4 Making Competition Effective
| Author | Scott Hempling |
| Pages | 117-187 |
4.A. Effective competition: Denitions, goals and metrics
4.A.1. Denitions of competition
4.A.2. Goals of competition
4.A.3. Effective competition: Meanings and measurements
4.B. Unbundling: Reducing the incumbent’s control of “essential facilities”
4.B.1. Unbundling dened
4.B.2. The antitrust foundation
4.B.3. Statutory foundation: The prohibition against “undue preference”
4.B.4. Unbundled rates for competitive neutrality
4.B.5. Separation to reduce temptation
4.B.6. Unbundling’s effects on vertical economies
4.B.7. New bottlenecks and new tensions
4.C. Reducing non-facility entry barriers
4.C.1. Entry barriers dened
4.C.2. Product promotion advantages
4.C.3. Entrenched customer preferences
4.C.4. Long-term contracts
4.C.5. Entry barriers in regulated utility markets
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Making Competition Effective
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[P]ipelines continue to possess substantial market power; . . . they have exercised that
power to deny their own sales customers, and others without fuel-switching capability,
access to competitively priced gas; and . . . this practice has denied consumers access to
gas at the lowest reasonable rates. . . . [D]iscrimination in transportation has denied gas
users, and the economy generally, the benets of a competitive wellhead market.1
[Transmission owners have engaged in] refusals to wheel, dilatory tactics that so pro-
tracted negotiations as to effectively deny wheeling, refusals to provide service priority
equal to native load, or refusals to provide service exibility equivalent to the utility’s
own use.2
It is easy to see why a company that owns a local exchange . . . would have an almost
insurmountable competitive advantage not only in routing calls within the exchange,
but, through its control of this local market, in the markets for terminal equipment and
long-distance calling as well.3
Chapter 3 addressed the legal steps necessary to authorize competition. It is necessary to
remove statutory exclusivity, grant entry rights to new competitors and address incum-
bents’ sunk costs. But authorizing competition does not promise effective competition—a
market structure which rewards merits, not market power. After dening “effective com-
petition,” this Chapter 4 describes the three steps necessary to create it. Regulators must
“unbundle” the incumbent’s competitive services from its monopoly services, grant all
entrants access to the monopoly facilities on non-discriminatory terms and reduce non-
facility barriers to entry.
Once a market is made potentially competitive, there still is the risk that sellers will
behave anti-competitively, weakening the competitive forces that policymakers have autho-
rized. We turn to anti-competitive behavior and its prevention in Chapter 5.
4.A. Effective competition: Denitions, goals and metrics
4.A.1. Denitions of competition
“Competition” has two dimensions: seller behavior and market structure. Businesses vying
for customers tend to focus on behavior. They dene competition as rivalry, as having
1. Associated Gas Distribs. v. FERC, 824 F.2d 981, 1010 (D.C. Cir. 1987).
2. Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services
by Public Utilities, Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Order No.
888, 75 FERC ¶ 61,080, App. C (1996) (citing intervenors’ allegations).
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competitors. For them, competition is “a conscious striving against other business rms
for patronage perhaps on a price basis but possibly also (or alternatively) on non-price
grounds.”4
Economists, removed from competition’s daily pressures, focus more on market struc-
ture. They dene pure competition as a market in which “the number of rms selling a
homogeneous commodity is so large, and each individual rm’s share of the market is so
small, that no individual rm itself is able to inuence appreciably the commodity’s price
by varying the quantity of output it sells.”5 Some economists describe market structure
by focusing not on the number of players, their sizes and market shares, but on presence
or absence of entry barriers. In this view of structure, even a monopolist can perform like
a competitor if competition is a threat; that is, if potential competitors can enter easily.6
4.A.2. Goals of competition
Whether competition in a particular market is effective depends on one’s goals. Dening
those goals is difcult:
[T]he most severe stumbling block in evaluating industrial performance is likely to be
securing agreement on what is considered good or bad attributes of performance. Con-
icting value judgments concerning performance attributes and their weights undoubtedly
underlie many disputes as to the proper public policy toward monopolistic business
enterprises.7
Some view competition’s purpose as “lower prices”; they judge its success on that dimen-
sion alone. Doing so misses much richer purposes. Scherer and Ross would ask: Does
the market display “greater responsiveness to consumer demands and generate more
potent incentives for the frugal use of resources,” compared to the predecessor monop-
oly market?8 Alfred Kahn argues that competition aims to produce performance that is
“positively good—efcient, progressive, risk-taking, innovative.”
9
Consistent with Kahn,
one can view competition as a progression of breakthroughs:
4. F M. S & D R, I M S E P
16 (1990).
5. Id.
6. See W J. B, J C. P & R D. W, C M
T I S (1982). The authors provide a “formal analytic structure” to support
the insight that “potential competition, that is, the mere threat of entry, can . . . affect the behavior of
rms signicantly and benecially” (emphasis in original). See also Ala. Power Co., 13 NRC 1027, 1061
(1981) (reasoning that “the existence of a potential [wholesale] competitor may have an effect on the
actions of another distributor”), aff’d, Ala. Power Co. v. NRC, 692 F.2d 1362 (11th Cir. 1982).
7. S & R, supra note 4, at 55 (crediting Adam Smith).
8. Id. at 54.
9. 2 A K, T E R: P I 18 (1970, 1988)
(emphasis in original).
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