Master thesis
Economics
Mergers, (Tacit) Collusion and
Bundling
An Analysis of the Ziggo-Vodafone Joint Venture.
Author:
Kevin Westerveld
Supervisor:
Dr. A.M. Onderstal
Contents
1 Introduction 2
2 Literature review 5
2.1 Bundling and price discrimination . . . 5
2.2 Unilateral effects . . . 6
2.3 Coordinated effects . . . 9
2.4 Non-horizontal merger guidelines . . . 13
2.5 Conclusion . . . 14 3 The model 16 3.1 The model . . . 16 3.2 Unilateral effects . . . 17 3.3 Coordinated effects . . . 18 3.4 Conclusion . . . 21
4 An analysis of the Ziggo-Vodafone joint venture 22 4.1 Dutch telecommunication markets . . . 22
4.2 Unilateral effects . . . 28
4.3 Coordinated effects . . . 39
4.4 Conclusion . . . 42
1
Introduction
Telecommunication services, like (mobile) telephony, television and internet, play a fundamental role in modern economies. In 2014, the added value of the Dutch telecommunication markets was almost 8 billion euros, 1.2 percent of GDP (CBS, 2016). The telecommunication services change rapidly due to developments in networks and infrastructures. Firms with cable infrastruc-tures are now able to supply triple-play packages with broadband internet, fixed telephony and television. From 2006 KPN (the owner of the Dutch DSL-network1) can supply television in addition to fixed telephony and in-ternet using the DSL-network. Nowadays, telecommunication firms supply also quad-play bundles (triple-play bundles including mobile telephony).
Table 1 shows that the number of bundles in the EU as a percentage of household has been growing. From 2011, the percentage of dual-play bundles is decreasing. The penetration of triple and quad-play has been increasing since 2007. In the Netherlands, there were more than six million multiplay subscriptions with broadband internet, fixed telephony, mobile telephony or television in the first quarter of 2016 (ACM, 2016c). Competition authorities are dealing with the question what the effect is of bundling on competition in the telecommunication markets2.
Competition authorities must assess the mergers in the telecommunica-tion markets. Recently, the British competitelecommunica-tion regulator called the Euro-pean Commission to block the merger between two telecom firms: Three and O2 (Guardian, 2016). The European Commission emphasizes that telecom mergers can result in a reduction of competition and that pro-competitive regulation will benefit consumers. Nevertheless, a degree of consolidation can also bring benefits. Cross-border consolidation can facilitate the integration of networks in Europe (Ansip, 2015).
This thesis describes the effects of mergers and joint ventures on telecom-munication markets. These markets are characterized by firms that provide bundles of telecommunication services. The horizontal and non-horizontal guidelines of the European Commission (2004) give a guidance whether merg-ers are compatible with the common market and not result in an impediment of effective competition. Market shares and concentration levels are impor-tant first indicators in these merger assessments. In addition, Ivaldi et al. (2003) describes market characteristics that potentially affect competition
1DSL stands for Digital Subscriber Line. This is a communication medium used to
transfer digital signals over the standard telephone lines.
2The Dutch competition authority started a discussion on internet with the statement:
‘Bundling ensure that fewer consumers are willing to switch between telecommunication companies’ (ACM, 2016a)
Table 1: Penetration of bundles in EU27 as a percentage of households. TV: Subscription television, FT: Fixed telephony, MT: Mobile telephony, BB:
Broadband services. 2007 2009 2011 2014 TV+FT+MT+BB 1 1.5 2 4 Total quad-play 1 1.5 2 4 TV+FT+MT 0 0.5 0 0 TV+FT+BB 4 8 10.5 11 TV+MT+BB 0 0.5 0 1 FT+MT+BB 2 2 2 4 Total triple-play 6 11 12.5 16 TV+FT 3 2.5 2 2 TV+MT 1 1 1 0 TV+BB 3 4 4.5 5 FT+MT 1 1 1 1 FT+BB 13 15 17 14 MT+BB 1 2 2 2 Total dual-play 22 25.5 27.5 24 Total 29 38 42 44
Source: E-communications household survey by European Commission (2007), European Commission (2008a), European Commission (2012) and European Com-mission (2014).
because of coordination between competitors. The bundling of products and services can give different insights in these merger assessments.
The main question we address is: What is the effect of mergers on com-petition in telecommunication markets? We focus on the Dutch telecom-munication markets assuming that Dutch telecomtelecom-munication firms supply bundles of services if they have the opportunity to do so. We will describe the unilateral effects and the coordinated effects on the competition in these markets. We apply existing theories of unilateral and coordinated effects on telecommunications markets. Our results may also apply to other markets in which bundling of goods and service is common.
We use a theoretical model to describe the effects of the joint venture between Ziggo and Vodafone in a case study. In February 2016, Ziggo (a subsidiary of Liberty Global) and Vodafone announced to merge their Dutch operations (Vodafone and Liberty Global, 2016). The main business line of Ziggo includes broadband internet, fixed telephony and television. Whereas Vodafone’s main business line is their mobile network. KPN, the main com-petitor of Ziggo and Vodafone, supplies internet, fixed telephony, television and a mobile network. Before the merger KPN has a monopoly position on the bundle market, because it can supply all the goods. After the merger, the integrated firm Ziggo-Vodafone can compete with KPN on the bundle market. In this thesis, we will assess the competitive effects of this joint venture in the Dutch telecommunication markets.
The structure of this thesis is as follows. In section 2, we will survey the literature on the impact of mergers in the telecommunication markets. In section 3, we will use a theoretical model to examine the unilateral and the coordinated effects of a joint venture in a heterogeneous Bertrand price competition game. In section 4, we will study the Ziggo-Vodafone joint venture in the Netherlands and assess the potential effects for competition.
2
Literature review
In this section, we will give an overview of literature related to bundling, merger assessments and collusion in the telecommunication markets. In sec-tion 2.1, we will describe literature related to bundling and price discrim-ination, because this is commonly used in the current telecommunication markets as discussed in the introduction.
The horizontal merger guidelines give a guidance for the assessment of merging parties which are potential or actual competitors on the same rel-evant markets (European Commission, 2004). The merger guidelines dis-tinguish two ways in which a merger can enhance market power: unilateral effects3 and coordinated effects.
Literature related to anti-competitiveness due to unilateral effects from horizontal mergers will be described in section 2.2. The elimination of com-petition through a merger, can result in market power without a change in the behavior of other firms. The anti-competitive effects in this manner are called unilateral effects.
Literature related to anti-competitiveness due to coordinated effects will be described in section 2.3. Mergers can result in anti-competitive effects by increasing the risk of coordination and accommodating behavior among ri-vals. Anti-competitive effects from this manner are referred to as coordinated effects.
In section 2.4, we will describe the main economic concern of the non-horizontal guidelines: the likelihood of foreclosure. The non-non-horizontal merger guidelines by the European Commission describe how the Commission as-sesses mergers of firms that are active on different relevant markets (Euro-pean Commission, 2008b).
In section 2.5, we will give a brief conclusion of literature related to bundling, merger assessments and collusion in the telecommunication mar-kets.
