Cable Europe response to BEREC s consultation on its draft report on oligopoly analysis and regulation

Transcription

1 Cable Europe response to BEREC s consultation on its draft report on oligopoly analysis and regulation 30 July 2015 Cable Europe welcomes the opportunity to comment on the BEREC s draft report on oligopoly analysis and regulation. BEREC s draft report comes at a critical time. President Juncker launched in November 2014 his ambitious investment plan to revive Europe s economy and support strategic investments in broadband infrastructure. The ROADMAP for the evaluation and Reform of the Regulatory Framework for electronic communications networks and services (REFIT) underlines the need to incentivise investment in high-speed broadband networks to deliver a true single market and announces the electronic communications review to ensure a consistent and predictable regulatory framework environment to support infrastructure investments in both fixed and wireless networks. However, at least one aspect of BEREC s draft report, namely that related to the so called tight oligopolies is, in our view, contradictory with the goal of creating regulatory certainty to encourage investment. In effect, BEREC suggests to revise the regulatory framework to include findings of joint dominance but also to consider potential ex ante intervention in relation to tight oligopoly. In other words, BEREC seems to take the approach that further regulation might be necessary beyond the existing regulatory framework s criteria, to answer potential competitive ineffectiveness in oligopolistic situations not covered by the current SMP principle. We believe that BEREC s draft report could be sending the wrong message to investors with such an approach. It is a sound regulatory principle that rules should not be changed in the middle of the game. Given that competition has evolved and is evolving in electronic communications markets, a policy assumption that ex-ante regulation is necessary in light of a specific market structure and a set of loose and difficult to ascertain criteria is likely to remove investment incentives and therefore will probably affect dynamic efficiencies and innovation in the sector. On the other hand, the effect on investment of creating a new layer of ex ante regulation based on a new market failure approach, will have the likely result of locking in regulation permanently contrary to the initial goal of the regulatory framework which is designed to allow a transition towards the competition rules. As such regulation would undermine incentives for further investments by competing networks, such as cable, and therefore limit competitive constraints exerted on incumbents. Infrastructure competition will not be developed and more regulation will be needed in an endless vicious circle. The BEREC approach would give NRAs possibility to regulate non SMP situations while keeping SMP regulation at the same time. Who would really benefit from this approach? Would it be self-fulfilling? 1

2 1. Timing of this debate Whatever the conclusion of this BEREC report might be, Cable Europe wonders whether the right place for this discussion should not be under the umbrella of the Framework review. There is no urgent need for this discussion and we believe that the debate should rather go hand in hand with the review of the telecoms directives. Indeed the ROADMAP for the REFIT exercise of the Regulatory Framework has a wider scope than the report at hand and will include the matter of oligopoly regulation in the context of impact assessments examining the effects of regulation on the market, incentives for investment etc. 2. Joint Dominance On joint dominance, BEREC recommends to update Annex II of the Framework Directive to structure the criteria to be used to assess joint dominance around the criteria used in the Airtours case and to develop in more detail the criteria to be used when assessing joint SMP. Cable Europe believes, however, that any relaxation of the standard of proof to establish collective dominance beyond the standard of competition would be misguided. The only relevant approach to correctly assess collective dominance has to follow the strict criteria of the Airtours and Impala judgments 1. These criteria suggest that tacit collusion is unlikely to arise in telecommunication markets, which are characterised by innovation and asymmetry, and in which no economically sound mechanism through which collusion could be achieved and sustained has been identified by competition authorities. Still, the merger review process does consider the scope for tacit collusion and ensures that telecom mergers do not lead to tacit collusion; since competition law already covers the concept of tacit collusion, ex ante regulation aimed at preventing tacit collusion does not appear needed. Recent merger decisions also confirmed that tacit collusion is not a concept that plays a key role in electronic communication markets. In none of the recent telecom and cable mergers by the Commission, did the Commission make a positive conclusion that the transaction would lead to coordinated effects. In light of these observations, we would strongly advice against adopting an alternative standard for joint dominance/tacit collusion outside of competition law. Indeed, the standard developed in the context of competition law is not only the relevant legal standard, but it is also sound from an economics point of view. In fact, experience has shown that an approach based on a checklist of criteria is not only impractical (as it is difficult to weigh positive and negative criteria, which will inevitably arise) but also prone to significant errors. Establishing a coherent collusive mechanism based on the ability 1 General Court, Airtours v. Commission, Case T-342/99 [2002] ECR II-2585; General Court, Independent Music Publishers and Labels Association (Impala) v. Commission, Case T-464/04 [2006] ECR II

