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Advocacy and Capacity Building on Competition Policy and Law in Asia (7up2 Project)
Advocacy and Capacity Building on Competition Policy and Law in Asia (7up2 Project)
16-17 August 2005, Hanoi, Vietnam
16-17 August 2005, Hanoi, Vietnam
Handling Competition Issues
in a Liberalized Telecom Market
Dong-pyo Hong
Ph.D. in Economics
Kim & Chang, Korea
Characteristics of Telecom Markets

Network Economy
A good becomes valuable to a user when the users adopt the same good or compatible
ones
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Fair competition issues : interconnection, network sharing
Economies of Scale
high fixed cost for constructing network
Natural monopoly due to decreasing cost function
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A telephone users benefits when other users are connected to the same network
Government has license for telecom business to avoid redundant investment
Generally a few service providers in market
Fair competition issues : entry barrier, predatory pricing, price regulation, collusion
Economies of Scope and High common costs
Providers can save cost by providing bundling service
Providers can distributing common cost across many services
Fair competition issues : cross subsidy, service bundling
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Characteristics of Telecom Markets (cont’d)
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Essential/Bottleneck facility
Elements of essential facility
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Examples: local loop network in fixed telephony service (cf. scarcity of spectrum in mobile
service)
Fair competition issues : interconnection, network sharing
Switching cost, lock-in and tipping
Cost and welfare loss in changing service providers
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(i)Control of the essential facility by a monopolist, (ii) a competitor’s inability practically or
reasonably to duplicate the essential facility, (iii)the denial of the use of the facility to a competitor,
(iv)the feasibility of providing the facility
Inconvenience in number change, expenditure on new terminal, abandoning mileage service etc.
Fair competition issues : entry barrier, bundling
Universal service
Telecom service as public utility
Government should guarantee the widespread access to and affordability of basic telecom
services (ex. residential service, emergence call etc.)
2
First-Mover’s Market Power Sustained/Fortified
: First-movers maintain their market dominance by combining inborn advantages and derivative
advantages.
First-Mover’s Advantages
Inborn (Absolute) Advantages: Holding essential facilities, Preoccupying markets and scarce resources
(e.g. high-quality frequency, number etc.)
Derivative (Secondary) Advantages: Economies of scale/scope, Brand power
Fixed Service Market
Dominant firm retains substantial market share and profits, based on its holding of
essential facilities (local loops)
Currently, the system of unbundling fixed network elements is not actively utilized
Mobile Service Market
Dominant firm has accumulated a substantial amount of profits by preoccupying markets and realizing
economies of scale as a first-mover
→ Brand Power established → Consumers ‘locked-in’
Consumer-lock-in effect is deepening by structural entry barriers and consumers’ switching costs
3
Leveraging market power in new service markets
: First mover’s advantage in investment and marketing → transferred to new service market
Fixed market
In Korea, KT invested aggressively in VDSL using excess profits from monopoly markets such as LM (Land
to Mobile) call and leased line markets, putting pressure on competitors through strong marketing
In the last year, the number of KT subscribers increased while the number of Hanaro decreased
Mobile market
Profits from mobile telephone market invested in wireless Internet
→ advantage in wireless Internet service market
Worries concerning transfer of market power to the IMT-2000 services in the future
Limitation of new entrants
Limitation in facility based competition due to matured market and lack of fund
4
Effective Competition
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Specific policies are needed to achieve ‘effective competition’
Effective Competition
Active competition between suppliers
Absence of persistent excess profit
Absence of market power
☞ Market power: Ability to set prices independent of the behaviors of other carriers and the
consumers
Benefits of effective competition
Satisfactory service quality, prices that reflect costs, innovative services, variety of choices,
efficient provision of services, sufficient information for the consumers, etc.
Process of effective competition policy
Market definition
Market analysis: Whether the market is, or expected to be, effectively competitive
Examine whether the policy to promote competition is needed
Abolish or modify the existing policy as necessary, or introduce a new policy
5
Fair competition issues on network
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Interconnection
Network Opening
Accounting Separation
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Interconnection
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Why necessary?
Telecom networks need to interconnect for social welfare
Essential facility (e.g. local loop) should be accessed by many other carriers for
service provision
Local Switch
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Toll Switch
Local Switch
Toll Switch
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4
1
Local Switch
2
Local Switch
5
Local Area 2
Satellite
Local Area 1
International
Gateway Switch
Undersea
Optical Fiber
Foreign
Country
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Interconnection (cont’d)
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How to Regulate?
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Mandate to negotiate interconnection in (upon request)
Obligation to treat interconnecting carriers indifferently
 For example, a local carrier should treat other long-distance carriers in the
same way as it treats its own long-distance subsidiary
Regulate the interconnection charge to be based on costs
Collocation of equipments or facilities required for interconnection
Obligation to provide information
Other topics
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Interconnection between data networks (Internet interconnection), Opening of
wireless Internet access
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Network Sharing
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LLU (Local loop unbundling)
- Oblige a local carrier to allow other carriers to use its local loop (unbundled)
Unbundling fixed network elements
- Oblige a carrier to provide unbundled network elements such as pole, duct and
cable of local loop
Roaming
- Sharing of mobile networks
MVNO (Mobile Virtual Network Operator)
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Accounting Separation
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Concept
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Typically a telecom operator provides many services
Divide costs between different services to determine the cost of each service (Cost
allocation)
 Need to allocate joint and common costs
Purposes
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Use the cost for (ROR) price regulation
Check if the cross-subsidies exist between the monopolistic service and the
competitive service, etc.
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Price Cap Regulation

