Evaluating market power using competitive benchmark prices instead of the Herfindahl-Hirschman index

Antitrust Law Journal

Volumn 74, Issue 2, 2007, Pages 387-407

  Hausman, Jerry A ^a   Sidak, J Gregory ^b  

^a MASSACHUSETTS INSTITUTE OF TECHNOLOGY   (United States)

^b GEORGETOWN UNIVERSITY LAW CENTER   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 34548132417     PISSN: 00036056     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Conference Paper

References (70)

1. See U.S. Dep't of Justice & Federal Trade Comm'n, Horizontal Merger Guidelines 0.1 (1992, revised 1997) [hereinafter Merger Guidelines].
2. See Commission Regulation, Guidelines on Market Analysis and the Assessment of Significant Market Power, 2002 O.J. (C 165) 6, 14-15 1 70 [hereinafter SMP Guidelines].
3. The guidelines provide the analytical framework used by the agencies and provide guidance in shaping enforcement policy. For example, the Merger Guidelines state the goal is "to reduce the uncertainty associated with enforcement of the antitrust laws in this area." See Merger Guidelines, supra note 1, at 0.
4. See Council Directive 2002/21, On a Common Regulatory Framework for Electronic Communications Networks and Services, 2002 O.J. (L 108) 33, 36 _ 28, 44 art. 14(2) (EC) [hereinafter Common Regulatory Framework] ;
5. Ministry of Communications, Marine and Natural Resources, S.I. No. 307, European Communities (Electronic Communications Networks and Services) (Framework) Regulations 2003.
6. See SMP Guidelines, supra note 2, at 19 ¶¶ 97-98; Common Regulatory Framework, supra note 4, Annex II.
7. These competitive benchmark prices may require econometric adjustment to account for differences in quality, cost, and currency.
8. For an explanation of how market demand allows for evaluation of consumer welfare, see Jerry A. Hausman, Exact Consumer Surplus and Deadweight Loss, 71 AM. ECON. REV. 662 (1981).
9. ComReg, Market Analysis-Wholesale Mobile Access and Call Origination, Document 04/118, Dec. 9, 2004, available at http://www.comreg.ie/
10. We use ComReg's market definitions for the purposes of this economic analysis. Consistent with the requirements of the New Regulatory Framework, we also consider the other economic factors discussed above.
11. Decision No: 08/05 of the Electronic Communications Appeals Panel in respect of Appeal Numbers ECAP6/2005/03, 04, 05, 06, 07, 08, December 14, 2005, available at http://www.ecap.ie/NR/rdonlyres/D7CBHCD-5C97-40B8-BE4C- B0E3CE90552F/ 0/ECAPDecisionNo0805.pdf.
12. ComReg Market Analysis, supra note 8, ¶ 4.133, at 62.
13. See MERRILL LYNCH, GLOBAL WIRELESS MATRIX 2Q04, 3, tbl. 1 (Sept. 2004), available at http:/www.comcom.govt.nz/IndustryRegulation/Teiecommunications/ Investigations/ MobileTerminationRates/ContentFiles/Documents/Gl obal % 20 Wireless % 20 Matrix%202Q04%20Sept%2004.pdf. Only Denmark had a higher churn rate. The Irish churn rate also exceeded the U.S. churn rate of 2.2 percent per month.
14. Id. The Federal Communications Commission (FCC) finds the U.S. mobile market to be effectively competitive.
15. See, e.g., FCC, ANNUAL REPORT AND ANALYSIS OF COMPETITIVE MARKET CONDITIONS WITH RESPECT TO COMMERCIAL MOBILE SERVICES 94 (2006), available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/ FCC-06-142Al.pdf [hereinafter FCC Report].
16. ComReg Market Analysis, supra note 8, ¶ 4.133, at 62. These prices were hypothetical rather than actual market prices, which excluded handset costs and subsidies-an important competitive factor in mobile competition for postpaid customers.
17. See Jerry A. Hausman, Mobile Telephone, in HANDBOOK OF TELECOMMUNICATIONS ECONOMICS 564 (M. Cave et al. eds., 2002).
18. See, e.g., FCC Report, supra note 12. For example, the DOJ permitted the merger of Cingular and AT&T Wireless, the second and third largest mobile providers. It is not plausible that the DOJ would allow a merger if it thought that the market was not effectively competitive. See Merger Guidelines, supra note 1, at 0.1-0.2.
19. ComReg Market Analysis, supra note 8, ¶ 4.134, at 62.
20. See ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, COMMUNICATIONS OUTLOOK 2005, 172 Fig. 6.8 (2005), available at http://www.thepublicvoice.org/ events/tunis05/oecd_outlook.pdf.
21. ComReg Market Analysis, supra note 8, ¶ 4.137, at 63.
22. Id. 1 4.153, at 66. In Ireland in 2004, three MNOs-Vodafone, 02, and Meteorhad facilities-based mobile networks. Another MNO, H3G, entered the market in 2005.
23. ComReg did attempt to demonstrate that return on capital employed was high among mobile providers in Ireland. Although we do not review that claim here, economists have known since the early 1980s that one cannot use accounting rates of return to demonstrate the presence of SMP. The problems with using accounting rates of return are especially severe in an industry like mobile telephony, which has had a very high rate of technical change requiring new investment in technology.
24. ComReg Market Analysis, supra note 8, ¶ 4.69, at 48.
25. Id. ¶ 4.68, at 48.
26. Id. ¶¶ 4.125-4.132, at 61-62. 23 Id. ¶ 4.117, at 59.
27. 3G is third-generation digital technology, which replaces the older second-generation (2G) technology. 3G technology allows for significantly faster data transmission speeds and also higher voice transmission capacity. See Hausman, Mobile Telephone, supra note 13, at 564.
