The Transition from Monopoly to Competition in Telecommunications

An effective competition policy must take into account the specific characteristic of the market to which it is applied. Telecommunications network service markets raise unique challenges for the application of competition policy. These challenges arise from the specific manner in which some incumbent network operators are able to continue to dominate their markets after the introduction of competition.

It is generally desirable to minimise government intervention in competitive markets. However, there is a general consensus that regulatory intervention is required to implement a successful transition from monopoly to competitive telecommunications markets. The introduction of effective competition into telecommunications markets around the world has generally been more difficult and intrusive than in the case of most other markets.

Advantages of Incumbent Operators

The nature of telecommunications networks provides strong advantages to well-established network operators. These advantages often call for pro-competitive measures that are relatively unique to the telecommunications sector. Such measures are discussed throughout this Module and in Module 3 - interconnection. Without such measures, new entrants may never overcome the incumbency advantages of established operators. Incumbents in other types of markets (e.g. steel, chemicals, and food products) generally do not enjoy similar advantages and, therefore, those types of markets typically require less detailed sector-specific regulation.

Some major advantages of incumbent operators are listed below. Technical terms used in this list are discussed in greater detail in the following sections of this Module.

Control of Essential Facilities

Incumbent operators often own essential facilities that were built and paid for under a regime of government ownership or guaranteed rate-of-return regulation. In telecommunications network markets, essential facilities may include public rights-of-way, support structures such as poles and conduits, local loops, telephone numbers and frequency spectrum. New entrants typically require access to these facilities in order for competition to be feasible. Duplication of these facilities may be either technically difficult, or more often, economically inefficient.

Control of essential facilities can give an incumbent numerous advantages over new entrants, particularly in the absence of strong pro-competitive regulation.

An incumbent can also discriminate in the provision of essential facilities to make its competitors' services less attractive to end-customers.

Economies of Established National Networks

As a related matter, incumbent network operators might enjoy economies of scale and scope that cannot be matched by new entrants for many years (or decades). For some network elements (e.g. a national local access (loop) network), the cost of duplicating an incumbent's facility may be prohibitively high. At the same time, the facility may have a large enough capacity that one or more competitors may be able to share use of the facility with the incumbent without imposing any congestion costs.

In addition, many established telecommunications operators have a long history of providing local access service at subsidised rates. This provides the incumbent with advantages in terms of economies of density, scale and scope. In competing for a new customer, an incumbent can often set a relatively low price, which reflects a lower long-run total- service incremental cost than new entrants, and spreads its joint and common costs across a large established customer base. A new entrant must often cover a much higher long-run total service incremental cost, since this must be recovered from a smaller customer base.

Vertical Economies

Many incumbents have vertically integrated upstream and downstream production facilities. For example, they may operate local access networks, national long-distance networks and international networks. These incumbents would usually enjoy vertical economies. For example, it is less expensive to coordinate local, long distance and international telecommunications within a single firm than through arm's-length negotiations and transactions with different (often competing) operators. Incumbents may also enjoy vertical economies related to integrated network planning, construction, operations (e.g. traffic aggregation) and maintenance.

Control over Network Standards and Development

An incumbent usually has a significant advantage in that its existing technologies and network architecture have become de facto network standards to which all competitors must adapt their networks. Unless competitors are notified well in advance, the incumbent may obtain a substantial head-start in the deployment of new network services or features that rely on switching, transmission or software upgrades installed by the incumbents.

Cross-Subsidies

Incumbent operators are often able to cross-subsidise some services from others. Many different forms of cross-subsidy are possible. In most countries, local access services have traditionally been cross-subsidised by international access services, in order to maintain below-cost tariffs in the former. New entrants typically do not have a similar range of services to cross-subsidise. Some incumbents have engaged in anti-competitive practices by which competitive services (e.g. mobile telephone services or internet access services) are priced below costs and effectively subsidised by monopoly or less competitive services, such as international services.

Customer Inertia

Telecommunications network markets are often characterised by a high degree of customer inertia. New entrants may find it very difficult to persuade customers to switch from an incumbent that has served them for many years. This is particularly true for lower-volume users (e.g. residential customers) when marketing costs and customers-switching costs and inconveniences can be high (e.g. dialling extra digits to reach a new entrant's network, dealing with two telephone bills, changing telephone numbers, etc). In some cases, incumbents may intentionally take actions to "lock in" their customers, and to make switching to competitors more difficult and costly.

The "natural" advantages of incumbent operators (e.g. economies of scale and scope and customer inertia) can be augmented by anti-competitive conduct on the part of such operators. This is where telecommunications regulators (and competition authorities) often face difficult challenges. Their goal is to promote competition without unfairly "handicapping" incumbents.

Before dealing with specific types of anti-competitive conduct, we will describe some of the basic concepts that are widely used in competition law and policy.