2.1
Bundling and price discrimination
Bundling as a price discrimination technique was first suggested by Stigler (1963). He showed the potential benefits for monopolies to sell bundles of goods rather than selling them as separated goods. The author was triggered by the antitrust cases about block-booking of movies, the supply of a com-bined package of movies to exhibitors. He described that the owner of two films uses the popularity of one to force the exhibitor to buy the other as
well. Suppose there are two films and that we assume that some buyers prize one film much more relative to the other. Person A would pay 8 for film X and 2.5 for film Y. Person B would pay 7 for film X and 3 for film Y. Suppose the seller sets a price of 7 for film X and earns 14. For film Y, the seller sets a price of 2.5 and earns 5. The total earnings of selling both films are 19 if the seller sets the prices for the films separately. With block-booking the seller sets a price of 10 and he earns 20. This paper showed the importance of economic theory of bundling in relation with competition policy for the first time.
According to Nalebuff (2002), the economic theory of bundling has more and more moved from classrooms and academic journals to the public policy area. Nalebuff worked as an economic expert for the merging firm GE-Honeywell. GE’s business included everything from plastic and television to financial services, aircraft engines, medical imaging and lighting. Honey-wells business developed a leadership position in aerospace. In this merger case, the relationship between the merging firms was not horizontal (com-petitors), nor it was vertical (little overlap between two companies). The focus was on conglomerate effects, the two products are used together by a common customer. The proposed merger passed the examination of the US department of justice, however the European antitrust authorities blocked the merger. The European Commission argued that the combination of the two firms would result in the creation of a dominant position. The conglom-erate effects would enable the merged firm to abuse their market power to the products of others, for example by foreclosing the competitors. This would have diminished competition and affecting adversely the quality and consumer prices (European Commission, 2001).
2.2
Unilateral effects
In the previous section, we showed that bundling of products and services played an important role in the European Commission’s merger assessment of the GE-Honeywell merger case. Nowadays, bundling plays an important role in the telecommunication market as discussed in the introduction. In this section and section 2.3, we will describe the merger guidelines of the European Commission.
The horizontal merger assessment of the European Commission basically consists of: (i) the definition of the relevant market and (ii) the competi-tive assessment of the merger (European Commission, 2004). To define the relevant market, the European Commission identify the actual competitors of the merging parties, who can constrain the behavior of the merging par-ties. In the European Commission’s notice on the definition of the relevant
market (European Commission, 2011), the Commission uses two dimensions to define the relevant market: the relevant product market and the relevant geographic market. The relevant product market is defined as follows:
A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer by reason of the products’ characteristics, their prices and their intended use.
The relevant geographic market is defined as follows:
The relevant geographic market comprises the area in which the firms concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homo-geneous.
Both the definition of the product and the definition of the geographical market are used to establish the relevant market for a given competition issue.
Pereira and Vareda (2013) described that the increasing number of bun-dles require adjustments in the framework of the relevant product market for individual services. The relevant product market is the smallest set of products in which a hypothetical monopolist can rise prices. Bundles create complexities in defining the relevant market, because it involves the deter-mination of the substitutability between products of the same type and the substitutability between products of different types. The problem is not the increase in the number of products because of the introduction of bundles, but the type of the bundle products. This problem can be solved through a careful definition of the choice alternatives. In a technical article by Pereira et al. (2013) the estimates show that the demand for triple-play products (fixed voice, fixed broadband and subscription television services) is elastic. The demand estimates are used for implementation in the different SSNIP test. The three versions indicate that triple-play products of fixed voice, fixed broadband and subscription television are a relevant product market in Portugal.
In addition, Pereira and Vareda (2013) describes that the evolution of bundle markets will undergo three phases: (i) Development, (ii) Transition and (iii) Maturity. The development period is the period where bundles have been introduced, but consumers still prefer to buy telecommunication ser-vices as individual products. It is likely that these products are not a single relevant product market and thus should be analysed within the defined indi-vidual product markets. The transition phase is the period where consumers
already prefer to buy bundles, but several consumers still prefer individual products. It is likely that bundles constitute new markets that coexist with the traditional individual markets. The maturity phase is the period where most consumers prefer bundles. It is likely that the individual products will cease to exist.
After defining the relevant product and geographic market, the horizontal and non-horizontal merger guidelines describe the potential effects of merg-ers in the relevant market. Consummerg-ers benefit from effective competition. It results in low prices, high quality, a variety of goods and services and inno-vation. The power of firms to diminish those benefits is defined as ‘increased market power’. In the assessment of a merger, the European Commission compares the degree of competition before and after the merger. The first indication of the degree of competition are the market shares of the firms and concentration level of the market. The merged firm market shares are calculated as the sum of their pre-merger market shares. The European Commission uses the Herfindahl-Hirschman Index (HHI), to calculate the concentration level in a market.
HHI =
N
X
i=1
s2i (1)
Where si is the market share of firm i in the market, and N is the number
of firms. In addition, the difference in the HHI as a result of the merger is an important first indicator of the potential increased market power.
∆ = HHIpost−merger− HHIpre−merger (2)
The European Commission does not have concerns with a post-merger HHI below 1.000. In addition, the European Commission does not have concerns with a post-merger HHI between 1.000 and 2.000 and a ∆ below 250. There-after the European Commission does not have concerns with a post-merger HHI above 2000 and a ∆ below 150 (European Commission, 2004). The European Commission describes that these HHI levels and deltas may in-dicate absence of competition concerns. However, they do not give rise to a presumption of the existence or absence of competition concerns. In the horizontal merger guidelines, the European Commission list several factors that may influence whether unilateral effects are likely.
2.3
Coordinated effects
In the previous section, we described the unilateral effects of a merger. In this section, we will describe the coordinated effects of a merger. The framework of the assessments of coordinated effects also applies for the non-horizontal merger guidelines (European Commission, 2008b). The elimination of firms in markets can increase the likelihood of collusion after the merger. ‘The Eco-nomics of Tacit Collusion’ describes the relevant factors for the sustainability of tacit collusion. Tacit collusion refers to an outcome (e.g. prices or quan-tities) that are equal to collusion but involve no communication between the parties4 (Ivaldi et al., 2003). The intuition is that firms can maintain higher
prices by tacitly agreeing that any deviation from collusive equilibrium (e.g. a lower price) would trigger retaliation. The retaliation must imply a signif-icant profit loss for the deviating firm compared to the profit that it would have obtained from collusive outcome. Retaliation mechanisms should satisfy two condition to prevent firms from deviating from the collusive outcome:
1. The profit loss imposed on a deviant firm by retaliation must be suffi-ciently large to prevent deviations.
2. It must be in the interest of the firms to carry on the retaliation once a deviation has occurred.
Deviation from the collusive outcome results immediately in positive profits for the deviating firm, however retaliation occurs in the future. The stability of collusion depends on the relative importance of current and future profits.
Collusion is sustainable if and only if firms put sufficient weight on future profits, i.e., if their discount factor is not too small.
The analysis of the coordinated effects is based on the folk theorem where we assume that future profits are discounted by firms in an infinite repeatedly game. In that case, collusion is feasible in equilibrium if the discount factor of all firms is larger than the critical discount factor. The critical discount factor is the minimum discount factor to allow all firms to sustain to the monopoly outcome: δ∗i = π d i − πci πd i − πni (3) Where πid is the profit of firm i when deviating from collusive agreements, πc
i is the profit of firm i when colluding and πin is the profit of firm i when
firms are in Nash equilibrium.
4Ivaldi et al. (2003) argue that tacit coordination would be a better term. We use the
There are many market characteristics that affect the sustainability of collusion. In the following part of this section, we will briefly explain the most important characteristics that affect the sustainability of collusion for the telecommunication markets.
