Competition studies - 1
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Competition studies - 1

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145 pages
English

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Market definition in the media sectoreconomic issues
Economic policy - Economic and Monetary Union
Information - Documentation
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EUROPEAN COMMISSION
Competition studies — 1
Market definition in the media sector
Economic issues
Report by Europe Economics
for the European Commission,
Directorate-General for Competition,
Information, communication and multimedia
Media
November 2002Preface and disclamer
This report has been prepared by Europe Economics as part of an assign-
ment for the Media Unit of the Directorate-General for Competition of the
European Commission.
Europe Economics was appointed to produce this report following the
restricted tender procedure COMP/C2/2001/16, which comprised two lots:
lot 1: market definition in the media sector: comparative legal analysis
(awarded to Bird & Bird);
lot 2: mark: economic issues (awarded to
Europe Economics).
The two studies are complementary, and Europe Economics read and took
account of Bird & Bird’s interim report when drafting the present report.
Further information on decisions of the Directorate-General for Competition
of the European Commission in the media sector can be found in the 2002
compilation ‘EU competition policy in the media sector’, available on request
from the Media Unit of the Directorate-General for Competition of the
European Commission.
The opinions expressed in this report are purely those of the authors
and may not in any circumstances be regarded as stating an official
position of the European Commission.
Europe Direct is a service to help you find answers
to your questions about the European Union
New freephone number:
00 800 6 7 8 9 10 11
A great deal of additional information on the European Union is available on the Internet.
It can be accessed through the Europa server (http://europa.eu.int).
Cataloguing data can be found at the end of this publication.
Luxembourg: Office for Official Publications of the European Communities, 2003
ISBN 92-894-5659-0
© European Communities, 2003
Reproduction is authorised provided the source is acknowledged.
Printed in Luxembourg
PRINTED ON WHITE CHLORINE-FREE PAPERTABLE OF CONTENTS
1 EXECUTIVE SUMMARY...............................................................................9
1.1 Purpose and Scope...........9
1.2 Structure of the Report.....................................9
1.3 Defining Markets..............................................10
1.4 Market Definition Issues in Media..................................................10
1.5 Framework for Defining Markets in Media Cases........................................................12
2 METHODOLOGICAL ISSUES....................................15
2.1 Introduction......................................................................................15
2.2 Price Discrimination........19
2.3 Bundling...........................................................29
2.4 Advertising and Free Content........................44
2.5 Gateways..........................................................................................55
2.6 Rapid Change..................66
2.7 Convergence....................................................69
3 PRACTICAL ISSUES ..................................................72
3.1 Introduction......................................................72
3.2 Key Steps for Market Definition in Media......................................................................72
3.3 Definition of the Relevant Products..............74
3.4 Assessing Substitutability..............................81
3.5 Cross-checking with Other Evidence...........98
4 CONCLUSIONS.........................................................................................104
4.1 Why Define Media Markets?104
4.2 The Structure of Media Markets...................................................104
4.3 Defining Media Markets in Practice.............106
APPENDIX 1: THE CONCEPT OF MARKET DEFINITION ..............................108
APPENDIX 2: CHALLENGES TO THE TRADITIONAL FRAMEWORK .........123
APPENDIX 3: CATEGORISATION OF TRADITIONAL TECHNIQUES ...........133
APPENDIX 4: BIBLIOGRAPHY ..........................................................................139
3DETAILED TABLE OF CONTENTS
1 EXECUTIVE SUMMARY...............................................................................9
1.1 Purpose and Scope...........9
1.2 Structure of the Report.....................................9
1.3 Defining Markets..............................................10
1.4 Market Definition Issues in Media..................................................10
False problems................................ 11
1.5 Framework for Defining Markets in Media Cases........................12
Weaknesses in the traditional tests................... 12
False solutions................................................................ 12
Key steps for market definition.......................................................... 13
Developing operational guidance...................... 14
2 METHODOLOGICAL ISSUES....................................................................15
2.1 Introduction......................................................15
Definition of the media sector............................................................ 15
Economic characteristics of media industries that affect market definition ....................... 15
Economies of scale and value-based pricing.............................16
Inter-related markets, advertising and free content..................... 17
Stages of production ................................................................................................... 17
Rapid change and convergence................. 18
Structure of the section...... 18
2.2 Price Discrimination........19
The role of price discrimination in the media sector.......................................................... 19
Market definition issues ..................................................................... 20
The case of price discrimination by customer group.................. 20
The case of price discrimination through versioning................... 22
Examples........................................................................................................................... 23
Geographic price discrimination by cable franchise area ........................................... 23
Versioning of books as paperbacks and hardbacks................... 24
Versioning of movie releases...................... 26
Temporal discrimination for durable content ............................................................... 27
Summary of methodological issues .................................................. 28
2.3 Bundling ...........................................................29
The role of bundling in the media sector........................................... 29
The case of bundling to extract consumer surplus..................... 30
The case of bundling as a form of entry deterrence................... 30
Market definition issues ..................................................................... 31
Substitutability between bundled and unbundled supply............................................ 32
Analysis of complements and secondary markets...................... 34
Examples........................................................................................................................... 36
Bundling of pay-television and telephony... 37
Bundling of broadband content................... 39
Bundling of academic journals....................42
Summary of methodological issues .................................................................................. 44
2.4 Advertising and Free Content........................44
The role of advertising and free content in the media sector............ 44
4Market definition issues ..................................................................................................... 45
Treating advertising space as access to an audience................ 46
Treating advertising as content ................................................................................... 47
Markets for the supply of free content......... 47
Examples........................................................... 48
Competition between free-to-air broadcasters............................ 49
Competition between a pay-television operator and free-to-air broadcasters ............ 52
