Information Technology Reference
In-Depth Information
BACKGROUND
market with a downstream firm but also in the
case of the regulation of conduct of a vertically
integrated firm. It has long been regarded as one
of the important competition policies to prevent
the abuse of market power in the upstream mar-
ket. The measures adopted are largely classified
into conduct regulation and structural separation.
Control over vertically integrated incumbent
carriers has been an important regulatory consid-
eration since the introduction of competition in
the telecommunications industry. The rationale
for the regulations is the fact that vertically inte-
grated incumbent carriers are offering both local
and long-distance services and newly entered
long-distance carriers are offering their services
by interconnecting with local telecommunica-
tions facilities of the incumbents. The measures
considered are conduct regulation including the
obligation to interconnect and structural separa-
tion of incumbents into local and long-distance
businesses. Structural separation has not been
introduced except in the U.S.A. where the courts
ordered the old AT&T to separate into a new AT&T
and several RBOCS (Regional Bell Operating
Companies).
Structural separation of the incumbent NTT
has been discussed since the privatisation of NTT
Public Corporation and the introduction of com-
petition in 1985 in Japan. It once seemed that the
discussion had been settled by the reorganisation of
NTT into two local companies, one long-distance
company and a cellular company under a holding
company structure in 1999. However, the discus-
sion has been revived with the 'Koizumi-Reform'
in 2006 (MIC (2006a)) and it was decided, through
political compromise, to resume the discussion in
2010 ((MIC (2006b)).
The structure of the telecommunications
industry has changed significantly with the dif-
fusion of broadband internet. This chapter tries to
re-evaluate the discussions on structural separation
from the view point of transaction costs by taking
into account the changes in industry structure from
POTS to broadband.
The reason why vertical integration has been
discussed so much is explained by the probability
that a vertically integrated firm might abuse market
power it has built in the upstream market to the
detriment of the downstream market. The abuse
of market power derived from vertical integration
typically includes 'refusal to deal' and 'raising
rivals' costs'. If a firm having market power in
the upstream market refuses to supply goods or
services to rivals in the downstream market, they
are obliged to exit from the market when they
cannot find other sources of supply.
Price discrimination is also frequently dis-
cussed in this connection. A vertically integrated
firm can raise wholesale prices for competitors
in the downstream market. This kind of price
discrimination drives competitors into disadvan-
tageous situations. This is called 'raising rivals'
costs'. Margin squeeze refers to the same kind
of situation.
Two measures have been discussed to prevent
these kinds of abuse of market power. One is con-
duct regulation to control the supply conditions of
input goods or services, and the other is structural
separation to divide a vertically integrated firm into
a monopolistic input supplier and a final goods
or services provider in the downstream market.
Although anti-competitive problems have been
widely discussed, we must take into account the
fact that vertical integration promotes efficiency
1
.
The merits of vertical integration include the
elimination of inefficiency between firms in ad-
dition to the usual economies of scale and scope.
A typical example is the elimination of the
'hold-up' problem. Investment into assets that
have a value only in relation to a specific firm is
called 'asset specific investment'. Once a firm
is committed to an asset specific investment, the
counterpart might demand ex post unfavourable
changes in the terms of the business or the termi-
nation of the business relationship. If a firm fears
that it might fall into this kind of situation, it holds
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