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Friday, September 8 • 4:43pm - 5:15pm
Identifying Market Power in Times of Constant Change

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We show that traditional approaches to defining markets to investigate market power fail in times of rapid technological change because demand and supply are in constant flux. Currently, empirical analyses of market power rely upon historical data, the value of which degrades over time, possibly resulting in harmful regulatory decisions. This points to a need for a different approach to determining when regulation is an appropriate response to market power. We present an approach that relies upon essential factors leading to monopoly (EFs), such as control of essential resources, which persist across generations of products. Market power analyses should be a search for EFs and policy responses should focus on diffusing market power without destroying value.

This issue is particularly important for the broad category of telecommunications, as telecommunications continues to evolve from services provided via specialized networks to services provided by apps residing on generalized networks designed primarily to accommodate data. This transition in services and networks is disruptive to business and regulatory models that are based on the traditional network paradigm.

One failing of the traditional regulatory approach is the problem of analysis decay. While this reliance is appropriate under stable market conditions because it grounds the analyses in real experiences, it provides invalid results when demand characteristics are unstable or unknown, such as in rapidly changing markets and emerging products.

We use as an example over the top (OTT) services. Three issues may arise with OTT providers. One issue is whether the OTT provider should be considered a telecommunications provider. Per our analysis, the OTT provider is not a provider of a physical communications channel and so is not a telecommunications carrier but rather a software interface for customers. The OTT provider does not compete with telecommunications channels and is indeed dependent on them.

Another issue is how an OTT provider competes with telecommunications providers. We assert it is futile to base policy or regulation on a product rivalry when product definition evolves rapidly. Even if one could conduct a valid analysis, its relevance would quickly decay. Instead, decisions on whether to regulate should be based on analyzing whether any operator possesses EFs. Service operators that do not, should not be subjected to economic regulation, except to address consumer protection issues and perhaps network interconnection. Operators that do possess EFs will possess market power over time and over generations of products. How this market power should be addressed would depend upon the specifics of the situation.

A less prominent issue is the regulator’s role in the evolution of traditional telecommunications providers’ business models. Sometimes telecommunications providers seek to have regulations imposed on OTT providers. In our analysis this is an issue of how traditional operators will evolve their business models to an NGN world.

This theoretical analysis currently is complete. The next step is to provide a strong grounding in actual cases of factors that created market power to determine possibilities of impacts on antitrust policy. Some practitioners might resist this research as it calls into question the usefulness of a cottage industry of economists, lawyers, and policy-makers; however, applicable empirical work will inform the value of the EFs approach. TPRC’s combination of policy-makers, lawyers, economists, and industry leaders will lend itself well to this issue.

avatar for Tim Brennan

Tim Brennan

Professor Emeritus, UMBC

avatar for Janice Hauge

Janice Hauge

Professor, University of North Texas

Friday September 8, 2017 4:43pm - 5:15pm EDT
Founders Hall - Auditorium