3 to achieve and sustain a collusive understanding is key to any sound economic analysis of collusion. 3. Tight oligopoly The economic evidence to which BEREC refers in its draft report comes in large part from a 2006 policy note from the Economic Analysis Team of Dutch regulator OPTA, entitled Is two enough 2. The OPTA report argued that oligopolies can lead in some circumstances to the exercise of significant market power, absent any collusion, as the degree of competition between operators in oligopolies with few operators may be less intense under perfect competition. The report describes such oligopolies as non-competitive oligopolies. And there is a significant risk that non-collusive yet non-competitive oligopolies threaten effective competition. The OPTA report seems to justify economically its theory on the fact that a non pure Bertrand competition model is met, because there is at least some price differentiation. We are not convinced by such economic theory as it imperfectly captures the risk of soft competition and forgets to examine further criteria. We therefore consider that tight oligopolies have no clear economic theoretical foundation. While BEREC s draft report appears more cautious than OPTA s report with regard to the need for future ex ante intervention in tight oligopolies, it has to be underlined that it ignores the operator s dynamic incentives to invest: the presence of some market power does not in itself mean that there is a market failure that needs to be addressed via regulation. In fact, some degree of ex-post market power may be necessary for investment to take place in the first place. While under perfect competition price is equal to marginal cost, prices in oligopolistic markets will typically be above marginal cost, with firms enjoying a certain degree of market power 3. As acknowledged by BEREC itself in its consultation, prices above marginal costs can be efficient: firms would not be able to cover their fixed costs in the long-term if they price at marginal cost, and the expectation of future profit may increase dynamic efficiency by incentivising innovation and risky investments 4. In fact, as underlined by Motta: It is precisely the prospect of enjoying some market power (i.e. of making profits) that pushes firms to use more efficient 2 As stated in paragraph 5 of BEREC s 2013 response and in footnote 7 of BEREC s 2014 Opinion. 3 See e.g. Maskin E. and Tirole J., A Theory of Dynamic Oligopoly, II: Price Competition, kinked demand curves, and Edgeworth Cycles, Econometrica, Vol. 56, No. 3 (May, 1988): in markets with few sellers, firms typically do not sell at marginal cost, and the fact the classic Bertrand model predicts an outcome that conflicts with this observation is in part due to its static nature. On the Bertrand Paradox, and factors that reconcile the Bertrand model with prices above marginal cost (such as product differentiation and capacity constraints), see Tirole J., The Theory of Industrial Organization, the MIT Press, 1988, II.5. 4 BEREC s Draft Report, p

4 technologies, improve their product quality, or introduce new product varieties. 5 Consequently, policies aimed at enhancing static efficiency at the cost of dynamic efficiency are in our view short-sighted 6. In order to determine whether regulation is useful in this context, one thus has to determine not only whether regulation would decrease prices in the short term, but also at what cost and how it will affect investment 7. There is little doubt that if prices were to be brought down to marginal costs to ensure static competition, firms would have few incentives to invest in their networks since they could anticipate that future profits would be dissipated with such regulation. As explained by Laffont and Tirole in the context of telecommunications, incumbent telecom operators would not build local loops if they expected not to be able to enjoy some mark-ups when reselling or exploiting the local loops themselves. 8 Note that we are not making a general argument on the relationship between the number of operators and the degree of innovation 9. Rather, the point underlined here is that imposing ex ante remedies, such as access regulation on an operator will likely reduce the attractiveness for this operator of investing in new infrastructure. While such regulation may be perfectly justified on static efficiency grounds when there is a single dominant operator, it is harder to justify when there is effective competition among infrastructures because the static efficiency gains will be smaller than with a single operator. Moreover, with this type of approach the risk for a type 1 mistake (overregulation) is much higher. The reason for this is that an oligopolistic market is very likely to have a competitive outcome, however this is much less likely to be the case for a single SMP. Furthermore regulating a single SMP relates in most cases to regulating a former monopoly, however joint dominance involves regulating a former monopoly and a privately financed operator which has never held a position of SMP. One can only imagine the extra burden of a type 1 mistake for such a privately financed operator. 5 Motta M., Competition Policy. Theory and Practice, Cambridge University Press, 2004, p See also Carlton and Heyer who, in the context of antitrust, argue that allowing a firm to capture as much of the surplus that, by its own investment, innovation, industry, or foresight, the firm has itself brought into existence is an essential element of antitrust policy (Carlton D. W. and Heyer K., Extraction vs. Extension: The Basis For Formulating Antitrust Policy Towards Single-Firm Conduct, Competition Policy International, Vol. 4, No. 2, Autumn 2008). For a more general presentation of the appropriation principle for market efficiency, see Makowsk L. and Ostroy J. M, Appropriation and Efficiency: A Revision of the First Theorem of Welfare Economics, The American Economic Review, vol. 85, n 4, 1995, p As pointed out by Cabral L. in Introduction to Industrial Organization, The MIT Press, 2000, p.28, a bias towards static efficiency is not innocuous since in industries with rapidly evolving technologies, static efficiency is a second-order effect compared to dynamic efficiency. 8 Laffont J.-J. and Tirole J., Competition in Telecommunications, The MIT Press, 2000, p On this question, see in particular Aghion Ph., Bloom N., Blundell R, Griffith R. and Howitt P. "Competition And Innovation: An Inverted-U Relationship," Quarterly Journal of Economics, 2005, v120 (May),