Price regulation which sets the price ceiling for the market dominant firm after considering price
level, productivity, yet providing some degree of freedom for the firms to set price

In the US and the UK, administrative(regulatory) costs have fallen, price have fallen and
productivity increased
- Cost reduction and incentive to rationalize management
- Prevent cross-subsidization
- Remove uncertainty by enhancing transparency of regulation
- Reduce regulatory costs such as verifying production cost
- Promote stable investment by regulating for a limited period
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Price Regulations
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Objectives and Principles of Price Regulation
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Ex-ante vs Ex-post Regulation
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ROR Regulation
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Price Cap Regulation
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Universal Service: Concepts
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Universal service
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In Korea, universal service is defined as “’basic (fundamental)’ telecom services
that every user can be provided anytime and anywhere at affordable rates”
Currently, local telephony, local payphone service, insular service, emergency
services, discount services of telephony to handicapped and low-income (See
below for other countries)
Universal service policy
-
Promoting or maintaining universal availability of connections by individual
households to public telecom networks (Source: Hank Intven (ed.), Telecommunications
Regulatory Handbook)
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Universal Service: Backgrounds

Access to telecommunications as basic rights of all citizens
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Increasing need to solve ‘digital divide’ problems as the informatization of the
society progresses
Network externality and universal service
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Network externality: Benefit enjoyed by a network user increases as more users
are added to the network
As the socially optimal network size may not be achieved through market functions,
some subsidies for universal service may be welfare-enhancing
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USO (Universal Service Obligations)
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USO: Requirement on operators to provide universal service
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In monopolistic era, USO was only implicitly imposed on the monopolist
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The revenues from providing services, say, to uneconomic areas (at the same
affordable price) may not cover corresponding costs
A regulator might decide to, or not to, set up specific mechanisms to recover the
‘costs’ from USO
The ‘costs’ were usually financed by cross-subsidies (i.e., high prices of longdistance services subsidized low prices of local telephony)
Since the introduction of competition, USO needed to be more specified
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Cross-subsidies may distort competition
Clearer definition of universal service
How to finance the associated ‘costs’
Competitive and technological neutrality
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Universal Service : Funding Mechanisms
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Mandatory service obligations
General taxes
Cross subsidies
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Access deficit charges
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Traditional approach
May entail inefficient price structure and distort competition
May lead to inefficient interconnection and distort competition
USF (Universal service fund)
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Potential to improve efficiency and transparency
Administrative complexity
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Universal Service Fund
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Good USF (Intven)
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Independent administration, transparent financing, market-neutral, targeted funding,
subsidies should be relatively small, competitive bidding
Good collection mechanism needs to be designed (who should contribute to the
fund on what basis, how to determine the amount of USF, who collects the
contributions, etc.)
Cost models for USF
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Subsidies to uneconomic areas
LRIC for improved efficiency
Competitive bidding process
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Regulations in telecom industry in Korea
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Price cap regulation
Non-price regualtion
Role Sharing between Regulatory and Competition Authorities
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Price cap regulation
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Only KT’s local call and SKT’s mobile phone tariffs are liable to prior approval and other providers
only notify their tariffs
※ Market Share: Local(KT,95.6%), Mobile(SKT, 57%)
- Purport : to regulate consumer predation or predatory price to exclude competitors
↔ Need to allow more freedom in terms of means of competition (lift price regulation)
- less price competition
- too much competition in non-price area
- less incentive for price reduction
- price rigidity and incentive for cartel
※ price cap regulation
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Non-price Regulation
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Local loop unbundling
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Number portability
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Universal Service Fund was Introduced in Jan 2000.
Review the possibility of including the broadband in universal service after 2005
Obligatory donation and accounting regulation
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Essential facility owners are required to provide interconnection
Long-Run Incremental Cost: Assess the connection charge most effectively
Universal service obligation
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Local Telephony : Implementing stage-wise from Jun 2003 to Dec 2004
Mobile : Implementing in 6 months intervals in order of SKT(1st), KTF(2nd), and LGT(3rd) from Jan
2004
Obligatory interconnection and provision of facility
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introduced in 2002 for local loop networks and broadband Networks
Ban on cross subsidy of facility-based service operator
Differentiated frequency use cost
Advertisement, standardized contract, membership service and subsidy on phones
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Role Sharing between Regulatory and Competition Authorities
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Strengthened role of Korea Communication Commission(1995)
- Power to approve dominant player’s tariffs, power to recommend business permit, enact
notification on regulatory procedures
- Examine the agreement regarding provision of facilities and interconnection
- Investigate unfair practices and arbitrate consumer loss and damage
- Authorize the agreement between telecom operators
- Arbitrate disputes of network sharing and interconnection between operators
Agreed on general principle for role division
- General abuse of dominant position, unfair trade practices, cartels  KFTC
- Industry specific, technical areas reducing consumer welfare  MIT
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※ OECD conducted an analysis on role division of competition and technical issues in 1998
- Often, regulatory agency deals with technological and economic issues and competition agency
exclusively deals with competition law enforcement
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