Summary of methodological issues .................................................................................. 54
2.5 Gateways..........................................................55
The role of gateways in the media sector.......... 55
The case of gateways in distribution........... 55
The case of gateways resulting from network effects ................................................. 56
The case of content gateways ....................................................57
Market definition issues ..................................... 58
Markets for gateway services...................... 58
Defining markets in which there is no trade ................................................................ 59
Examples........................................................................................... 60
Digital television platforms 60
Refusal to supply content to an Internet portal............................ 64
Summary of methodological issues.................................................. 65
2.6 Rapid Change ................................................................66
The role of rapid change in the media sector.................................... 66
Market definition issues..... 66
Examples........................................................................................................................... 67.................. 68
2.7 Convergence....................69
The role of convergence in the media sector.................................... 69
Market definition issues ..................................................................... 69
Examples........................................................... 71
Summary of methodological issues.................................................. 71
3 PRACTICAL ISSUES ..................................................72
3.1 Introduction......................................................72
3.2 Key Steps for Market Definition in Media......................................................................72
The need for a structured approach.................. 72
Proposed key steps for market definition analysis............................ 73
3.3 Definition of the Relevant Products..............74
Overview of issues ............................................................................................................ 74
The case of joint production.............................. 74
The case of groups of similar products............. 75
The case of potential products .......................................................................................... 77
The case of in-house production....................... 78
The case of price discrimination........................79
The case of non-contractual trade..................... 79
The case of access to an audience................................................................................... 79
Treatment of geographic and other dimensions of market definition ................................ 80
Summary of practical issues.............................80
3.4 Assessing Substitutability..............................................................................................81
Overview of issues............................................ 81
Use of product and production similarity........... 82
The hypothetical monopolist test in the absence of data.................. 84
5Analysis of substitutability with new distribution channels................................................. 85
Use of consumer survey evidence ....................................................91
Illustrative methodology for the analysis of switching costs.............. 91
Analysis of substitutability induced by characteristics other than price.............................96
Summary of practical issues................................97
3.5 Cross-checking with Other Evidence...........................................98
Overview of issues ............................................................................ 98
Use of price differences to define markets........ 99
Use of market definitions from different stages of supply................ 100
Impact of rapid change on use of recent substitution evidence and precedents ............ 101
Summary of practical issues ........................................................................................... 102
4 CONCLUSIONS.........................................................104
4.1 Why Define Media Markets?104
4.2 The Structure of Media Markets...................................................................................104
Markets must be defined in terms of trade, not undertakings......... 104
Markets in which there is no trade must sometimes be defined ..................................... 105
The most relevant market may be at a different level in the chain of production............ 105
There may be many relevant markets containing a single product.105
4.3 Defining Media Markets in Practice.............................................106
APPENDIX 1: THE CONCEPT OF MARKET DEFINITION ..............................108
Introduction...................................................................................................................... 108
Economic Markets and Relevant Markets....... 108
The European Commission Notice on Market Definition................ 110
Purpose of market definition..................... 110
The hypothetical monopolist or SSNIP test .............................................................. 110
Dimensions of market definition.................................................111
Issues with the Hypothetical Monopolist Test.................................. 112
The so-called cellophane fallacy............... 112
Relevance of market share data based on market definition.... 112
The competitive price standard ................................................................................. 112
Reconciling the Concepts................................ 113
The competitive process and competition law.......................... 113
Using the hypothetical monopolist test...................................... 114
The role of market definition in the economic analysis of competition...................... 116
Practical constraints on the specification of relevant markets................................... 116
Perennial Market Definition Issues.................................................. 117
Significance thresholds for hypothetical price increases.......... 117
Market definition under hypothetical conduct or prices............................................. 118
Supply-side substitutability........................ 118
Non-uniqueness of relevant market .......................................... 120
Chains of substitution................................................................ 122
APPENDIX 2: CHALLENGES TO THE TRADITIONAL FRAMEWORK .........123
Introduction...................................................................................................................... 123
Theories of Competition in the “New Economy”.............................123
Market Definition as Unnecessary.................. 124
Market Definition as Potentially Harmful ......................................................................... 126
Alleged Weaknesses of the Hypothetical Monopolist Test.............. 126
An Alternative Hierarchical Approach 128
6Conclusions for the Media Sector ................................................................................... 131
APPENDIX 3: CATEGORISATION OF TRADITIONAL TECHNIQUES ...........133
Introduction...................................................... 133
Direct Assessment of Substitutability .............................................................................. 133
Residual Demand Analysis.............................135
Inferences from Market Outcomes.................. 136
Interplay between Techniques......................................................................................... 137
APPENDIX 4: BIBLIOGRAPHY..........139
Articles, Books and Speeches......................... 139
European Commission Competition Decisions............................................................... 143
Other Competition Decisions, Judgements and Reports................ 143
Official Publications, Notices and Guidelines.................................. 144
71 EXECUTIVE SUMMARY
1.1 Purpose and Scope
1.1.1 The purpose of this report is to analyse the methodological problems of market definition
in the media sector, and, based on the European Commission’s Notice on Market
Definition (1997), to develop practical approaches to market definition for media cases.
