Tag Archives: Competition Law and Telecommunications

Riding the M&As wave in India’s telecommunications industry: The ambiguity of market concentration

By Francisco Beneke*

One can write either loud praise or a strong critique about the work of the Competition Commission of India (CCI) and the Competition Appellate Tribunal (Compat). However, it must be agreed that their influence on global affairs is growing at a fast pace. Now, the authorities must choose how to deal with a wave of consolidations in the world’s second largest mobile telecommunications market.

The industry was shaken up by the disrupting entry of Reliance Jio Infocomm, a company backed by India’s wealthiest man, Mukesh Ambani. It quickly captured an astonishing 100 million subscriber base in less than three months by basically giving all services for free for a limited period of time (ending in June this year). This was a hard blow to the industry, which had to enter into a profit-damaging price war, but fantastic news for consumers. In the aftermath, most of the main players have followed a consolidation strategy. In short, the deals may leave the mobile telecommunications market with three companies controlling at least 80 percent of subscribers and revenue.

Should these concentration figures raise concerns? A sensible answer is that the matter is complicated. Common thinking within antitrust authorities is that market concentration does not tell the entire story but that other factors, such as entry barriers, have to be examined. This, however, is not an interesting point because of two reasons: first, antitrust authorities tend to easily conclude the existence of barriers to entry in highly concentrated markets; and second, it is hard to find concentrated markets without some sort of entry impediment.

The more interesting question is how to interpret different market structures given certain industry characteristics. Under certain conditions, fewer firms can mean tougher competition. The reason is a commonly overlooked factor by antitrust authorities, which is the game being played in the industry. In other words, how firms adjust their behavior to that of their competitors. Here is where the work of John Sutton has made an invaluable contribution to our understanding of market structure.[1]

The game the author contemplates with the lowest concentration given a market size of a homogenous good is that of a cartel.[2] When firms collude to achieve the monopoly price, more firms can enter and share the market because of higher profits. When the game is more competitive—for example, with any form of uncoordinated behavior such as a Cournot or Bertrand setting—lower industry profits cause fewer competitors in equilibrium. In the most competitive game (Bertrand) the steady-state number of firms is one.

The bad news is that research on the determinants of the game in each market is still inconclusive.[3] As a practical matter, an antitrust authority like the CCI can conduct an investigation to obtain evidence on collusion and ensure that the strategies followed by market participants are at a minimum not the least competitive ones. But another important question still remains and is that of whether an increase in concentration will favor a game that leads to lower consumer welfare. An additional factor to consider in this matter is that of endogenous sunk costs, which can help understand how the existence of a few big players can actually be good news for consumers.

In markets like mobile telecommunications, firms usually choose how much they invest in the quality of their products (which in a broad sense includes advertising as well). That is, sunk costs are not exogenous. This is why, according to Sutton, we can see similar levels of concentration in the Indian market and that of my home country, El Salvador, even if the difference in size is abysmal. In such scenarios, Sutton’s model predicts that the biggest firms are expected to be the ones that offer the best quality and capture demand away from inferior products, which could mean greater concentration but is not necessarily detrimental to consumer welfare. The result will depend on how much value consumers place on superior quality.

We can easily imagine that preference for quality will be dictated in part by income. Here is where an important feature of the Indian market—and that of some developing countries—comes into play. India is an economy with rapidly rising incomes. If we can expect this trend to hold in the future, the mobile telecommunications market will be able to introduce better quality products for more demanding consumers. This could mean that the ideal market structure is one with a few firms with the resources to invest in the infrastructure needed (say, a 20 billion USD LTE network like the one deployed by Reliance Jio).

A final word of caution is in order. This article attempts only to shed light on factors that can be useful in understanding the consequences of the wave of consolidations in the telecommunications industry in India. However, a claim is not put forward that increased concentration is necessarily a good thing for consumers (it can lead to other overlooked problems already analyzed in this blog). Sutton’s theories rely on a set of assumptions that may or may not hold in this specific case. Their analysis can, nevertheless, help the CCI and the Compat to make a more educated guess (because merger control is nothing more than that) on the likely effects of the mergers that are currently taking place.