The number of competitors. The number of competitors in the market can influence the sustainability of collusion. Many competitors make it more difficult to reach agreements. Thereafter, firms must share the collusive profit with more firms. This results in a larger gain for deviating firms and reduces long-term benefit from maintaining collusion. Collusion is more difficult to sustain when there are more competitors.
Asymmetry in market shares. More asymmetric market shares hinder collusion, because in a situation with asymmetric market shares the smallest firm has more to gain from deviation. However, market shares are endoge-nous. When market shares are asymmetric we would suspect different costs or differentiated goods and services. The asymmetry in market shares may show more profound asymmetries, that makes collusion more difficult to sus-tain.
Cost asymmetries. With asymmetric costs the likelihood for sustainable collusion is smaller in contrast to symmetric costs. First, it is more diffi-cult for firms to agree on a price with asymmetric costs. Firms with lower marginal costs prefer lower prices than the high cost firms. Second, low cost firms are more difficult to punish, because they might profit more from undercutting their rivals and they have less to fear from possible punishment. To ensure the low-cost firm to stick to the collusive behavior, firms can give the cost firm a larger profit. This helps the incentive for the low-cost firms, but also change the incentive for the high-low-cost firm. Therefore, while market shares are endogenous, it can provide indirect evidence of more profound asymmetry that hinder collusion.
Asymmetric capacity constraints. The previous reasoning is also re-lated to other differences in cost structure, like production capacities. Firms with capacity constraints has less to gain from an undercut of the collusive price. However, capacity constrained firms also reduce the ability of retali-ation of other firms. Hence, the effect of symmetric capacity constraints on sustainability of collusion is unambiguous. Less ambiguous is the effect of asymmetry in capacities. Increasing the capacity of one firm at the expenses of another, reduces the ability for the small capacity firm of retaliation.
Product differentiation. With vertical differentiation in a market, like a firm with a ‘better’ product, the likelihood of tacit collusion is similar to that of asymmetric costs of production. The ‘better’ quality firm gains more from cheating and has less to fear from retaliation.
Entry barriers. Collusion is more difficult to sustain when there are high barriers to entry. First, in a situation with low entry barriers, large profits (prices) would trigger entry and reduces the profits of collusion. Second, the prospect of entry in the future reduces the retaliation (it reduces the cost of deviation), because in the future there will be entry. This makes collusion more difficult to sustain.
Demand growth. It is more difficult to sustain collusion when the deviat-ing short-term gains are small compared to future costs of retaliation. Con-sequently, in markets with high entry barriers, collusion is easier to sustain in markets with growing demand, and more difficult to sustain in declining markets. In markets with low entry barriers, high demand can result in entry of firms and makes collusion more difficult to sustain.
Frequent interaction, price adjustments and market transparency. Frequent interaction and price adjustments makes collusion easier to sustain. Firms can retaliate quicker to a deviation from the other firms with frequent interaction. Frequent price adjustments result in quicker retaliation and that the cheating firm is unable to take advantage a long time. Collusion is more difficult to sustain when there is lack of transparency on prices and sales. Multi-market contract. Collusion is easier to sustain when firms are ac-tive on several markets. First, firms have more interaction on several markets. Second, one firm may have a competitive advantage in one market, while the competitor has an advantage in another market. The asymmetry in market shares is restored in such a case.
In the previous part of this section, we described the most important market characteristics that affect the sustainability of collusion. Mergers and joint ventures potentially influence these market characteristics. For in-stance, mergers can result in a reduction of competitors, more symmetry in market shares and less capacity constraints. Compte et al. (2002) explored tacit collusion with (asymmetric) capacity constraints from a more applied perspective to contribute to merger analysis. The model allows the authors to show the impact of changes in the distribution of capacities, i.e. mergers,
split-overs and transfers. This helps to study merger analysis compared to symmetric capacity constraints. The central question in the model is: given a distribution of capacities, for which values of the discount factor is collu-sion sustainable? The impact of the changes in capacities on the minimal threshold is analyzed.
A simplistic example of the model by Compte et al. (2002) is given by Ivaldi et al. (2003). Consider a duopoly, where two firms have asymmetric capacity constraints: one firm benefits from a larger capacity (KL) compared
to the other firm (KS). Suppose there are no variable costs, the demand is
inelastic and without capacity constraints the firm can sell a quantity of D at any lower price than r. If the firms sustain collusive price pc = r with market
shares αL and αS = 1 − αL5, each firm i gets a profit of αiD/(1 − δ). Firms
can sell at full capacity, but that is followed by retaliation. This retaliation is also affected by the capacity constraints. Large firms are more able to pun-ish smaller firms than the reverse. It is more likely that larger firms cheat: more short-term gains and less to fear from retaliation by smaller firms. In standard price competition, the profits are proportional to production capac-ities. Short term gains are also proportional to the capacities, so the overall discount factor is proportional to the production capacities. To sustain col-lusion, it is necessary to give the firm with large capacity a larger market share. Compte et al. (2002) generalize the result to an arbitrary number of firms with the KS as the aggregate production capacity of all the smaller
firms (expect the larger one).
If the aggregate capacity does not exceed the market size, the total ca-pacity of the firms does not affect the likelihood of collusion. When the small firms can together supply the entire market, the threshold depends on the total capacity and not on the distribution. Retaliation possibilities are max-imal and any further expansion of the capacity only increase the incentives to undercut their rivals without increase impact in retaliation power.
Asymmetric capacities make indeed collusion more difficult to sustain when the aggregate capacity is limited. However, asymmetry may help col-lusion when the aggregate capacity is larger than market size. The results provide guidelines for competition policy, especially for merger policy, that differ from static analysis such the standard concentration tests (HHI).
5The total capacity is assumed to be larger than the market size, otherwise there is no
2.4
Non-horizontal merger guidelines
The previous sections described the unilateral effects and coordinated ef-fects of a merger. These efef-fects apply for both horizontal as non-horizontal mergers. In this section, we will describe the main concern of non-horizontal mergers: foreclosure.
The non-horizontal merger guidelines by the European Commission (2008b) describe that non-horizontal mergers are not a threat for effective competi-tion unless the merging parties have a significant degree of market power. Market shares and concentration levels provide first indicators of the mar-ket power. The European Commission is unlikely to find concerns in non-horizontal mergers, when the market share of the merged firm in each of the markets is below 30 percent and the post-merger HHI is below 2.000. The market shares and concentration levels are a first indicator of market power, however the thresholds do not give rise to a legal presumption.
Conglomerate mergers are one of the broad types of non-horizontal merg-ers. These types of mergers are mergers between firms that are neither hori-zontal nor vertical in relationship. For instance, mergers involving suppliers of complementary products. The unilateral effects of conglomerate mergers arise when these mergers give rise to foreclosure. The European Commis-sion describes foreclosure as any instance where the access for competitors to supply markets is eliminated or hampered because of a merger. Tying and bundling are practices that often have no anti-competitive consequences, however in certain circumstances these practices result in a reduction of ri-val’s ability to compete. The European Commission’s assessment of the con-glomerate mergers consists of three steps. First, whether the merged firms are able to foreclose its rivals. Second, whether it would have economic in-centives to foreclose its rivals. Third, whether the foreclosure strategy would have a significant detrimental effect on competition (European Commission, 2008b).