1.1.2 In the light of a literature review and of an analysis of problems with market definition in
the media sector, the report seeks to identify which of those perceived problems are
genuine ones, which reflect weaknesses of traditional methods used for market definition
purposes in competition cases, and which can be addressed simply by a careful
application of traditional market definition techniques, grounded in the hypothetical
monopolist test.
1.1.3 The report also considers how the problems that have been identified can be addressed
in practice, in particular by analysing feasible avenues of inquiry when the data required
by traditional market definition techniques are not available.
1.2 Structure of the Report
1.2.1 This section provides a brief overview of the main results of the study. The remainder of
the report is structured as follows.
1.2.2 Section 2 considers the methodological issues arising in defining markets in the media
sector, based on an analysis of the main economic characteristics of media industries that
may affect the assessment of market definition. It seeks to identify whether, and how,
these features may give rise to specific problems for market definition in media cases,
and outlines how these problems might be addressed.
1.2.3 Section 3 considers how these issues manifest themselves in practice when defining
markets in the media sector. Based on a proposed framework and key steps for market
definition in media cases, it provides an economic critique of approaches to market
definition in media that have been adopted in some competition decisions in the past, and
outlines ways of addressing the practical problems that might be faced.
1.2.4 Section 4 draws out the implications and conclusions of these analyses.
1.2.5 The analysis is supported by a number of appendices. Appendix 1 provides a detailed
economic overview of the concept of market definition, highlighting the central role of
substitutability in terms of product/service characteristics and intended use as well as
price: this provides a consistent foundation for the report’s approach to defining markets.
Appendix 2 reviews critically a strand of literature that promotes the view that market
definition, and specifically the hypothetical monopolist test, are not appropriate
approaches to competition analysis for “new economy” and media cases. Appendix 3
proposes a categorisation of traditional market definition tests and techniques. Appendix
4 provides a list of bibliographic and case references.
91.3 Defining Markets
1.3.1 Market definition is primarily an analytical tool to help identify, in a systematic way, the
competitive constraints faced by an undertaking. The purpose of defining the relevant
market is that of identifying those products (in which we include services) whose suppliers
are capable of exerting effective competitive pressures on each other and of constraining
each other’s behaviour.
1.3.2 The theoretical approach to define markets put forward by the European Commission
notice is based on the hypothetical monopolist test, also called the small but significant
and non-transitory increase in price (SSNIP) test. This test should be seen as a thought
experiment, which provides the framework within which the exercise of defining the
relevant market is carried out, rather than as a specific quantitative technique for market
definition.
1.3.3 The proposition behind the hypothetical monopolist test is that, for antitrust purposes, a
relevant market is defined when a hypothetical monopolist (or hypothetical cartel acting as
if it were a single undertaking) of all products included in a candidate market could
increase its profits by imposing a small but significant and non-transitory increase in price.
1.3.4 If the hypothetical monopolist were able to profitably raise its prices, the candidate market
is accepted as a relevant market, since competition from outside does not act exert an
effective constraint on behaviour within it. On the other hand, if the prices of other
products of similar characteristics and intended use effectively constrain the terms offered
by the hypothetical monopolist, then the relevant market must be defined more broadly.
At the heart of the assessment of whether a price increase is profitable or not, is an
estimate of the constraints exerted by demand- and supply-side substitutability.
1.3.5 Appendix 1 discusses in greater detail the concept of market definition and the framework
given by the hypothetical monopolist test.
1.4 Market Definition Issues in Media
1.4.1 We have taken two parallel approaches to the identification of the issues raised by market
definition in the media sector:
(a) an analysis of the specific economic characteristics of media industries, and their
implications for the methodologies that can be used for market definition (Section 2);
and
(b) an analysis of some past competition decisions in the media sector, and the practical
problems that appear to have been encountered in dealing with market definition
(Section 3).
1.4.2 Few, if any, of the issues identified are entirely specific to the media sector. Instead, our
analysis focuses on the relative prevalence of certain issues in the media sector
10

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