*Co-editor, Developing World Antitrust

[1] Sutton, J. (1991). Sunk Costs and Market Structure. Cambrige, MA: MIT Press; and Sutton, J. (1991). Technology and Market Structure. Cambrige, MA: MIT Press. For a discussion of Sutton’s work see Carlton, D.W., and Perloff, J.M. (2005). Modern Industrial Organization. USA: Pearson/Addison Wesley.

[2] With differentiated products, the theories predict only a lower bound of market concentration, but anything over it is possible.

[3] Carlton and Perloff (2005), supra, n. 1.

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Telecommunications Industry, Market Failures, and Government Intervention in El Salvador

By Carmen Ortiz*

In October of 2015, an incumbent in the Salvadoran telecommunications industry, Telefonica, affirmed that the country is the most underdeveloped in terms of telecommunications in Latin America[i]. The government responded with an effusive denial[ii]. It supports the current framework of allocation of Radio Electric Spectrum (RES) by auctions that reward the highest price. The controversy brings up considerations from a public law and competition policy perspectives regarding the impact that the sector regulation, Ley de Telecomunicaciones (LT), has on the conditions of competition in the market for broadband services.

The regulation’s objectives are the promotion of access to telecommunications for all sectors of the population, the protection of the rights of the users, operators, and service providers, the development of a competitive telecommunications market and the rational and efficient use of RES. RES[iii] is a scarce public resource fundamental for essential sectors such as telecommunications and for services such as mobile and wireless broadband. The reason for the regulation of RES is its scarcity and the fact that competing uses of the same frequencies result in chaos[iv]. Barriers to entry through the hoarding of RES are a type of business strategy[v].

The controversy points out market failures in terms of missing markets for the provision of full national coverage of broadband services. Three operators, Telefonica, Claro, and Tigo, offer 3G and/or 4G only in restricted areas close to the main cities. Digicel does not offer 3G, nevertheless, is the only one with national coverage for 4G services. The fact that the frequencies assigned for mobile telecommunications have all been licensed to incumbents[vi] and that no entry has occurred in the last 10 years indicate that the lack of RES is a barrier to entry.

SIGET, the regulator responsible for the management of RES, orders public auctions upon requests of licenses for its use. Licenses have a 20-year term and are adjudicated to the highest bidder. From a public policy and competition policy point of view, the legal framework is fundamentally flawed: it bans an evaluation for the appropriateness of issuing licenses of RES according to its rational and efficient use.

“Effective policy must recognize competition issues in the downstream market for wireless services”[vii]. Superintendencia de Competencia, the national competition authority, performed a substantial analysis on the topic and issued recommendations to SIGET on how to promote and protect competition through the management of RES[viii], for example, by performing auctions exclusively for entrants. Unfortunately, its recommendations are not binding for the regulator.

An analysis from a public law perspective can identify if the regulation favors certain players at the detriment of others and if competition and consumer welfare are neglected. The question to be answered is how the LT protects or neglects the interests of the players involved.

Starting with incumbents, who in majority have colluded in the past[ix], they would prefer to maintain the status quo and close the market than to confront pressures of an entrant. The price for closing the market can be paid through an auction, even if overbidding is necessary. The LT permits this strategy and facilitates foreclosure. On the contrary, potential entrants are negatively affected. They might not posses at once the economic resources necessary to win an auction against motivated incumbents and to invest on sunk costs to enter the market. Being implicitly excluded from a positive outcome in the auction and from the downstream market means they are losers. Moreover, the LT gives them incentives to abstain from participating in auctions.

The SC is obstructed from protecting and promoting competition to achieve economic efficiency and consumer welfare because its opinions and recommendations on the efficient management of RES are not binding for SIGET. SC could even be demotivated to continue spending resources in performing analysis and recommendations on a topic that has a dead end with the regulator. The SIGET is unable to achieve its own objectives because the LT inhibits it from evaluating the efficiency and rationality in allocating RES. New market failures cannot be prevented or corrected. The central government, receiving millions of dollars to be paid in the auctions, supports emphatically the higher bidder-winner design and fails to acknowledge the new market failures faced in the industry. Favored with additional income, it has no intentions to reform the legal framework. Finally, consumers, the most important of all, are deprived from wider choices and from the benefits of vigorous competition, innovation, lower prices, and ample access to broadband benefits in wider geographical areas. Hence, consumers are losers.