The ability of the merging parties to foreclose competitors is by condition-ing the sales in a way that link the products in separate markets together by bundling. The European Commission describes that the effects of bundling can only be expected when at least one of the merging parties’ products is viewed by many consumers as important and there are few alternatives for that product. Further, a large common pool of customers for the single products is necessary for foreclosure to be a potential concern.
The incentive for firms to foreclose rival firms depends on the profitability of bundling. Bundling can result in losses for the merged firms as several customers is not interested in bundles. For the merged firm, there is a trade-off between the possible costs and the possible gains from expanding market
shares or perhaps the ability to raise price due to the firm’s market power. The guidelines show that foreclosure can only significantly impede effec-tive competition if a sufficiently large fraction of market output is affected. If there remain single-product players in these markets, it is unlikely that competition will deteriorate from bundling. Bundling can result in a reduc-tion of sales for the single-component rival in the market. For competireduc-tion policy, this is not itself a problem. Conglomerate mergers may produce cost savings in the form of economics of scope. Product value for the customers can result from better compatibility and quality assurance of complemen-tary components. This economics of scope is necessary but not sufficient to provide efficiency justification for bundling.
2.5
Conclusion
In this section, we described existing literature related to bundling, unilateral effects, coordinated effects and foreclosure.
Bundling as a price discrimination technique was first suggested by Stigler (1963). He described that the owner of two films uses the popularity of one to force the exhibitor to buy the other as well. The GE-Honeywell merger case showed the link between bundling and merger assessments. The proposed conglomerate merger passed the US merger examination, however the merger was blocked by the European Commission. The combination of the two firms would enable the merged firm to abuse their market power to the products of others.
The horizontal merger assessment by the European Commission consists of: (i) the definition of the relevant market and (ii) the competitive assess-ment of the merger. The definition of the relevant product market requires adjustments because of the increasing number of bundles. The problem can be solved with a careful definition of the choice alternatives (Pereira and Vareda, 2013). In the competitive assessment of horizontal mergers, the Eu-ropean Commission compares the degree of competition before and after the merger. The first indication of the degree of competition are the market shares and concentration levels of the market.
In addition to the unilateral effects, mergers can result in anti-competitive effects by increasing the likelihood of coordination among rivals. Tacit collu-sion refers to an outcome that is equal to collucollu-sion but involve no communi-cation between the parties. The intuition is that firms can maintain higher prices by tacitly agreeing that any deviation from collusive equilibrium would trigger retaliation. Mergers and joint ventures can influence market charac-teristics that affect the likelihood of sustainable tacit collusion. Compte et al. (2002) explored tacit collusion with (asymmetric) capacity constraints from
a more applied perspective to contribute to merger analysis.
The non-horizontal merger guidelines by the European Commission de-scribe how the Commission assesses mergers of firms that are active on dif-ferent relevant markets. The European Commission’s assessment of these mergers consists of three steps. First, whether the merged firms are able to foreclose its rivals. Second, whether it would have economic incentives to foreclose its rivals. Third, whether the foreclosure strategy would have a significant detrimental effect on competition (European Commission, 2008b).
3
The model
In this section, we will use a theoretical model to analyse the merger of two telecommunication firms operating in a bundled good setting. The model is inspired by the Ziggo-Vodafone joint venture in the Netherlands. The Dutch telecommunication markets are characterized by firms that bundle their goods and services. Before the merger, the merging firms were able to supply one of the two goods (pure components). After the merger, the integrated firm can supply the pure components as well as the bundle.
We will use a theoretical model to show the potential unilateral and co-ordinated effects of a merger in a bundled good setting. In section 3.1, we will describe the model in detail. We will give an analysis of the unilateral effects of a merger in section 3.2. In section 3.3, we will give an analysis of the coordinated effects of a merger in a bundled goods setting. We will give a brief conclusion of the effects of a merger in section 3.4.
3.1
The model
We analyse the merger by using a simplistic theoretical model. Consider three markets where firms compete on prices (Bertrand competition): broadband internet, mobile network and the bundle market. Before the Ziggo-Vodafone joint venture, the broadband internet market was characterized by two firms: Ziggo and KPN. The mobile network market consists of two firms: KPN and Vodafone. Before the merger, the bundle market is a monopoly, with KPN as the monopolist. Consider an economy with N consumers where the number of consumers is even with N ≥ 2. The consumer values are shown in table 2. We assume that the purchase of both services from one single telecom-munication provider is beneficial for consumers (b). In the Netherlands, consumers prefer bundled communication services, because it is more con-venient because of the single invoice and because they have the perception that bundles are cheaper than paying for each service separately (European Commission, 2012). In this model, we assume that b is larger than 0. The purchase of both services from different telecommunication providers does not bring additional benefits for consumers.
VI and Vm are the consumers’ willingness to pay for respectively, internet
and mobile network. For the sake of simplicity, we make the arguably strong assumption that VI and Vm are identical and positive for all consumers. The
firms compete on prices and maximize profits. The firms set a price indepen-dently of other firms for the internet, mobile and bundle as long the firm can supply the service. Consumers maximize their consumer surplus that equals the value of the service minus the price of the service. In a situation where
Table 2: Consumer values before merger
Consumer values Internet Mobile network Bundle good
KPN VI Vm VI + Vm+ b
Ziggo VI -
-Vodafone - Vm
-the consumer surplus is equal over multiple firms, -the consumers are equally divided by the products.
.
3.2
Unilateral effects
Before the merger We analyse the effects on prices before and after the merger. Before the merger, Bertrand competition results in the following prices in the pure components markets:
Pbef oreI = cI (4)
Pbef oreM = cM (5)
Where Pbef oreI and Pbef oreM are the before merger equilibrium prices for broad-band internet and mobile telephony. And where cI and cM are the marginal
costs for respectively, the broadband internet product and mobile telephony. Consumers benefit from the supply of the bundle from one supplier, the sup-plier of the bundle is aware of this and supplies the bundle for the following equilibrium price:
Pbef oreB = cI + cM + b − (6)
Where PB
bef oreis the before merger equilibrium price for the bundle and is the
smallest possible monetary unit and 0 < < b. The consumers in this market benefit more from the bundle compared to the sum of the benefit of both goods separate6. The consumers buy the bundle and the pure components
will not be sold.
6The consumer surplus of the bundle is larger than the sum of the consumer surplus
Table 3: Consumer values after merger
Consumer values Internet Mobile network Bundled good
KPN VI Vm VI + Vm+ b
Ziggo-Vodafone VI Vm VI + Vm+ b
After the merger After the merger, the merged firm Ziggo-Vodafone can supply the bundle. The consumer values are shown in table 3. Bertrand competition in the three markets result in the following equilibria prices:
Paf terI = cI (7)
Paf terM = cM (8)
Paf terB = cI + cM (9) Where Paf terI , Paf terM and Paf terB are the post-merger equilibrium prices for re-ceptively, the broadband internet product, mobile telephony and the bundle. The additional benefit for consumers of purchasing both products from one single provider (b) plays an important role in the welfare analysis of a merger in a bundled good market. A relatively large b will influence the equilibrium price of bundles before and after the merger:
P rice − dif f erence = Pbef oreB − Paf terB (10) = (b − + cI+ cM) − (cI + cM) (11)
= (b − ) (12)
3.3
Coordinated effects
In this section, we will analyse the coordinated effects of a merger on the sus-tainability of tacit collusion. The critical discount factor for firm i (minimum discount factor to allow firms to sustain monopoly outcome) is calculated in the following way:
δi = πd i − πic πd i − πin (13) Where πd
i is the profit of firm i when deviating from collusive agreements,
πic is the profit of firm i when colluding and πin is the profit of firm i when firms are in Nash equilibrium.
