Analyzing Telecommunications Market Competition: Foundations for Best Practices

Competition is an increasingly important theme in telecommunications policy. It has been credited with expanding services, lowering prices, and stimulating innovation. (Jamison et al. 2009) But competition can raise difficult challenges for telecommunications policy makers and regulators. One of these challenges is determining the optimal mix of market and regulatory involvement in determination of prices, services, and investment decisions. In this paper, we provide an overview of assessing market power and competition, focusing on methods of analyzing market competition in order to determine the most appropriate form of regulation as well as merger policy. Of primary importance is the ability of the government and regulatory authority to accurately define the market prior to being able to consider market power. Markets are defined along both product and geographic boundaries. In terms of products, a market is the set of all products that customers are willing to substitute if prices were to change, and excludes all products that customers do not find to be reasonable substitutes for the products in the market. The market definition includes all suppliers who could create substitutes for these products and excludes all suppliers who could not do so. Geographic markets are defined by the geographic boundaries that customers and suppliers would stay within to provide and purchase these products. Markets are typically defined by using the SSNIP test, but other methods can be used. Upon defining the relevant market, governments and regulators are tasked with analyzing competition within that market. We discuss methods of identifying market power with specific focus on the telecommunications industry, and consider approaches for determining whether market power is being exercised by firms within the defined market. We examine the typical methods of measuring market concentration, but note that market concentration is not the whole ii story. More important than market concentration are the suppliers' abilities to raise prices, barriers to entry and exit, and anticompetitive conduct.