5 Lastly, any competitive analysis should be based on a market behaviour approach (tacit collusion, competitive oligopolistic outcome) rather than a market structure approach, as it is the case for tight oligopolies. Cable Europe therefore believes that regulatory intervention in the absence of collusion raises the question of the threshold for intervention and risks sacrificing dynamic efficiencies for the benefit of short term static efficiencies. 4. BEREC should take into account a number of market developments in its analysis A number of market developments have led to increased competition among telecommunication providers, in particular: The development of NGA networks; The emergence of OTT content providers; The constantly growing customer demand; The rise of bundled services These changes have led to the growing importance of novel competitive constraints when assessing the nature of competition in oligopolistic telecom markets 10. And we would strongly encourage BEREC to take into account these developments in its future analysis. In particular, the rise of NGA, as illustrated in the figure below, emphasizes the importance of innovation in the industry. This innovation both makes tacit coordination less likely (as explained above, a collusive understanding is difficult to sustain in the presence of strong innovation), and calls for a cautious approach in non-collusive oligopolies in order to not negatively impact such innovation for static benefits. 10 In addition, there are a number of market developments that suggest that barriers to entry in both fixed and mobile markets - may not be as large as anticipated at the time of the OPTA report in 2006, including i. voluntary access agreements to mobile networks; ii. access obligations to such bottlenecks as ducts in the fixed networks, which in turn have allowed third party operators to deploy fibre in urban areas; iii. the development of ultrafast mobile (4G). 5

6 Next Generation Access (NGA) broadband coverage in the EU, % 80% 60% 40% 20% 0% Source: European Commission, Digital Agenda for Europe, Scoreboard 2014 Trends in European Broadband Markets 2014, based on data from (IHS,VVA and Point Topic). For the purpose of this report, Next Generation Access includes VDSL, Cable Docsis 3.0 and FTTP. The ever growing consumer demand for broadband, fueled in part by the development of VOD and OTT, also contributes to this innovation. This development puts pressure on broadband providers to offer ever higher speeds and innovate, which in turn makes tacit collusion/joint dominance less likely (as explained above, innovation makes it more difficult to sustain a collusion as the incentives to deviate from a collusive agreement increase in dynamic industries). The rise of bundled service increases differentiation and limits transparency. In light of the variety of existing tariffs and bundles of services, transparency in the market is relatively limited. This lack of market transparency implies that it would be particularly difficult for operators to monitor adherence to a collusive understanding. These important developments need to be taken into account to provide a solid foundation for BEREC to structure its economic arguments on oligopolistic telecom markets. Therefore, more comprehensive research by BEREC itself, which would consider the rapidly changing, dynamic evolution of the industry, would be welcome. 5. Retail market should be the starting point In any case, Cable Europe would like to stress again the fact that one should always first analyse the retail markets before assessing wholesale markets. Consumer welfare is measured in the retail market. If prices are not problematic in the retail market why should intervention even be considered in wholesale markets? 6

7 6. Annex: Charles River Associates report on oligopolies and competition in Electronic Communication Markets Cable Europe has commissioned Charles River Associates to conduct a study on oligopolies and competition in Electronic Communication Markets. The report is attached to this submission. It highlights key economic features of competition in oligopolies, both from a theoretical and an empirical point of view that can contribute to a better understanding of the subject and to BEREC s consultation. It also reviews the available empirical evidence on competition in the provision of broadband services, finds significant support for the finding of inter-platform competition and cautions against any regulation that risks hampering future investment in cable infrastructure, and therefore limiting the competitive constraint exerted by cable operators on incumbent providers. 7