Defining markets under Chapter 10 of the ECA

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In the Discussion Document on a Regulatory Framework for Broadcasting Transmission Services, ICASA has set out the methodology for defining markets for competitive reviews undertaken in terms of Chapter 10 of the Electronic Communications Act of 2005. Defining the relevant market is a critical first step in addressing market failure under the Act. The text below reflects the approach as set out in Annexure A to the Discussion Document.

 

Step 1: outline the services considered relevant for a market definition taking into account functional and geographic perspectives.

“A relevant product market comprises products or services that are sufficiently substitutable. An assessment of demand-side substitutability is the starting point for the definition of a relevant product market. It is also relevant to assess whether substitutability exists on the supply side of the market.

  • Demand-side substitutability exists when two or more products in the market are, in the perception of the end user, mutually exchangeable or substitutable on the basis of certain characteristics (such as price and the utility they provide to the end-user).
  • Supply-side substitutability exists when providers of other (non- substitutable) products, as a response to a small price change in the short term, can change their production or distribution and offer substitutable products without incurring significant additional costs or substantial risk.

An acknowledged method of analysing substitutability is the so-called ‘hypothetical monopolist test’. The aim is to find the best-defined market in which a hypothetical monopolist is able to exercise market power. The test is done on the basis of a small but significant (in practice 5-10 %) and non-transitory increase in price (SSNIP) for the relevant product, based on the assumed price level in a market with effective competition. All other prices are assumed to be unchanged. Then one assesses the effect of the price increase in the relevant market and assesses the total effect on the producer’s revenue as a result of the price increase.

The method depends on a significant amount of data that will often be difficult to produce. Alternative approximation methods may therefore also be applied. The hypothetical assessment should be supplemented by actual information on behaviour on the supply and demand sides to the extent that such information is available.

  • On the demand side, allowance should be made for such factors as an end users’ access to information, switching costs and other lock-in mechanisms.
  • On the supply side, account should be taken of the actual potential a provider has to change production as well as any regulatory conditions that prevent market entry by competitors in the market.

 

Step 2: once the relevant product markets have been identified the next step is to define the geographic market.

The outer geographic borders for the relevant product market will generally be determined by the extent of the network and the jurisdiction of the legal regulation of the market. The extent to which a more detailed geographic definition of the market has to be carried out will rest on an assessment of the substitutability of the relevant products and services on the supply and the demand side, using the Hypothetical Monopolist test, as described above. The relevant geographic market is that area in which the relevant products and services are provided on sufficiently similar or homogeneous competitive terms.

In assessment of substitutability on the demand side it is important to take account of preferences and geographic purchase patterns, if such information is available. With this as the basis the markets can be defined regionally within the national frontiers, nationally or trans-nationally. Given jurisdictional issues, the Authority can only define regional or national markets.