The Political Economy of European Union Competition Policy

A Case Study of the Telecommunications Industry

Tuna Baskoy

• Publisher: Taylor & Francis
• Year: 2008
• Print ISBN: 9780415542401
• eBook ISBN: 9781135890131
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

In the European Union (EU), competition policy occupies a central place amongst other EU public policies and is the first truly supranational public policy regulating market competition. One of the stated objectives of EU competition policy is to prevent excessive concentration of economic power in the hands of a few.

1
Introduction

Electronic communications function like the central nervous system or the arterial system in a human body, and the information carried over the system is the lifeblood of contemporary societies. As an essential part of our daily lives, telecommunications is defined as “[t]he transmission and reception of information of any type, including data, television pictures, sound, and facsimiles, using electrical or optical signals sent over wires or fibers or through the air” (Microsoft Corporation, 2002, p. 513). Parallel to the increasing significance of electronic communications, the market value of telecommunications has also risen significantly over the past quarter century.

The European Commission estimated that the global market for telecommunications was ECU (European Currency Unit) 390 billion in 1986 and the European Union (EU), formerly European Community (EC), accounted for ECU 82 billion or 21 percent of the world market (CEC, 1988a, p. 5). The world-wide market value of telecommunications reached 1.137 billion in 2007 (191.54 percent growth), and the market value of the EU’s telecommunications was 348 billion, an amount equal to 30.61 percent of the world market (European Information Technology Observatory (EITO), 2007, slides # 6 and 10). In addition to a 10 percent rise in the EU’s share of the world telecommunications market between 1986 and 2007, the EU telecommunications market grew by 324.39 percent, almost doubling the growth of telecommunications world-wide, in part because of the geographical enlargement of the EU itself.

As part of neo-liberal economic policies and intensifying economic globalization in the 1980s and 1990s, the years 1980 to 2004 have seen an important domestic, as well as international, push towards marketization through deregulation and liberalization (Nitzan, 2001; Albo, 1997). These policies were carried out swiftly to open up formerly regulated industries to market competition in both advanced industrial and developing countries. The promotion of ‘efficiency’ through market competition has become the fundamental political aspiration around the world. Establishing and maintaining competitive markets in formerly monopolistic industries by replacing vertical or industry-specific regulation with horizontal or competition/antitrust law was the primary goal. Telecommunications was one of the many monopolistic industries that experienced this sort of radical transition along with transportation, water and electricity.

Like elsewhere around the world, telecommunications in the EU had been a tightly regulated monopoly before 1980. The industry had been perceived as a ‘natural monopoly’ and state- or privately-owned national monopolies controlled the industry for decades. With a dramatic shift in public policy in the 1980s, the industry underwent a drastic restructuring owing mainly to EU competition law. Eliassen, Mason, and Siovaag (1999, p. 23) noted that EU competition rules served as the principal public policy instrument to reorganize the telecommunications industry by subjecting state-owned monopolistic services firms to market competition, thereby facilitating the transition from monopolistic to competitive markets. Moreover, European Commission officials as well as member state regulators relied heavily on European competition law to regulate market competition in the industry in the post-liberalization period.

Former EU competition commissioner, Mario Monti (2004) stated that the goal of liberalization and deregulation of the industry was the establishment of market competition. As an important field, telecommunications policy has attracted the attention of scholars. However, there are discernible differences regarding their analysis. It is possible to group the scholars in three camps. Scholars in the first group, like Von Weizsiicker (1984, pp. 208–9), argue that market competition promotes innovation, reduces telecommunications costs, and spurs growth in the demand for network services. New technologies and new products are beneficial not only for firms, but also for the society. The rationale behind the positive attitude towards competition in the telecommunications industry is based on the logic that a competitive market with free entry promotes technological and product innovation, as competitive pressure motivates firms to be aggressive, entrepreneurial and risk-taking (Thimm, 1992). For them, deregulation and liberalization provide openings for reaping the benefits of competition.