We compare the highest critical threshold of sustainable collusion of all the firms (δ∗) before and after the merger. A change that causes δ∗ to increase makes collusion more difficult to sustain. Reversely, a decrease of δ∗ makes collusion more sustainable. The questions arise: for which values of the discount factor is tacit collusion sustainable and what is the effect of a merger?
Before the merger We need to calculate the profits of the firms to com-pare the critical thresholds (δ∗). Consider two representative consumers and their willingness to pay for the services before the merger are represented in table 2. To sustain collusion, we assume that the firms divide the consumers in a way that KPN attract half of the consumers and Ziggo and Vodafone attract half of the consumers. In that situation, the equilibrium joint profit maximizing prices are represented in equations 14 to 16.
Pbef oreI ∗ = VI (14)
Pbef oreM ∗ = Vm (15)
Pbef oreB ∗ = VI+ Vm+ b (16)
Where PI
bef ore∗, Pbef oreM ∗ and Pbef oreB ∗ are the collusive prices before the merger
for respectively, the broadband internet product, mobile network and bundle. We know that the before merger Nash equilibrium prices from equation 4, 5 and 6. Firms can deviate from the collusive agreement to price just below the collusive price () and obtain both consumer groups. The is ignored in the following parts, because it is the smallest possible monetary unit. We can derive each firm’s critical threshold for sustainable collusion before the merger. δKP N = πd KP N − πcKP N πKP Nd − πn KP N (17) = 2(V I + Vm+ b) − (VI+ Vm+ b) 2(VI+ Vm+ b) − b (18) = (V I+ Vm+ b) 2(VI + Vm+ b) − b (19)
δZig = πd Zig− πcZig πd Zig− πnZig = 2V I − VI 2VI− 0 = 1 2 (20) δV od= πdV od− πc V od πd V od− πV odn = 2V m− Vm 2Vm− 0 = 1 2 (21)
The critical threshold for sustainable collusion for Ziggo and Vodafone does not depend on b. The critical threshold for KPN depends on b. From equation 19 it follows that if b is larger than 0 the critical discount factor for KPN is > 12 before the merger. The critical discount factor for the market (δ∗) before the merger is equal to the critical discount factor of KPN (δKP N) if b
is larger than 0.
After the merger After the merger, the critical thresholds for Ziggo and Vodafone are not different to the situation before the merger and represented in equation 20 and 21. The critical threshold for KPN is calculated in equa-tion 22. δi = πd i − πci πd i − πni = 2(V I+ Vm+ b) − (VI+ Vm+ b) 2(VI+ Vm+ b) − 0 = 1 2 (22) δZig∗ = δ∗V od= δ∗KP N = 1 2
After the merger, the critical discount factor for KPN, Vodafone and Ziggo is equal to 12. Collusion is equally sustainable for all the firms after the merger. The decrease in the critical discount factor for KPN makes collusion easier to sustain. The reduction in the critical discount factor, increases the likelihood that prices will increase because of collusion. The results are in line with former literature that describes the effect of market symmetry on the sustainability of tacit collusion.
The additional benefit of consuming a bundle, b, plays an important role in the coordinated effect. A relatively large b makes collusion more sustainable after a merger compared to the situation before the merger.
= (V
I + Vm+ b)
2(VI+ Vm+ b) − b ≥
1
2 (23)
3.4
Conclusion
The model shows two contradicting economic effects of a conglomerate merger in markets where consumers prefer buying bundles instead of single services. On the one hand, the merger results in positive unilateral effects with a lower equilibrium price of the bundle. On the other hand, the merger results in negative coordinated effects because of a lower critical discount factor for the original monopolist. This increases the likelihood of tacit collusion in these markets.
The overall effect of the merger is ambiguous and depends on the specific market characteristics of the markets. In the next section, we will take a closer look at the market characteristics of the Dutch telecommunication markets to show the unilateral and coordinated effects of the Ziggo-Vodafone joint venture.
4
An analysis of the Ziggo-Vodafone joint
ven-ture
On 15 February 2016, two telecommunication companies, Vodafone Interna-tional Holdings B.V. and Liberty Global Europe Holding B.V., announced to merge their operating businesses in the Netherlands to form a 50:50 joint venture. Based on the regulatory approval and required steps, Liberty Global and Vodafone anticipated that completion will take place around the end of 2016 (Vodafone and Liberty Global, 2016). On 3 august 2016, the Euro-pean Commission cleared the creation of the joint venture, conditional on Vodafone divesting its fixed telephony line (European Commission, 2016).
In this section, we give an analysis of the competitive assessment of the Ziggo-Vodafone joint venture7. The analysis is based on the horizontal and
non-horizontal merger guidelines of the European Commission and our model in section 3. The guidelines by the European Commission and our model distinguish two different effects of a merger: the unilateral and coordinated effects. The structure of this section is as follows. In section 4.1, we will de-scribe the Dutch telecommunication markets. In section 4.2, we will analyse the (potential) unilateral effects of the joint venture. In section 4.3, we will describe the market characteristics that affect the coordinated effects as a result of the joint venture. We will give a brief conclusion of the competitive assessment of the Ziggo-Vodafone joint venture in section 4.4.
4.1
Dutch telecommunication markets
In this section, we will describe the Dutch telecommunication markets. First, we will give a brief historical overview of the markets followed by an overview of the different infrastructures nowadays. Last, we will give a description of the merging parties.
History This section contains a brief historical overview of the Dutch telecommunication markets. The first Dutch telecommunication service was the postal service and resulted in the creation of ‘The Postal law’ in 1807. The law organized the state monopoly position for postal services, where only the Dutch state had the rights to collect, transport and distribute post (NRC, 1999). In 1852, the Dutch state started with the construction, distri-bution and exploitation of national telegraph lines followed by the telephony network in 1881 (KPN, 2016a). The postal services and telephony service joined together and resulted in the creation of PTT (State company of Postal,
Telegraph and Telephone). From 1980, the European Union supported the liberalization and privatization of the telecommunication markets. On 1 Jan-uary 1989, PTT is transformed to KPN (Royal PTT Nederland NV). From 1994, the shares of KPN were negotiable on the stock market in Amsterdam. The government was not any longer the only shareholder, but it still had a golden share that allowed the government to have a veto (KPN, 2016a). The introduction of internet caused the separation of the postal services and telecommunication services into PTT Postal and PTT Telecom (KPN, 2016a). The telecommunication part of the firm continued as KPN NV. In 2006, the Dutch government sold their last shares of KPN. This resulted in a privatized KPN (Trouw, 2006).
The first Dutch television broadcast was on 2 October 1951. The dis-turbed incoming antenna signal resulted in the creation of Central Antennas Installations (CAI). These networks connected households to a commonly used antenna system with use of the coax cable. In every municipality, a CAI infrastructures was constructed that combined networks for neighbor-hoods, villages and whole municipalities. These coax cable infrastructures became the ‘traditional’ television infrastructure. The ownerships of these CAI infrastructures moved from consumers and housing co-operations to gov-ernments. Casema (Central Antenna System Exploitatie Maatschappij) was the first operating cable company founded in 1972. More and more gov-ernment owned CAI infrastructures were taken over by private companies. The introduction of fiber in combination with the coax cable infrastructure created a network that could provide a television signal, broadband internet connection and telephony line.
