Limits to competition When is regulation the right instrument? Tommaso Valletti, DG COMP and Imperial College London ACE, Madrid, 16th November 2017

Competition policy vs. regulation text book approach CP attempts to prevent situations where market power can be exploited; R deals with such situations. Prices/profits/quality are not usually explicitly controlled with CP. R specifies precise details of what firms can and cannot do (ex ante intervention); CP issues “guidelines” and uses precedent (ex post intervention). Typically sector-specific regulators, and a generalist competition policy authority: capture?

Mobile interconnection revenues from calls from landlines 1. Telecoms Calling a mobile phone from a BT line (1997): 35 ppm! (But 30 ppm would go to the mobile operator...) Landline revenues from calls to mobiles Mobile interconnection revenues from calls from landlines © Imperial College Business School

Invisible prices (to us) Interconnection between networks Call termination is one of the most important interconnection services Interconnection prices are invisible to us, but affect competition a lot and, ultimately, the tariffs we pay

Interesting findings Competitive “bottlenecks” Some prices are monopolised “Two-sided” markets and skewed pricing structures Policy question: intervene to achieve efficiency (regulation vs. competition policy)

In theory… but in practice? Regulation cuts termination rates → cheaper F2M calls But retail mobile prices can go up! Plausible? “Waterbed” Collected data 20 countries over 10 years

Average Price around the introduction of Regulation

The “waterbed” effect General phenomenon involving complementary goods Think of aftermarkets: primary and a secondary market Do consumers have foresight? Then it’s a system market

2. Retail banking: Interchange fees - Two-sided market logic to get "both sides on board" - However, "merchant internalization" of consumer benefits from card payments may lead to excessive fees (e.g. Rochet-Tirole) - Interchange fees are "hidden fees" that harm some consumers at large => in the absence of surcharging there is no correct price signal

Competition or regulation - Competition between payment schemes will often drive up interchange fees even further (see Wright) and lead to even larger “hidden costs” as schemes compete for issuing banks/cardholders - There is scope for regulation (IF Regulation 2015/751) - Merchant indifference test is in line with the theory and it seems a good framework to correct for the negative externalities and thus removing “hidden costs” The Court found that MIT is not suitable because: (i) ignores the many benefits cards generate for merchants (avoided cost of other payments means) and (ii) compares to cost of cash only and ignores costs for payments with competing means like PayPal and AMEX. These reasoning is surreal. The MIT is perfectly capable to encorporate this criticisms. First it precisely looks at the cost advantage of cards relative to cash and in theory it can integrate the cost of AMEX and PayPal. These means of payments were not incorporated in the analysis beacsue those transactions are negligible.

Back to telecoms History of liberalisation, regulation/competition hand-in-hand to achieve efficiency and limit market power. Successful? Objectives? Can give subsidies, but in a way that preserves competition Broadband Banking (low cost financial intermediation/avoiding big shocks) Alternative energy (cut energy costs/environmental concerns)

The Commissioner's view What competition can do – and what it can't "Competition puts power in the hands of consumers… And there are also regulations that help to make competition work better, like the rules that give competitors access to railways or telecoms networks… But we also need rules that go well beyond the competition between companies." Pesticides Vehicle emissions Privacy Banking "Markets that are open for competition still need the right regulation. Because it's when competition enforcement and regulation work well together that we get a market that really serves the needs of Europe's people." (25th October 2017)

Competition policy vs. regulation text book approach (revisited) Prices/profits/quality are not usually explicitly controlled with CP. R specifies precise details of what firms can and cannot do (ex ante intervention); CP issues “guidelines” and uses precedent (ex post intervention). Typically sector-specific regulators, and a generalist competition policy authority: capture?