From a competition law and public law perspective, an efficient management of RES and a national broadband planning for the long term should be a priority in developing countries. The state is responsible for these and its responsibility cannot be circumvented by the economic gains resulting from a higher bidder-winner auction design. Auctions for licenses of RES are a way of efficient allocation and encouragement of investment. For this, the regulator should make efforts to remove the legal obstacles that obstruct its responsibilities. Then, evaluate the existence of market failures, the conditions of competition in the market (with the support of the competition authority), the legitimate needs of RES of the incumbents and the asymmetries between incumbents and entrants. The ideal outcome of an auction and its design should be based on a case-specific analysis. The design of auctions of RES must have as objectives attracting entrants, preventing collusion and promoting competition both in the auctions and in the downstream markets[x]. Regulations that inflexibly favor the higher bidder-winner may hinder competition, obstruct economic efficiency, economic growth and neglect consumer welfare. Such design does not guarantee that the winner could give the most efficient use of RES. Aiming for the highest price does not imply success in public policy nor economic efficiency in benefit of consumer’s welfare.

*LLM in International Competition Law and Policy, University of Glasgow, School of Law, Scotland, United Kingdom. Candidate for the LLM in Law and Economics, University of Utrecht, Netherlands. Head of the Mergers Control Unit in Superintendencia de Competencia, El Salvador, from January 2012 to August 2015.

References

[i] See recent declarations on local newspapers, available at: http://www.laprensagrafica.com/2015/10/15/el-salvador-el-pais-mas-atrasado-en-telecomunicaciones-de-latinoamerica

[ii] See, Government of El Salvador’s official webpage, available at:

http://www.presidencia.gob.sv/el-salvador-en-primeros-lugares-de-latinoamerica-en-crecimiento-de-acceso-a-telefonia-roberto-lorenzana/

[iii] Radio waves or hertzian waves: Electromagnetic waves of frequencies arbitrarily lower than 3 000 GHz, propagated in space without artificial guide. See the Radio Regulations Articles, International Telecommunication Union (ITU) Library & Archives, Edition of 2012, pg. 7, available at: http://www.itu.int/dms_pub/itu-s/oth/02/02/S02020000244501PDFE.PDF

[iv] Ozanich G.W., Hsu, C., Park, (2004). H. 3-G wireless auctions as an economic barrier to entry: the western European Experience, Telematics and Informatics 21, pg. 227. Available at: https://www.researchgate.net/profile/Han_Park/publication/223696166_3-G_wireless_auctions_as_an_economic_barrier_to_entry_the_western_european_experience/links/00463536b910a89e98000000.pdf

[v] Porter, M., (1984). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press, NY., pg. 13-14.

[vi] According to the Cuadro Nacional de Atribucion de Frequencias (Table of national assignation of frequencies), see at: http://www.siget.gob.sv/attachments/2213_CNAF%202004%20y%20modificaciones%20al%202014.pdf

[vii] See, Cramton, P., Kwerel, E., Rosston, G., Skrzypacz, A. (2011). “Using Spectrum Auctions to Enhance Competition in Wireless Services”, The Journal of Law and Economics, Vol. 54, pg. 168, available at: https://web.stanford.edu/~skrz/spectrum-auctions-and-competition.pdf

[viii] See the opinion issued by the Competition Authority of El Salvador, 11/10, 2013, pg. 11, available at: http://www.sc.gob.sv/uploads/SC-043-S-LP-R-2013_111013_1340.pdf and the decisions SC-016-S/C/R/2011 and SC-013-S/C/R-2012

[ix] See Superintendencia de Competencia decision on collusion: SC-017-O/PS/R-2010/RES:19-12-2011

[x] Klemperer, P. (2001).”How (Not) to Run Auctions: the European 3G Telecom Auctions”, November 2001, available at: http://dx.doi.org/10.2139/ssrn.297907, pg. 3

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