The traditional monopolies of KPN in the telephony market and the cable firms in the television market were under pressure in 2006. The technological developments created the possibility to supply triple-play packages (broad-band internet, fixed telephony and television) with the cable and with the KPN telephony infrastructure (DSL-infrastructure). SEO (2006) described in their essay which types of government regulation were appropriate when all consumers have access to the DSL and cable infrastructures. The theory of market mechanisms show that markets can have market failures. Examples of market failures are public goods, market power, external effect and asymmet-ric information. With intervention governments try to reduce these market failures. However, this can also result in government failures. For instance, efficiency problems, information problems, reduction of investments and rent-seeking. Telecommunication networks have economics of scale, density ad-vantages and combination adad-vantages. If the adad-vantages work, a national telecommunication firm will occur. The likelihood that those firms abuse their market power through monopoly prices and reduction of innovation is
high. Access regulation and price regulation are appropriate interventions in that case.
From January 2015, KPN is obliged to give other firms access to their DSL and fiber infrastructure. The Dutch competition authority (ACM) em-phasized that two suppliers, KPN and Ziggo, bring not enough effective com-petition. The likelihood that KPN had a dominant market position on the fixed telephony market and business market was high without regulation. Thereafter, the competition authority concluded that there are characteris-tics that are conductive to a joint dominant position of KPN and Ziggo in the broadband internet market. The ACM imposed KPN to fulfill reasonable requests for the provision of access to their DSL and fiber infrastructure. Ac-cess regulation makes it for other parties possible to supply competitive offers to consumers by using the KPN infrastructure. The regulation is beneficial for consumers due to the increase of suppliers and the competitive prices (ACM, 2015).
The first mobile telephony conversation was in 1973 and invented by Martin Cooper who worked for Motorola. The introduction of the GSM (Global System for Mobile Communications) brought the mobile telephony to consumers in 1994. In the Netherlands PTT started with the first operational GSM-network followed by Libertel (Vodafone), because PTT did not have a monopoly position on the GSM network. The first mobile frequencies were provided by the Dutch government for free. The increased popularity of GSM resulted in the decision by the Dutch government to create an auction to expand the network and increase the competition on the GSM network. Thereby, the auction resulted in revenues for the Dutch government. The latest auction of the Dutch GSM network was in 2012. Providers could bid for frequencies on the 2G, 3G and the fastest 4G network that are valid for 17 years. Five firms signed in for the auction: KPN, Vodafone, T-Mobile, Tele2 and UPC/Ziggo. KPN, Vodafone, T-Mobile and Tele2 obtained the network rights for the networks. UPC/Ziggo did not obtain network licenses and stated that the price is too high in comparison with the additional revenues for the firm (Telecompaper, 2012). The auction resulted in an unexpected high revenue for the Dutch state of 3,804 billion euro (NRC, 2012).
Telecommunication infrastructures In the previous section, we described a brief historical overview of the telecommunication services in the Nether-lands. Nowadays, the telecommunication markets consist of several services that can be supplied in different ways. In this section, we will give an overview of the infrastructures and telecommunication services nowadays.
There are three infrastructures with various owners that can be used to supply fixed telecommunication services: DSL, cable and fiber infrastructure. DSL is a technique that makes it possible to use the copper telephony line for fast internet and digital telephony. DSL providers also supply television, this is called IP-TV (Consumentenbond, 2016a). The owner of the Dutch DSL infrastructure is KPN. The coax cable infrastructure is the ‘traditional’ television infrastructure. Nowadays, the cable infrastructure is also able to supply broadband internet and fixed telephony. Ziggo is the owner of the ca-ble infrastructure in the Netherlands. The latest infrastructure that supplies fixed telecommunication services is the fiber infrastructure. With use of the fiber infrastructure broadband internet, fixed telephony and television ser-vices are available. KPN is the owner of the fiber infrastructure8. For
televi-sion services, there are two other infrastructures. Digitenne (owned by KPN) provides television services through the ether with a receiver. CanaalDigitaal provides television with use of satellites.
Currently, there are two main types of mobile networks: the 3G and 4G networks. KPN, Vodafone and T-Mobile own 3G and 4G networks, Tele2 only owns a 4G network. These firms allow other providers to use their net-work, those providers are called mobile virtual network operators (MVNO). A MVNO is a company that does not own a network, but provides telecommu-nication services with use of the network of other firms. Examples of Dutch MVNO’s are Ziggo, Telfort, Lebara, Ben, AH Mobile, Hollandsnieuwe and Simyo. Tele2 provides 4G mobile telephony services with their own network, but for 2G and 3G network services Tele2 uses the network of T-mobile. Some of the virtual network providers are subsidiary firms of the network owned firms. Telfort and Hi are part of KPN (KPN, 2016b). Hollandsenieuwe is a daughter firm of Vodafone (Consumentenbond, 2016b). From 2013, Ziggo is an MVNO that uses the network of Vodafone for their mobile services (Ziggo, 2013).
The top six rows in table 4 show the types of infrastructures in relation with the number of connections in the broadband internet and television markets. In the broadband internet market, the percentage of fiber infras-tructure connections has been increasing. The percentage of consumers that
8Reggefiber is the owner of the fiber infrastructure. KPN is the owner of Reggefiber
use cable and DSL infrastructures for broadband internet is decreasing. Nev-ertheless, the market shares of these infrastructures are larger compared to the new fiber network. Table 4 show that in the television market the ca-ble infrastructure is the most used infrastructure. In the first quarter of 2016, more than half of the consumers (56 percent) used the cable infras-tructure, compared to 33 percent of the consumers that use DSL, digitenne or the satellite. The data usage of consumers in the mobile network market has been increasing, especially the volume of 4G data is growing which is a logical consequence of a faster connection. The amount of SMS services is decreasing. In the market for multiplay connections the total number of con-nections has been increasing from 2014-Q4. The triple-play and quad-play connections are increasing compared to the dual-play that is decreasing the last two quarters.
The merging parties The previous sections described the developments and the current infrastructure of the Dutch telecommunications markets. In this section, we will describe the role of the merging parties in the telecom-munication markets.
Ziggo is with other brands like Virgin Media, Unitymedia, Telent, UPC, VTR and Liberty a consumer brand of Liberty Global. Liberty Globals op-erations cross 14 countries, with 57 million television, broadband internet and telephony services at December 31, 2015. Before it was part of the Lib-erty Global group, Ziggo is founded through multiply mergers with @Home, Casema and Multikabel (Ziggo, 2016). In November 2014, Ziggo merged with UPC. UPC (United Pan-European Communications) was a subsidiary of Liberty Global.
Vodafone is one of the world’s largest telecommunication firms. The firm has mobile operations in 26 countries and partners with mobile networks in 57 countries. In addition to the mobile networks, Vodafone has fixed broadband operations in 17 markets. In the Netherlands, Vodafone announced to invest in the fixed broadband market in October 2014 (Telegraaf, 2014). The firm had 461 million mobile customers and 13 million fixed broadband customers worldwide in December 2015 (Vodafone and Liberty Global, 2016).
Table 4: Broadband internet and television connections per type in the Netherlands. The volume of mobile networks and the number of multiplay connections in the Netherlands.
