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Margit Vanberg, Conclusions in:

Margit Vanberg

Competition and Cooperation Among Internet Service Providers, page 74 - 75

A Network Economic Analysis

1. Edition 2009, ISBN print: 978-3-8329-4163-5, ISBN online: 978-3-8452-1290-6 https://doi.org/10.5771/9783845212906

Series: Freiburger Studien zur Netzökonomie, vol. 14

Bibliographic information
74 network areas. Those network areas showing natural monopoly characteristics, but no substantial sunk investments, are considered contestable (quadrant 2). Only when natural monopoly characteristics are combined with substantial sunk costs (quadrant 1) should ex-ante regulation be considered. 4.5 Justifying interventions by general competition policy in network industries General competition law applies to all network industries, even if some market segments of these industries are subject to sector-specific regulation. If competition authorities find evidence for the abuse of market power by a market participant, they have the right to intervene into the market. Ex-post intervention by competition authorities is not based on a reference model comparable to the theory of monopolistic bottlenecks. If no monopolistic bottlenecks can be identified ex-ante, then only a case-by-case analysis can disclose those particular circumstances of a market that lend stable market power to a firm. As was argued for the case of sector-specific regulation, competition policy for network industries must also take into account that the nature of competition in network industries is complex. Competitive network markets will show market characteristics of monopolistically competitive markets. Product differentiation and price differentiation tactics make competition in network markets different from competition in markets of homogeneous goods. The traditional antitrust approach of measuring market shares in the relevant product market in order to prove market power is particularly inappropriate for network industries (Knieps, 2006: 70). The alternative methodological approach of using game theoretic models to prove the existence of stable market power in a particular market setting likewise is unsatisfactory in that such models typically simplify and therefore do not reflect the nature of competition in network industries correctly. Furthermore, game-theoretic models typically have multiple solutions (Knieps, 2006: 71). To prove stable market power that allows a dominant firm to make above competitive profits over an extended time period without inducing market entry, competition authorities must show, for a given market constellation, that entry barriers exist that prevent competitors from entering a market in which above competitive profits are being made. This requires a thorough examination of the competition dynamics in the market. 4.6 Conclusions Competition policy and sector-specific regulation have many limitations. Government interventions into market processes should therefore be applied restrictively. Sector-specific regulation generally infringes more on the freedoms of the regulated firm than antitrust policy. Furthermore, the likelihood of committing a Type-1 error is higher in sector-specific regulation when compared to general competition law. 75 For these reasons, the justification for sector-specific regulation needs to be especially strong. In the special case of network industries, the effectiveness of competition in a market is often difficult for policy makers to assess. The market characteristics that are typical for network industries lead to market structures with only few active firms and prices which are above marginal costs. This chapter discussed the need to judge the competitiveness of network industries using a reference model of competition that is capable of explaining the typical market characteristics of network industries, such as economies of scale and network externalities, without automatically equating these characteristics with signs of market failure. The disaggregated regulatory approach encourages sector-specific regulation only when the claim of market power is strong. It uses the theory of monopolistic bottlenecks to identify ex-ante those network areas which lend stable market power and to justify sector-specific regulation in these network areas. The disaggregated regulatory approach is committed to minimal invasion into free markets by searching for monopolistic bottlenecks on the lowest possible level on which network elements can be differentiated. Regulation should be applied only to those network elements identified as monopolistic bottlenecks. A disaggregated analysis of the network elements in Internet service provision is presented in chapter 5. General competition law applies to all markets, irrespective of whether some segments of these markets are also subject to sector-specific regulation. For market interventions based on general competition law competition authorities must prove that market power exists and that it is being abused. This can only be done on a case-by-case basis. The effects of strong network externalities on market processes are discussed in general in chapter 6. Chapter 7 uses the insights gained there to analyze whether network externalities erect entry barriers in the special case of Internet backbone services and therefore lend stable market power to Tier-1 ISPs.

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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.