DP3988 Market Definition in the Telecoms Industry

Author(s): Jordi Gual
Publication Date: July 2003
Keyword(s): competition policy, market definition, telecommunications, telecoms
JEL(s): L40, L51, L96
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3988

Market definition for antitrust purposes is by now firmly rooted in economic analysis both in the US and the EU, even if the approaches are slightly different. This Paper examines the theoretical basis for the legal definitions and assesses whether the general principles need to be adapted when dealing with the telecommunications services industry. The Paper finds that the conventional antitrust methodology for market definition can be, to a large extent, readily applied to the telecoms industry but points out some key adjustments that have to be made to ensure that the antitrust and regulatory authorities define markets that capture adequately the nature of the competitive interaction in this industry. Three adjustments are needed. First, careful consideration should be given not only to demand substitutabilities, but also to the competitive interaction with all potential suppliers. Second, demand complementarities and the economies of joint production should be properly recognized since they imply that in this industry bundles or systems of services may become a significant unit of antitrust and regulatory analysis. Third, market definition should take into account that the telecoms service industry is characterized by fixed and continuous sunk costs of service provision, and that this will often imply the need to revise the conventional concepts of market power and substitutability based on price elasticities.