Economic Underpinnings: The Economics of Telecommunications Networks, Market Power, and Vertical Foreclosure Theories

A. Introduction
This chapter describes the characteristic features of
telecommunications markets and explains the economic underpinnings
for competition analysis of conduct and transactions involving the
telecommunications sector. It includes a detailed discussion of market
definition, a key element in a typical analysis of whether a firm has
market power. It also gives a general overview of the anticompetitive
effects that can result from the exercise of market power, including
horizontal competitive effects and vertical foreclosure theories.
Horizontal competitive effects include unilateral and coordinated
effects. A merger has unilateral effects if it “enhance[s] market power
simply by eliminating competition between the merging parties”
regardless of whether the merger causes a change in the way other firms
behave.1 A merger is said to have a coordinated effect if it “enhance[s]
market power by increasing the risk of coordinated, accommodating, or
interdependent behavior among rivals.”2
Vertical foreclosure generally refers to the use of vertical integration
or other vertical restraints by an input supplier to achieve market power
in an output market. Vertical foreclosure theories frequently arise in the
communications industry because a supplier of key inputs often is a
downstream competitor, which has implications for the incentives of the
vertically integrated firm and its customers and competitors. For
example, such theories partly motivated the vertical divestiture from
AT&T of the Bell Operating Companies in the mid-1980s.
GUIDELINES 2 (2 010) [hereinafter 2010 MERGER GUIDELINES].
2. Id.
2 Telecom Antitrust Handbook
B. An Introduction to Market Power in Communications Markets
The U.S. Department of Justice (DOJ) and the Federal Trade
Commission (FTC) are charged with preventing firms from acquiring an
increased ability and/or incentive to exercise market power and to
prevent the illegal maintenance of market power. The joint DOJ-FTC
2010 Merger Guidelines lay out their enforcement policy with respect to
mergers. The “unifying theme of these Guidelines is that mergers should
not be permitted to create, enhance, or entrench market power or to
facilitate its exercise.”3 Antitrust enforcement against monopolization or
attempted monopolization is based on core principles focused on “market
power and separating the legitimate, procompetitive ways it is acquired
and preserved, from the illegitimate, anticompetitive ways.”4
The Federal Communications Commission (FCC) also reviews
competition in the telecommunications industry. For mergers, it relies on
a public interest standard under which it considers, among other things,
whether the merger “would enhance, rather than merely preserve,
existing competition,”5 in contrast to the Clayton and Federal Trade
3. Id.
4. Joel I. Klein, Assistant Atty Gen., Antitrust Div., U.S. Dept of Justice,
Rethinking Antitrust Policies for the New Econ omy, Haas/Berkeley New
Economy Forum, May 9, 2000, available at
5. E.g., Memorandum Report & Order, In re Charter Commcns & Time
Warner Cable, 31 FCC Rcd. 6327, 6338, ¶ 29 (2016) [hereinafter
Charter-TWC Order]. Pursuant to Section 310(d) of the Communications
Act of 1934, as amended, the FCC must determine whether the
Applicants have demonstrated that the proposed transfer of control of
licenses and authorizations will serve the public interest, convenience,
and necessity. 47 U.S.C. §310(d) [hereinafter 1934 Act]; see also 47
C.F.R. §25.119. In making this determination, the FCC assesses whether
the proposed transaction complies with the specific provisions of the
1934 Act, other applicable statutes, and the Commissions rules. See
Charter-TWC Order, 31 FCC Rcd. at 6336 ¶ 26. If the transaction does
not violate a statute or rule, the FCC considers whether the transaction
could result in public interest harms by substantially frustrating or
impairing the objectives or implementation of the 1934 Act or related
statutes. Id. The FCC public interest evaluation necessarily encompasses
the broad aims of the 1934 Act, which include, among other things, a
deeply rooted preference for preserving and enhancing competition,
accelerating private sector deployment of advanced services, promoting a
diversity of information sources and services to the public, and generally
managing the spectr um in the public interest. Id. at 6337 ¶ 27.
Economic Underpinnings 3
Commission Acts, under which the DOJ and the FTC consider whether
the transaction “may be substantially to lessen competition.”6 The FCC
also considers competition in and market power in non-merger contexts,
such as when it has chosen to forbear from imposing certain regulatory
requirements (e.g., rate and entry/exit regulation) on non-dominant
carriers (that is, carriers that it has determined to lack market power).
The 2010 Merger Guidelines do not directly define market power.
Instead, the Guidelines identify the competitive concerns associated with
increased market power as encouraging “one or more firms to raise price,
reduce output, diminish innovation, or otherwise harm customers as a
result of diminished competitive constraints or incentives.”7
In antitrust economics, market power generally is defined as the
ability to profitably affect the market price of a good.8 In the economic
model of “perfect competition,” every firm is small relative to the market
and products are homogeneous, so no one firm can affect the market
price. In such markets, long-run equilibrium is achieved when prices are
equal to the marginal cost of the firms in the industry. In this stylized
setting, market power is defined as the ability to sustain prices above
marginal cost.
A key condition for firms to exercise market power is the existence
of barriers to entry.9 George Stigler defined an entry barrier as a cost for
producing a good that must be borne by a firm that wants to enter the
market, but not by firms already in the market.10 An entry barrier is
linked closely to the ability of incumbent firms to raise price above cost
and has also been defined as “the extent to which, in the long run,
established firms can elevate their selling prices above minimal average
costs without inducing potential entrants to enter the industry.” 11
ANTITRUST LAW114b (4th ed. 2013) (“In sum, antitrust policy in the
United States follows a consumer welfare approach in that it condemns
restraints that actually result in monopoly output reductions, whether or
not there are offsetting efficiencies and regardless of their size.”)
7. 2010 MERGER GUIDELINES, supra note 1, at 2.
8. See, e.g., William M. Landes & Richard A. Posner, Market Power in
Antitrust Cases, 94 HARV. L. REV. 937, 937 (1981) (“[The] term market
power’ refers to the ability of a firm (or a group of firms, acting jointly)
to raise price above the competitive level without losing so many sales so
rapidly that the price increase is unprofitable and must be rescinded.”).
9. 2010 MERGER GUIDELINES, supra note 1, at 27-29.

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