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rities, just as competition authorities, often resort to market shares only as the main
determinant of a dominant market position.57
4.3 Criteria for judging competition in network industries
The focus now turns to a normative discussion of how the competitiveness of a market can be assessed for the purpose of judging the need for government intervention
into market processes. Since market characteristics and therefore also the characteristics of competition in a market depend on the particularities of the industry, such an
analysis must be undertaken for a particular industry in question. The present section
focuses on the special case of network industries.
Competition policy for network industries is made difficult by the fact that network industries do not feature the typical characteristics of competitive markets. A
main reason for this is that building a network infrastructure involves large fixed
costs. On the physical layer of a network industry, there will therefore often be only
one or very few active market players. The strong network externalities associated
with the demand for network services may also favor fewer larger firms on the
applications layer of network industries. The central characteristics of network industries therefore lead to a market structure in which only a few large competitors are
far more likely to exist than many small firms. Does this imply that competition is
not possible in network industries with large fixed and common costs?
4.3.1 Sufficient conditions for natural monopoly
One critical concept for understanding the competitive forces in a market is the
concept of natural monopoly. A market is considered a natural monopoly when a
single firm can produce the relevant output at lower costs than several firms. A formal definition of natural monopoly employs the concept of strict subadditivity of the
cost function in the relevant range of output (Baumol, 1977). The necessary conditions for subadditivity are different for single-product and multi-product production.
In the case of a single-product firm, economies of scale, defined by the fact that a
proportional increase in all inputs leads to an over-proportional increase in output,
are sufficient to prove subadditivity of the cost function (Baumol, 1977: 810). Economies of scale are, however, not a necessary condition for subadditivity in the
single-product case. It is possible that a cost function is subadditive in the relevant
range of output even for output ranges in which the demand curve crosses the marginal cost curve in the range of increasing marginal costs. Given large fixed costs of
production, it can be less costly to have a single firm produce in the range of increa-
57 See discussion in section 9.2.2 below.
67
sing marginal costs rather than to incur the fixed costs of production twice (Knieps,
2005a: 23).
In the case of a multi-product firm, economies of scope are a necessary condition
for subadditivity of the cost function. Economies of scope are defined by the fact
that it is less costly to produce two or more product lines in a single firm rather than
to produce any combination of the product lines in several firms (Panzar and Willig,
1981). Economies of scope are, however, not a sufficient condition for subadditivity
of the cost function. Intuitively, to prove subadditivity it must be shown that the
additional costs of producing an output vector z are lower when output vector x + y
is already being produced by the firm than when only the output vector x is already
being produced (Knieps, 2005a: 27):
C(x+z) – C(x) ? C(x+y+z) – C(x+y), whenever x,y,z ? 0.
This property of the cost function is called cost-complementarity. Costcomplementarity of production is a sufficient condition for subadditivity of the costs
function in the multi-product case.
The formal definition of strict and global subadditivity of a cost function, both for
the single-product and the multi-product case, given by Baumol (1977: 810) reads:
A cost function C(y) is strictly and globally subadditive in the set of commodities N = 1,…, n,
if for any m output vectors y1, … , ym of the goods in N we have C(y1,…, ym) < C(y1) + …
+ C(ym). This is clearly the necessary and sufficient condition for natural monopoly of any
output combination in the industry producing (any and all) commodities in N, for subadditivity
means that it is always cheaper to have a single firm produce whatever combination of outputs
is supplied to the market, and conversely.
4.3.2 Theories of monopolistic competition
A long history of regulation in network industries is evidence to the fact that competition authorities in past times often doubted that effective competition is possible
in these markets. A wave of deregulation in network industries since the 1980s demonstrates a changed perspective. Network sectors may not correspond to perfectly
competitive markets. Economic theory does, however, offer models of monopolistic
competition that allow for economies of scale, economies of scope and network
externalities in competitive market environments. Using these models as reference
models to judge competition in network industries increases the spectrum of observable market structures and market behavior that competition authorities can tolerate
without calling for market intervention.
Chamberlin’s theory of monopolistic competition (Chamberlin, 1933) is generally
considered the forerunner of the models of monopolistic competition. When Chamberlin developed his theory he was looking for an explanation of competition in real
markets. Chamberlin argued that competition in reality is characterized not by a
large number of competitors producing homogeneous products; rather it is a struggle
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Zusammenfassung
Die Konvergenz der Netztechnologien, die dem Internet, der Telekommunikation und dem Kabelfernsehen zu Grunde liegen, wird die Regulierung dieser Märkte grundlegend verändern. In den sogenannten Next Generation Networks werden auch Sprache und Fernsehinhalte über die IP-Technologie des Internets transportiert. Mit den Methoden der angewandten Mikroökonomie untersucht die vorliegende Arbeit, ob eine ex-ante sektorspezifische Regulierung auf den Märkten für Internetdienste wettbewerbsökonomisch begründet ist. Im Mittelpunkt der Analyse stehen die Größen- und Verbundvorteile, die beim Aufbau von Netzinfrastrukturen entstehen, sowie die Netzexternalitäten, die im Internet eine bedeutende Rolle spielen. Die Autorin kommt zu dem Ergebnis, dass in den Kernmärkten der Internet Service Provider keine monopolistischen Engpassbereiche vorliegen, welche eine sektor-spezifische Regulierung notwendig machen würden. Der funktionsfähige Wettbewerb zwischen den ISP setzt jedoch regulierten, diskriminierungsfreien Zugang zu den verbleibenden monopolistischen Engpassbereichen im vorgelagerten Markt für lokale Netzinfrastruktur voraus. Die Untersuchung zeigt den notwendigen Regulierungsumfang in der Internet-Peripherie auf und vergleicht diesen mit der aktuellen Regulierungspraxis auf den Telekommunikationsmärkten in den Vereinigten Staaten und in Europa. Sie richtet sich sowohl an die Praxis (Netzbetreiber, Regulierer und Kartellämter) als auch an die Wissenschaft.