1.2. Oligopolies in the regulation of electronic communications
1.2.3. Difficulties associated with the setting of dominance as the threshold for
Skepticism has grown on whether Article 102 of the Treaty provides an adequate basis for ex ante market regulation140. Doubt has been expressed on whether the findings of competition authorities in the context of alleged committed abuses of Article 102 may apply in ex ante approaches of dominance, on the grounds that NRAs rely on different sets of assumptions and expectations. The requirement that dominance be established implies a focus on the market structure that would pertain in the market under
139 Brodey, M., Telecommunications: Towards a new EU Regulatory Framework for Electronic Communications, [2000] CTLR, 182.
140 The Commission’ s policy to align its reasoning in merger cases in the findings of Article 102 cases has been cast in doubt because of the increased certainty and clarity inherent in assessing ex post behaviour in an oligopolistic market. Refer to Richardson, R., Gordon, C., Collective Dominance: The Third Way? [2001] ECLR, 420.
35 investigation, perhaps at the expense of other dynamic non-structural features of the scenario on the development of the market141.
The Commission acknowledges the differences between the assessment of power by an undertaking to affect competition for SMP regulatory purposes, and an ex post (Article 102) analysis of an effected market structure, in par. 73 of the Guidelines:
“In an ex post analysis, a competition authority may be faced with a number of different examples of market behaviour each indicative of market power within the meaning of Article [102]. However, in an ex ante environment, market power is essentially measured by reference to the power of the undertaking concerned to raise prices by restricting output without incurring a significant loss of sales or revenues”142.
Yet, dominance is a legal concept without any direct equivalent in economic theory143. Traditional economic theory supports that the structure of the market determines the firm’s conduct and that conduct determines market performance144.
European competition law has defined dominance as:
“a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by
141 Similar criticism was expressed for the application of the dominance test under the former ECMR, Fountoukakos, K., Ryan, S., ibid., 289. Doubts have been also expressed in the context of the efficient competitor test launched with the Commission Guidance on the former Article 82 (now Article 102 TFEU). The Guidance establishes the premise that, in general, only conduct which would exclude an “as efficient competitor” is abusive; the efficiency both of the firm under investigation and of its competitor may be measured with the use of cost pricing methods. This test, albeit suitable to apply in abuse of dominance cases, may be impractical when applied for ex ante sector-specific regulation in the electronic communications sector, because the focus should not be on the incumbent firm rather than the market itself. To take the efficiency of the incumbent as a criterion might lead to distortion in the market because of the inability of competitors to correctly observe the incumbent’s efficiency. Also, depending on the cost-control methodology imposed on the incumbent by sector-specific regulation, the level of regulatory costs might be fixed at a lower or higher level than actual costs. Stoyanova, M., The Dangers of Over-Regulation in the Electronic Communications Sector, [2007] World Competition, 112.
142 Para. 73 of the Guidelines.
143 Christensen, P., Rabassa, P., The Airtours decision: Is there a new Commission approach to collective dominance?, [2001] ECLR, 228.
144 This is the famous “Structure – Conduct – Performance” or SCP paradigm of Bain, S., Exonomies of Scale, Concentration and the Conditions of Entry in Twenty Manufacturing Industries, [1954] 44 American Economic Review, 15. See also Jones, A., Sufrin, B., EC Competition Law, 2nd edition, 2004, 52.
36 affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers”145.
Hence, under European competition law, dominance has been defined by reference to the effect on competition and the exercise of market power independently of competitors, customers and consumers146. The definition has received criticism from economic scholars, who consider that the legal definition of dominance suffers from the weakness of not having a well-defined economic meaning or a well-defined standard of measurement, because no firm would set a price independently of its customers and a test of independence of competitors’ pricing is not possible147.
The ability to behave independently, namely the absence of competitive market pressure faced by an undertaking, has attracted a lot of attention in EC cases148; the reason for the emphasis may be that this feature corresponds most closely to the economic textbook definition of market power149. Bishop and Walker have defined dominance as
‘the ability of a firm or a group of firms to raise prices, through the restriction of output, and maintain them for a significant period of time above the level that would prevail under the competitive conditions and thereby to enjoy increased profits from the action’150.