28. ComReg Market Analysis, supra note 8, ¶ 4.119, at 59.
29. Stigler's and von Weizsäckers definitions of barriers to entry focus on the effect of cost asymmetries. See GEORGE J. STIGLER, THE ORGANIZATION OF INDUSTRY 67-70 (1968);
30. C. Christian von Weizsäcker, A Welfare Analysis of Barriers to Entry, 11 BELL J. ECON. 399 (1980). Their definitions are more restrictive than Bain's.
31. See JOE S. BAIN, BARRIERS TO NEW COMPETITION: THEIR CHARACTER AND CONSEQUENCES IN MANUFACTURING INDUSTRIES (1956). For an analysis of the differences
32. see DENNIS W. CARLTON & JEFFREY M. PERLOFF, MODERN INDUSTRIAL ORGANIZATION 76-80 (4th ed. 2005).
33. See Press Release, ComReg, Smart Offered 3G License, (Nov. 16, 2005), available at http://www.comreg.ie/publications/defaul t.asp?ctype=5&nid=102203.
34. ComReg Market Analysis, supra note 8, ¶ 4.130, at 61-62.
35. Id. ¶ 4.22, at 37-38.
36. Case T-342/99, Airtours pic v. Commission, [2002] S.C.M.L.R. 317, available at http://eur-lex.europa.eu/smartapi/cgi/sga_doc? smartapicelexplus!prod!CELEX numdoc&lg=en&numdock=61999A034 [hereinafter Airtours}.
37. ComReg Market Analysis, supra note 8, ¶ 4.24, at 38.
38. Id. ¶¶ 4.27A, 4.31, at 39-40.
39. Id. ¶ 4.27B, at 39.
40. See OFCOM, THE COMMUNICATIONS MARKET-TELECOMMUNICATIONS APPENDICES (Aug. & Oct. 2004), available at http://www.ofcom.org.uk/research/cm/qu_10_2004/ 194541 (Oct.) and http://www.ofcom.org.uk/research/cm/cmpdf/telecom_apndx.pdf (Aug.).
41. ComReg Market Analysis, supra note 8, ¶¶ 4.54-4.56, at 45.
42. Id. ¶ 4.59, at 46.
43. Id. ¶ 4.65, at 47.
44. Id. ¶ 4.76, at 49.
45. Id. ¶¶ 4.85-4.87, at 52.
46. Id. ¶ 4.85, at 52
47. Airtours, supra note 30, ¶ 195.
48. ComReg Market Analysis, supra note 8, ¶ 4.91, at 53 (quoting Patrick Rey, Collective Dominance and the Telecommunications Industry (mimeo, University of Toulouse, Sept. 7, 2002)).
49. ComReg Market Analysis, supra note 8, ¶ 4.95, at 54.
50. Id. ¶ 4.97, at 55.
51. This strategy is sometime called "taking a hostage." Other strategies of credible precommitment also exist in certain situations.
52. The Horizontal Merger Guidelines recognize that a firm's incentive to deviate is greater when "the smaller is the base of sales on which it enjoys elevated profits prior to the price cutting deviation." Merger Guidelines, supra note 1, at 2.12.
53. MERRILL LYNCH, supra note 12. No average price was reported for Belgium. Merrill Lynch reported the amounts in U.S. dollars.
54. ComReg Market Analysis, supra note 8, ¶ 4.69, at 48.
55. Id., App. B. For an explanation of the importance of handset subsidies in mobile competition
56. see Hausman, Mobile Telephone, supra note 13.
57. ComReg Market Analysis, supra note 8, ¶ 4.138, at 63.
58. Id. ¶ 4.139.
59. Id. ¶¶ 4.6, at 32; 4.17, at 36; 4.33, at 41; 6.15, at 74.
60. The R2 of a regression of price on HHI is .005, far below levels of statistical significance. If one omits Switzerland, which has the high price observation of US$0.45, the coefficient of HHI in the regression becomes negative, although it remains insignificant.
61. See SMP Guidelines, supra note 2, at 19, ¶ 100.
62. Indeed, because 74 percent of subscribers were prepaid, using the OECD definition of high-user (for consistency with ComReg's analysis), one can estimate that only about 3.5 percent of 02's mobile users were high-use, postpaid consumers. Thus, among the four categories of users that ComReg considered, Ireland was less expensive for 96.5 percent of all customers compared to the United Kingdom, which, again, had been found to be effectively competitive.
63. ComReg Market Analysis, supra note 8, ¶ 4.140, at 63.
64. See, e.g., Hausman, Mobile Telephone, supra note 13;
65. Hausman, Exact Consumer Surplus and Deadweight Loss, supra note 7;
66. Jerry A. Hausman, Valuing the Effect of Regulation on New Services in Telecommunications, BROOKINGS PAPERS ON ECON. ACTIVITY: MICROECONOMICS 1 (1997).
67. This conclusion depends on approximately equal market own-price elasticities in both countries, which the econometric analysis reported here indicates holds true.
68. This latter question is not definitive in terms of competitive analysis because the existence of higher-quantity consumers may depend on unobserved preference factors. For example, wine consumption per capita is higher in France than in Norway. However, an econometric explanation gives greater assurance that the differences observed in Ireland do not depend on some unexplained competitive distortion.
69. A revenue equation or quantity equation will typically have price and income included. Given the small sample size and the lack of instruments, we use least squares rather than instrumental variables. The equation does not fail a Hausman specification test. A log linear specification uses the variables measured in logarithms, which has been found to be useful in many situations, especially where heteroscedasticity is present.
70. The elasticity is 1.0 minus the coefficient of the price variable, LPR04, since the left hand side variable is revenue. The elasticity estimate is consistent with the finding of lower price and higher ARPU in Ireland than in the United Kingdom.