated by that service to determine whether the service recovers its costs or loses money. Services that do not cover their costs are considered to be subsidised by other services with revenues that exceed their costs.

In effect, accounting separations require an operator to account for different services as if they were standalone operations. Since telecommunications operators provide a wide range of services, many accounting separations undertaken for regulatory purposes do not attempt to separate the costs of each individual service. Rather, they separate the costs of broad categories of service.

Accounting Separation - Cost & Revenue Categories

Determination of which accounting categories should be established will depend on the state of competition in national telecommunications market. In general, the more competitive the market, the more difficult the accounting separation process

Once all segments of a market become workably competitive, it will no longer be necessary to establish accounting separations, or worry about cross subsidies. At that point, no firm would retain segment. According, it could not raise prices above competitive levels and use the excess profits to cross-subsidise more competitive areas.

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

However, a further degree of accounting separation may illustrate a form of anti-competitive cross subsidisation that is potentially damaging to competition this is illustrated in Section C.

The total costs and revenues illustrated in Scenario C are the same as in Scenario B. However, Scenario C separates out the costs and revenues of the incumbent in providing local access services (e.g. call termination) to competitors. In so doing, Scenario C illustrates what appear to be anti-competitive cross-subsidisation practices on the part of the operator.

Scenario C indicates other potential problems that merit further investigation. For example, it is possible that the incumbent is implicitly charging its own competitive services at lower prices for local access services than it is to competitors. This problem is discussed later in this section.

A comparison of Scenario A, B and C indicates that it is important to design accounting separation categories to meet different market circumstances, and to take into account the type of cross-subsidy that is being investigated or monitored.

Accounting Separations - Cost Allocation Issues

In practice, it is sometimes difficult to separate the costs to telecommunications operators. Cost accounting approaches are well developed in some highly competitive industries, where business performance of different services or "profit centres" However, the same has not generally been true of incumbent telecommunications operators.

Identifying the cots of different services was simply not required in the monopoly era. Telecommunications managers and regulators typically focussed on the overall profitability of the firm, not on the profitability of individual services. If some services lost money, these losses were covered by profits in other services. Detailed costs separation approaches were never required or developed.

Given the arbitrary nature of some cost allocations, incumbent operators will often have the opportunity to allocate more costs to their less competitive service offerings. This "shifting" of costs will make the more profitable. For example, an incumbent might allocate 95% of its head office expenses to its basic telephone services, because those services account for 95% of its revenues. However, in reality, over 30% of the time of head office may be devoted to competition with new entrants in value-added, Internet and e-commerce services, which accounts for only 5% of its revenues. By shifting its head-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 pricing the competitive services below cost, and subsidising them from excess basic service revenues.

There is no simple solution to the accounting separation problems identified above. If there are serious concerns about anti-competitive cross-subsidies, the regulator will have to "role up its sleeves", and work to understand the cost structure of the incumbent. The help of experienced telecommunications accounting or economic consultants will be useful, if not essential, in most cases.

International benchmarks can assist in some cases. For example, consider two services: (1) local termination services provided by an incumbent to interconnecting competitors, and (2) cellular telephone services provided to end used in competition with the same competitor. A benchmarking study may show that the incumbent charges twice as much for service (1) in comparable countries, and only half as much for service (2). In such a case, the regulator will want to take a closer look at the costs and pricing of the incumbent to ensure it is not engaging in anti-competitive cross-subsidisation.

In conclusion, accounting separations can be challenging for both the regulator and regulated operators. However, some simplifying assumptions and benchmarking can assist in proving "order off magnitude" indications of possible cross-subsidies. Whatever techniques are used, accounting separations remain a valuable tool for regulators.

The accounting operations approach does have drawbacks. These include the discretionary nature of some cost allocation and the large amount of resources required for detailed cost separations. For example, the Canadian regulator spent the better part of a decade to develop its "Phase III" category-wide cost separations process. These drawbacks suggest that detailed accounting separations should not be relied on exclusively as a tool to identify and prevent anti-competitive cross-subsidies. In countries with limited resources, it may be more efficient to use a combination of benchmarking and very high level cost separations.