This is the same statement repeated in par. 73 of the Guidelines, which was set out earlier. Nonetheless, the ability to affect competition is not in itself sufficient to establish anti-competitive behaviour, since Article 102 of the Treaty does not prohibit dominance but the abuse of it151.
145 Case 27/76 United Brands v. Commission [1978] ECR 207.
146Discussion Paper, par. 21.
147 Pearce de Azevedo, J., Walker, M., Dominance: Meaning and Measurement, [2002] ECLR 363-367.
The opposite view has been expressed by la Cour, L., Mollgaard, H.P., Meaningful and Measurable Market Domination, [2003] ECLR, 132-135.
148 Case 85/76 Hoffmann La Roche v. Commission [1979] ECR 461, par. 42-46. . In Case T-210/01, General Electric v. Commission, the GC ruled that the existence of lively competition on a market does not rule out the possibility that there is dominant position on that market, since the predominant feature of such market is the ability of the undertaking to behave independently of such competitors (par. 117).
149, Newton, Ch., Do Predators Need to be Dominant? [1999] ECLR, 129.
150 Bishop, S., Walker, M., Economics of EC Competition law, Sweer & Maxwell, London, 2006, 87.
151 Wheatherill, S., Beaumont, P., EC Law, 2nd edition, Penguin, 1995, 721f. However, in Wanadoo, the GC considered the intention to abuse a dominant position sufficient to establish an anti-competitive
37 Under Article 14 par. 2 of the Framework Directive, dominance is set as the threshold for SMP also in oligopolistic environments. We have seen in the first sections of this chapter that competition law has relied on the theory of tacit collusion, as opposed to the strict application of economic models of Cournot or Bertrand type for its approach to oligopolistic markets and on this theory has SMP regulation built its approach to oligopolistic markets.152. Scholars have argued that the sole application of a static model such as the Cournot model may prove inefficient for the assessment of dynamic telecommunication markets which may lend themselves more easily to dynamic oligopoly theories, such as the theory of tacit collusion. In the model of Cournot competition, which leads to price equilibriums situated between marginal costs-pricing and monopoly pricing, oligopolists may achieve supra-competitive profits absent tacit collusion153.
Yet, the decision to regulate joint dominance in electronic communications ex ante, through the application of the dominance test, rests on the paradox that there is not a single Article 102 case precedent, where collective dominance was found to exist154. The analysis of the section 1.1.2 has shown that the concept of collective dominance was developed mainly in the context of merger cases, which suggests a lower evidence threshold due to ex ante speculation as opposed to the ex post proof, which seems more robust than ex ante speculation. The application of the stronger dominance test of Article 102 may not tally with the relaxation of the evidentiary burden after the Impala judgment.
scheme, Case T-340/03, France Telecom v. Commission of the European Communities, judgement of 30 January 2007.
152 Some commentators suggest that the Cournot model may present a more appropriate tool for the calculation of joint dominance in ex-ante assessments on market power, compared with the theory of tacit collusion, on the grounds that that the Cournot type of analysis differs from the analysis of tacit collusion in that, at least theoretically, it specifies the market outcome that is to be expected in a given situation instead of offering a more open prediction that the market outcome will be anti-competitive, Camesasca, P., ibid., 65. However, as in the case of every theoretical model, economic theory sets out specific factors for the application of the Cournot model, including product homogeneity, increased transparency with respect to prices and market demand, symmetry of market positions, as well as the stability and maturity of the market, Kloosterhuis, E., ibid, 85-86.
153 Petit., N., ibid., at foonote 332. Conversely, scholars have argued that the application of the Cournot model still leaves room for application of the theory of tacit collusion, because the Cournot price lies below that of a perfect cartel or a monopolist and the difference between these levels indicates the scope for profitable collusion (Kloosterhuis, E., ibid., 86).
154 In none of the three Article 102 cases mentioned in section 1.1.2, i.e. Italian Flat Glass, Laurent Piau and Efim v. Commission, was there a finding of collective dominance.