Broadband internet connections 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1
DSL 43% 42% 42% 41% 41% 40% Fiber 10% 11% 11% 12% 13% 14% Cable 48% 47% 47% 47% 47% 46% Television connections 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1 DSL, Digitenne, Satelite 33% 33% 33% 33% 33% 33% Fiber 8% 9% 9% 10% 10% 11% Cable 59% 59% 58% 57% 57% 56%
Volume mobile networks 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1
SMS x 1.000.000 912 867 967 960 834 760
Minutes x 1.000.000 6.720 6.844 7.185 6.755 7.167 7.233
Data (3G) MB x 1.000.000* 19.598 20.966 11.981 12.137 13.255 12.537
Data (4G) MB x 1.000.000 14.727 18.372 21.338 22.426
Number of multiplay connections 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1
Quad play 447 479 536 579 608 674
Triple play 3.750 3.787 3.791 3.822 3.857 4.033
Dual play 1.758 1.757 1.766 1.737 1.768 1.623
Total 5.955 6.023 6.093 6.138 6.233 6.330
4.2
Unilateral effects
In the previous section, we described the Dutch telecommunication markets and the role of the merging parties in these markets. In this section, we will assess the potential unilateral effects9 of the Ziggo-Vodafone joint venture.
We will start with defining the relevant markets for the Ziggo-Vodafone joint venture as described in section 2.2. We will use the market shares of the firms and the concentration levels of each of the defined markets as a first indicator of a potential dominant position. Thereafter, we will describe the factors in the Dutch telecommunication markets that can influence whether horizontal mergers are likely to have unilateral effects. Last, we will use the non-horizontal merger guidelines from section 2.4 to assess whether the joint venture will result in unilateral effects because of foreclosure.
Definition of the relevant market The European Commission assess whether mergers are compatible with the common market and not result in impede of effective competition. A dominant position is a primary form of such competitive harm. The European Commission defined a dominant position as follows (European Commission, 2004):
a situation where one or more undertakings wield economic power which would enable them to prevent effective competition from being maintained in the relevant market by giving them the op-portunity to act to a considerable extent independently of their competitors, their customers and, ultimately, of consumers
In section 2.2, we show that the first step in the assessment of mergers and joint ventures is to define the relevant markets. In addition, we show that bundles create some difficulties in defining the relevant market, because it in-volves the determination of the substitutability between products of the same type and the substitutability between products of different types. Pereira and Vareda (2013) extend the tools of the SSNIP (Small but Significant Non-transitory Increase in Price) tests to deal with these difficulties. We as-sume that the Dutch telecommunication markets are in the transition phase described in section 2.2. In this phase, consumers already prefer telecom-munication services in bundles, but several consumers still prefer individual products. In this phase, it is likely that the bundles will constitute new and separate relevant product markets that coexist with the traditional individual product markets. In addition, we assume that the substitutability of services between the broadband internet service, fixed telephony service, television
service, mobile network service, triple-play bundles and quad-play bundles is small. Therefore, we assume the following relevant product markets: the broadband internet market, the fixed telephony market, the television mar-ket, the mobile telephony, the triple-play market and quad-play market.
New developments in the telecommunication services and changing con-sumer behavior will change the substitution rates in the future. For instance, the relevant market for television services can change with the introduction of online television on-demand with faster broadband internet. In addition, mobile 4G network can be used for phone calls with Skype that can be a substitute for fixed telephony connections and mobile telephony calls.
The relevant geographic market comprises the area in which the firms concerned are involved in the supply of services and in which the condi-tions of competition are sufficiently homogeneous (European Commission, 2011). We define the geographic market for broadband internet, fixed tele-phony and television connections on national level. For specific products, like 4G-networks and fiber infrastructures the geographic markets are smaller, because the limited geographical availability of those services. However, we assume that the geographical availability of these products will increase soon. The geographic market is not broader, e.g. European level, because it is in most cases not possible to use services of foreign telecommunication providers.
Market shares and concentration levels In the previous section, we defined the following relevant markets: broadband internet, fixed telephony, television, mobile network, triple-play and quad-play markets. In section 2.2 and section 2.4, we show that the horizontal and the non-horizontal merger guidelines use the market shares of the firms and the concentration levels of markets as the first indicator of the degree of competition. In the next section, we will use the market shares of the firms in the defined telecommunication markets to calculate the concentration levels. The concentration levels and market shares will give us a first indicator of the potential unilateral effects of the Ziggo-Vodafone joint venture in the Dutch telecommunication markets.
Broadband internet market The market shares in the broadband internet market are represented in table 5. KPN and Ziggo are the largest firms with each a market shares between 40 and 45 percent of the total number of connections. The two largest firms have together a market share of at least 80 percent. Thereafter, KPN and Ziggo are independent of other firms with their own DSL and cable infrastructure. Tele2, Vodafone and some other firms are active in the broadband internet market with use of
DSL-Table 5: Market shares broadband internet (number of connections) 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1 KPN [40-45%] [40-45%] [40-45%] [40-45%] [40-45%] [40-45%] Ziggo [45-50%] [40-45%] [40-45%] [40-45%] [40-45%] [40-45%] Tele2 [0-5%] [0-5%] [0-5%] [0-5%] [0-5%] [0-5%] Others (incl. Vodafone) [5-10%] [5-10%] [5-10%] [5-10%] [5-10%] [5-10%] Data provided by the Dutch competition authority in Q1-2016 (ACM, 2016c).
infrastructure of KPN. According to ACM (2016c) the HHI of this market is 3,870 in the first quarter of 2016. Since 2014, the HHI in this market was not lower than 3,800. The delta of the HHI as a result of the joint venture depends on the market shares of Vodafone and Ziggo. We assume that the market share of Vodafone is between zero and five percent. The market share of Ziggo is between 40 and 45 percent. The maximum delta of the HHI of this joint venture will be:
Delta(HHI) = 502− 452− 52 = 450 (25)
The combined market share of the merging parties is between 40 and 50 percent, the HHI of the market is 3,870 and the delta of the HHI is between 0 and 45010.
Fixed telephony market The market shares of the number of single connections for the fixed telephony market are represented in table 6. At least four out of the five consumers with a fixed telephony connection are customer of KPN. Ziggo is the second largest firm with a market share between 10 and 15 percent. Both firms are independent of other firms, because they have their own DSL and cable infrastructures. Vodafone supplies their fixed telephony connection with use of the infrastructure of KPN. We calculate the concentration level in this market with the HHI in two different ways. First, in a symmetric way, where we use the lowest possible market share of the largest firms and the highest possible market share of the smallest firm. Second, we calculate the market shares in an asymmetric way with the highest possible market shares of the largest firms and the lowest market shares of the smallest firm. This methodology helps us to calculate the range
10An estimated Vodafone market share of zero percent, consequently results in a
Table 6: Market shares fixed telephony market(number of single connections) 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1 KPN [80-85%] [80-85%] [75-80%] [80-85%] [75-80%] [80-85%] Ziggo [10-15%] [10-15%] [10-15%] [10-15%] [10-15%] [10-15%] Tele2 [0-5%] [0-5%] [0-5%] [0-5%] [0-5%] [0-5%] Others (incl. Vodafone) [0-5%] [0-5%] [0-5%] [0-5%] [0-5%] [0-5%]
Data provided by the Dutch competition authority in Q1-2016 (ACM, 2016c).
of the HHI. For the calculation of the concentration levels, we assume that the other firms have a very small market share of almost zero percent11.
