Regulating for Non-Price Discrimination the Case of UK Fixed Telecoms

Abstract

Telecoms regulators have increasingly signaled concerns about the incentives and ability of vertically integrated incumbents to engage in discriminatory behavior against competitors in downstream markets. This concern is particularly strong in fixed telecoms where incumbents have substantial market power. In other regulated sectors, vertical or structural separation has often been adopted to eliminate any incentive to engage in such behavior. However, while vertical or structural separation in fixed telecoms may remove concerns about discrimination, it can give rise to other problems. Consequently, regulators or competition authorities have so far generally refrained from it.

The UK Office of Communications (Ofcom) has recently accepted undertakings from British Telecom (BT), the vertically integrated provider of fixed telecoms services in the UK. These constitute one of the latest attempts to address discriminatory concerns in fixed telecoms. Their aim is to tackle this concern by functionally rather than structurally separating the divisions of BT that provide upstream services.

Previous research in this area has either looked at the theoretical incentives of vertically integrated operators to engage in discriminatory behavior or considered the theoretical merits of various regulatory measures to improve competition. This paper contributes to the literature in this area by joining these two strands of analysis, examining the incentives of vertically integrated operators with market power to discriminate using where possible empirical evidence relevant to the UK and considering possible regulatory responses to this behavior. Further, given that competition authorities assess price discrimination using a rule of reason approach rather than a per se, ban, it discusses how in a regulated industry non-price discrimination could be treated differently from price discrimination. Finally, it briefly describes the remedy adopted by Ofcom to deal with this issue.

The structure of the paper is as follows: · Section 2 briefly describes the nature of the problem identified by Ofcom; · Section 3 presents a review of the literature on the incentives to discriminate; · While Ofcom only briefly discussed why BT had an incentive to engage in nonprice discrimination, Section 4 provides some evidence on whether the factors that provide and strengthen these incentives existed; Finally, Section 5 discusses why non-price discrimination could be treated differently from price discrimination and provides reasons why a per se ban may be justified. Having established that 'traditional' ex post and ex ante remedies are unlikely to be effective, it then briefly considers alternative regulatory responses to this behavior and describes the solution favored and adopted by Ofcom.

While the focus is mainly on UK fixed telecoms, the discussion should be relevant to all countries with vertically integrated operators.