38 Given the inevitable complexities inherent in the assessment of joint dominance, the high level of proof required for the establishment of joint dominance cases, creates doubts on whether there may be findings by NRAs on collective dominance in the long run under the SMP framework for electronic communications or there may be pleas on the absence of one condition discrediting in their entirety tacit collusion theories of harm. In a dynamic and forward-looking market analysis as in the case of the analysis requested by the Commission in the Guidelines, it is doubted whether any economic analysis would be able to provide the degree of certainty requested under Article 102.
In principle, all future predictions entail a certain degree of uncertainty related to unforeseen events, which is enhanced by the fact that the factors establishing all economic theories may collapse. Support for this concern is lent by the following observations, which will be dealt with in detail in the chapters that follow.
First, the decision of the European Commission to regulate termination rates under single dominance principles, as a result of the delineation of termination markets on the separate networks of mobile and fixed operators. Such approach indicates the Commission’s decision to have termination rates regulated ex ante as opposed to leaving such decision open to NRAs. Given that termination services could have been examined also from an oligopolistic perspective, had wider market definitions been adopted, such approach may also imply that the Commission was wary that NRAs could find ways out of regulation under tacit collusion principles. Notably, the Commission may have wanted to ensure that termination would be regulated anyway;
conversely, it is possible that the Commission did not want to leave NRAs with the option of pleading that one or more factors necessary for the establishment of collective dominance did not apply, hence allowing SMP not being established and the market escaping regulation. The relevant discussion is found in chapter 2.
Second, the application of factors capable of establishing joint dominance by NRAs and the Commission, which shows that, in the course of implementation of the SMP framework, joint dominance is considered only on very rare occasions. In the period from 29.08.2003 to 30.09.2013 there have been four (4) decisions establishing collective dominance concerns in three wholesale markets: IE/2004/121, ES/2005/330, IT/2006/424 and MT/2006/443. The first was taken in 2005 and the other three in 2006. All of them were subsequently deregulated through subsequent market
39 assessments and since then no electronic communication market has been regulated as an oligopoly in the 28 member states. Back in 2008, in an analysis of collective dominance under the first round of market review, Hou assumed that the analysis of collective SMP in the second round market review would continue to appear in more competitive markets155. However, this did not prove to be the case. The assessment of market notifications effected under Article 7 of the Framework Directive reveals a significant reduction in the number of cases involving collective dominance from 21 notifications in 2006 to 2 in 2010, none in 2011, 2 in 2012 and none in 2013. Of course, a complete analysis of the relevant national markets would be required in order to support the existence of collective SMP in any electronic communications market in any of the 28 member states and such analysis has not been undertaken in the context of this thesis. However, the observation remains that not only are there no findings on collective SMP, but also lack of notifications involving the assessment of prospective collective SMP, which shows the lack of concerns in the presence of a second wholesale operator. The relevant analysis is made in chapter 3.
It is noted that BEREC shares the analysis of different economic papers on the potential insufficiency of two competing networks to achieve effective competition and recognizes the necessity to review the criteria to assess joint SMP, in particular via an update of the Guidelines to cover the latest competition law developments and to assess clearly complexities associated with duopolies in electronic communication markets156.
Third, the careful reading of the history behind roaming regulation may support the assumption that the SMP regulation has possibly failed to address issues of collective dominance in wholesale roaming markets, hence the decision of the European Commission to regulate roaming through a separate regulation. The NRAs of the 12 member states that carried out their assessments of the respective wholesale roaming markets declared themselves unable to prove the existence of collective SMP, albeit they all recognised the existence of high rates and the majority accepted the existence of factors indicating collective dominance in the market, whereas some of them
155 Hou, L., The assessment of collective SMP: Lessons learned from the first market review, December 1st, 2008, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1309684
156 BEREC’s response to the European Commission’s questionnaire for the public consultation on the revision of the Recommendation on Relevant Markets BoR (13) 22, at p. 3.
40 accepted the potential existence of joint SMP in the short term. This observation is particularly interesting if one considers the risk of future collusion between the few operators active in the different Member-States for the provision the same bundled products, should the plan of the Commission for the development of a single European concentrated market with one legislation, one licensing system and one spectrum policy materialize. This subject is presented in chapter 4.
The same chapters, as well as the last two chapters on remedies attempt also to give some guidelines on the application of the SMP framework in oligopolistic electronic communications markets.
41