HHI(symmetric) = 802+ 12.52+ 52 = 6, 581.25 (26)
HHI(asymmetric) = 852+ 12.52+ 02 = 7, 381.25 (27) The market concentration level (HHI) is between 6,581.25 and 7,381.25. The market share of Vodafone in the fixed telephony market is between 0 and 5 percent. The market share of Ziggo is between 10 and 15 percent. The maximum delta of the HHI of this joint venture will be:
Delta(HHI) = 202− 152− 52 = 150 (28)
The combined market share of the merging parties is between 10 and 20 percent, the HHI of the market is between 6,581.25 and 7,381.25. The delta of the HHI is between 0 and 15012.
Television market The market for television subscriptions is domi-nated by two firms: Ziggo and KPN. The market shares are represented in table 7. Ziggo is the largest firm with a market share between 50 and 55 percent. KPN have a market share between 30 and 35 percent. Canaal Dig-itaal is the third largest firm with a market share between 5 and 10 percent. Some other firms have together a market share between 5 and 10 percent. The Dutch competition authority, ACM (2016c), reports that the HHI of the television market is 3,951 in the first quarter of 2016. Vodafone is active on
11According to European Commission (2004), a lack of information of very small firms
may not be very important because it does not affect the HHI significantly.
12An estimated Vodafone market share of zero percent, consequently results in a
Table 7: Market shares television (number of subscriptions) 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1 Ziggo [55-60%] [50-55%] [50-55%] [50-55%] [50-55%] [50-55%] KPN [30-35%] [30-35%] [30-35%] [30-35%] [30-35%] [30-35%] Canal Digitaal [5-10%] [5-10%] [5-10%] [5-10%] [5-10%] [5-10%] Others (incl. Vodafone) [5-10%] [5-10%] [5-10%] [5-10%] [5-10%] [5-10%] Data provided by the Dutch competition authority in Q1-2016 (ACM, 2016c).
the television market with use of the KPN DSL-infrastructure. We assume that the market share of Vodafone in the television market is between zero and five percent. The market share of Ziggo is between 50 and 55 percent. The maximum delta of the HHI as a result of the proposed joint venture will be:
Delta(HHI) = 602− 552− 52 = 550 (29)
The combined market share of the merging parties is between 50 and 60 percent, the HHI of the market is 3,951 and the delta of the HHI is between 0 and 55013.
Mobile telephony market Table 8 shows the market shares (the num-ber of connections) in the mobile market. KPN is the largest firm, Vodafone is the second largest firm and T-mobile is the third largest firm. All the MVNO’s together, have a market share between 20 and 25 percent. Tele2 has a market share between zero and five percent. In a report by ABN AMRO, the estimated market share of Ziggo in the mobile segment was one percent in August 2016 (ABN AMRO, 2016). The estimated market share by Telecompaper of Ziggo Mobile was five percent in June 2015 (Emmerce, 2015). For the calculation of the concentration levels, we assume that the other MVNOs have a very small market share of almost zero percent. Just like the calculation of the HHI in the fixed telephony market, the HHI in this market is calculated in a symmetric way and an asymmetric way.
HHI(Symmetric) = 302+ 202+ 202 + 52 = 1, 725 (30)
HHI(Asymmetric) = 352+ 252+ 152+ 02 = 2, 075 (31)
13An estimated Vodafone market share of zero percent, consequently results in a
Table 8: Market shares mobile market (number of connections) 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1 KPN [30-35%] [30-35%] [30-35%] [30-35%] [30-35%] [30-35%] T-Mobile [15-20%] [15-20%] [15-20%] [15-20%] [15-20%] [15-20%] Vodafone [25-30%] [25-30%] [25-30%] [20-25%] [20-25%] [20-25%] Tele2 [0-5%] [0-5%] [0-5%] [0-5%] MVNO’s (incl. Ziggo) [20-25%] [20-25%] [20-25%] [20-25%] [20-25%] [20-25%] Data provided by the Dutch competition authority in Q1-2016 (ACM, 2016c). The market share of Vodafone is between 20 and 25 percent. The estimated market share of Ziggo in the mobile market is between one and five percent. The delta of the HHI is between:
Delta(HHI) = 302− 252− 52 = 250 (32)
Delta(HHI) = 212− 202− 12 = 40 (33)
The market shares show that the joint venture will result in a concentration with a market share between 21 and 30 percent. The market concentration HHI will be between 1,725 and 2,075 and a delta between 40 and 250.
Quad-play market Most providers can supply multi-play bundles to consumers with use of the networks and infrastructures of competitors. KPN is the only supplier of quad-play bundles with their own infrastructures. Ziggo, Vodafone, Tele2 and Telfort can supply quad-play bundles with use of the infrastructures of rival firms. Telecompaper estimated that the market share of KPN in the quad-play market is 87 percent and the market share of Ziggo is 11 percent (Telecompaper, 2016). We assume that the market shares of the other small firms do not affect the HHI significantly. With use of the estimated market shares the HHI of the quad-play bundle market is calculated below:
HHI = 872+ 112+ 02 = 7, 690 (34)
The delta of the HHI depends on the market share of Vodafone and Ziggo in the quad-play market. The maximum market share of Vodafone in the quad-play market is two percent. In this maximum case, the delta of the HHI will be:
Table 9: Summary of Ziggo-Vodafone combined market share, the concen-tration levels (HHI) and the delta of the concenconcen-tration level (HHI) as a result of the proposed joint venture in the telecommunication markets
Combined
market share HHI
Delta (HHI)
Broadband internet [40-50%] 3,870 [0-450]
Fixed telephony market [10-20%] [6,581.25-7,381.25] [0-150]
Television market [50-60%] 3,951 [0-550]
Mobile telephony market [21-30%] [1,725-2,075] [40-250]
Quad-play market [11-13%] 7,690 44
Triple-play market [62-72%] 4,573 [0-1,240]
Triple-play market Telecompaper (2016) estimated that Ziggo is the largest firm in the triple-play market with a market share of 62 percent. KPN is the second largest firm with a market share of 27 percent. Some of the other firms in this market are Tele2 and Vodafone. We assume that the market shares of the other small firms do not affect the HHI significantly. The HHI of the triple-play bundle market is calculated below.
HHI = 622+ 272+ 02 = 4, 573 (36)
The maximum market share of Vodafone in this market is 10 percent. In this maximum case the delta of the HHI will be:
Delta(HHI) = 722 − 622− 102 = 1, 240 (37) Table 9 shows a summary of the combined market shares of the joint venture, the HHI of the markets and the delta of the HHI as a result of the joint venture in all the defined telecommunication markets. The horizontal merger guidelines by the European Commission in section 2.2 describe that it is unlikely to identify horizontal competition concerns in a market with a post-merger HHI between 1,000 and 2,000 and a delta below 250. The HHI of all markets are above 2,000, except the mobile telephony market. The HHI of the mobile telephony market is between 1,725 and 2,075. It is likely that the HHI is below 2,000 and the delta below 250. In that case, it is unlikely that the joint venture results in horizontal competition concerns in this market.
In addition, the horizontal merger guidelines describe that it is unlikely to identify horizontal competition concerns in markets with a post-merger HHI above 2,000 and a delta below 150. In the fixed telephony market and the
