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Margit Vanberg, The threat of market-power leveraging in:

Margit Vanberg

Competition and Cooperation Among Internet Service Providers, page 134 - 135

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
134 8 Policy conclusions In the preceding chapters it was argued that effective competition and the ease of market entry into Internet transport markets rely on the functioning of competition and in some respects on efficient regulation in upstream Internet periphery markets. Chapter 5 introduced the elements of the Internet periphery that are essential complements to Internet transport services. It was found that in some regions the local communications infrastructure must still be considered a monopolistic bottleneck. The present chapter provides a normative analysis of the necessary regulations in the local communications infrastructure market from the perspective of policy makers wanting to ensure competition in Internet transport services. It will be shown that regulation of non-discriminatory access to monopolistic bottlenecks in the Internet periphery is needed in order to hinder leveraging of monopoly power into Internet transport markets. Section 8.1 discusses the theoretical background for why leveraging of market power into related but competitive network areas needs to be considered when regulating monopolistic bottlenecks. Section 8.2 presents the principles of regulation to be respected within a disaggregated regulatory framework. In section 8.3 the extent of the monopolistic bottleneck in local communications infrastructure is discussed. Section 8.4 concludes the chapter. 8.1 The threat of market-power leveraging Whenever a monopolistic bottleneck exists, the possibility that the owner of the bottleneck could attempt to leverage market power into related markets has to be considered. The theory of vertical integration offers insights into when the bottleneck owner will find it in his interest to extend market power into related markets by discriminating competitors’ access to the monopolistic bottleneck. In the case of a monopoly on the upstream level and competition on the downstream level it can be shown that the upstream monopolist generally has no profit incentive to vertically integrate into the competitive downstream market (Kaserman and Mayo, 1995: 304). If the monopolist would succeed in foreclosing the downstream market to all competitors, it could make higher profits in an integrated monopoly, as compared to when it is a monopolist only on the upstream market, only when price differentiation is not possible on the upstream market but on the downstream market (Knieps and Fremdling, 1993: 152). In all other cases, the monopolist could not make higher profits by foreclosing the downstream market than can be made by extracting the monopoly profit on the upstream market. An upstream monopolist does, however, have an incentive to vertically integrate into a downstream market when the firms on the downstream market also have some degree of market 135 power. In this case a vertically integrated monopolist could avoid the doublemarginalization problem of successive monopolies and increase its profits compared to the non-integrated case (Kaserman and Mayo, 1995: 305). These conclusions drawn from the theory of vertical integration hold in the absence of market-power regulation. They are not applicable when regulation hinders the upstream monopolist from extracting monopolistic rents on the upstream market. In this case a monopolist can have an incentive to vertically integrate also into a competitive downstream market. As long as the downstream market is not price regulated an integrated monopolist can hope to foreclose the downstream market and extract above competitive returns on this level. Whenever a monopolistic bottleneck is identified for regulation, it is therefore important to consider also the incentives of a regulated monopolist to foreclose a related, unregulated downstream market. Foreclosure in this context does not only refer to practices by which access on the wholesale level is completely denied to competitors or offered only at discriminatory prices. Foreclosure can also refer to the practice of discriminating competitors by non-price methods relating especially to the quality of the service offered (Laffont and Tirole, 2000: 161). The threat of foreclosure adds additional demands to the regulation of bottleneck network elements. In addition to applying price regulation as an instrument to guide the efficient allocation of resources in the market, in which monopolistic bottleneck elements are found, policy makers must also monitor the quality of service of the wholesale products to guarantee equal chances for competitors in the downstream market. 8.2 The regulatory framework Since market-power leveraging can extend inefficiencies from monopolistic bottleneck network areas to related competitive markets, leveraging is often used as a justification for extending the regulatory basis into competitive market segments. Laffont and Tirole (2000: 163), for instance, argue: “…the deregulation of competitive segments is costly, since it substantially increases the monitoring requirements.” They favor a global price-cap regulation which includes both the intermediate (access) goods as well as the competitive retail goods of the bottleneck owner (Laffont and Tirole, 2000: 170ff.).118 A global approach to sector-specific regulation, however, neglects the fact that regulation in itself is always costly. The present analysis takes the stance that a minimization of the regulatory basis should be aspired to by avoiding the regulation of market segments that are competitive. When market power is effectively regulated, then this will hinder the bottleneck owner from leveraging market power into competitive markets. 118 Laffont and Tirole, however, also caution that a global price cap could be used by the incumbent to price squeeze competitors out of the market by meeting the price-cap requirements through a substantial decrease in the final goods prices combined with an increase in the intermediate goods prices (Laffont and Tirole, 2000: 174).

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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.