The second group of scholars, a dominant group in European telecommunications studies, focuses on the impact of institutional structures and processes on policy making and outcomes. They emphasize the cultural and historical contexts of regulatory policies, thereby analyzing policy processes to identify central policy actors. There has been an intense debate among the students of EU telecommunications policy regarding the level of analysis and the significance of the actors in EU electronic communications policy. These debates coalesce within three main subgroups. The first subgroup treats national political institutions as an independent variable contending that they provide a framework within which public policies are developed (Thatcher, 1999, p.1; Dyson & Humphreys, 1990, p. ix). With the priority on the ‘arts of statecraft’, they analyze policy processes to understand whether states can preserve their autonomy and hence their capacity to act independently by re-establishing their competence to govern. For scholars like Dyson (1986), Humphreys (2004), and Humpreys and Simpson (2005), EU institutions as agents of the member states exerted power to the extent that the member states or the principals delegated them. The EU’s role was secondary in that it was not a propelling force behind reform. Rather, its role can be summarized as ‘a further reason for reforms’ (Thatcher, 2004a, p. 285).

The second subgroup, consisting of researchers like Schneider and Werle (2007), concentrates on European levels of governance and singles out the European Commission, not the member states, as the leading actor of EU telecommunications policy. These scholars argue that the European Commission responded to counter the immediate American threat. Increasing competitive pressures led the European Commission to convince the member states to cooperate with each other to develop a common policy against the expansion of American Telephone and Telegraph (AT&T) and the diversification of International Business Machines (IBM) into telecommunications markets. Goodman (2006) extends this analysis to the other two important EU institutions, namely the European Court of Justice (ECJ) and the European Parliament (EP).

Within the second subgroup, there are scholars who concentrate on the supranational level with a focus on the implementation of competition rules in the telecommunications industry. Their analysis essentially tackles procedural questions such as how competition policy can be implemented, as telecommunications, mass media and information technology (IT) industries converge, new market structures replace the old ones, and firms re-position themselves in the telecommunications, broadcasting and IT industries (Larouche, 1998; Styliadou, 1997). Convergence among these three industries raises competition issues when a firm, which is dominant in one of the areas makes use of or extends its dominance into a related market, especially through a joint venture with another dominant firm from that market (Lang, 1997). The EU competition rules, which specifically focus on individual product and geographical markets in their analysis of market power, rarely capture the market power of conglomerates that actively operate in different industries, not only in national, but also in international markets (Just & Latzer, 2000; Lera, 2000; Latzer, 1998; Clements, 1998). Competition is taken for granted and the question of what kind of competition is not raised in this literature, either (Garzaniti, 2003).

The third subgroup considers the EU as a polycentric and multilayered political system in evolution. In contrast to the first two groups, which perceive power as concentrated either at the national or supranational level, scholars like Natalicchi (2001, pp. 211–3) conceptualize political power as dispersed across three types of actors: supranational institutions, national states and social forces. Moreover, subnational, national, supranational actors at the European-wide and international levels should be considered simultaneously because political power is spread among different actors at different levels. EU telecommunications policy is explained within the logic of demand and supply for supranational regulation by integrating an analysis of the role of multiple actors at different levels.

Taken as a whole, scholars in the second group examine the processes of EU electronic communications policy-making and implementation informed by a detailed, historical approach, albeit with differences in their emphasis on actors and levels of analysis. The goal is to pinpoint the most important actor and the appropriate level of analysis to shed some light on the process of European integration. Schneider and Werle (2007, p. 280) observed that students of European telecommunications policy have yet to question the nature of competition to be established, policy outcomes, or winners and losers.¹

Scholars in the third group are interested in the political economy of telecommunications policy. They take competition and profitability, not institutions, as independent variables and analyze their impact on telecommunications. For instance, Lüthje (1993) argued that the crisis of Fordist accumulation in telecommunications, as opposed to new technologies or international competition, triggered the problem of profitability that resulted in the redefinition of the roles of communications and computer companies. According to Locksley (1986), market competition and the profit imperative were the two significant factors for understanding the demand for and development of information and communication technologies. State-owned telecommunications service providers were privatized in order to generate private capital to exploit profit opportunities in the telecommunications industry. The end result of deregulation and privatization, which were deemed necessary for healthy capital accumulation, was the concentration and centralization of capital in information communication technologies (ICTs). Although scholars in the third group pinpoint policy outcomes and winners as well as losers, the problem with their analysis is that it is very broad and vague. Instead of providing a detailed industry level analysis, they provide sketchy empirical evidence. In addition, they are silent about EU telecommunications policy. Nor do they raise questions regarding the type of competition that policy makers and law enforcers targeted.

As this succinct review illustrates, the literature on telecommunications is rich and complex, but it is hard to find answers to the following vital questions: How was competition established? What kind of market was it aimed at: i.e. decentralized with many competitors or oligopolistic with few competitors? Who are the winners and losers? Given that EU competition law was the principal public policy instrument for deregulation and liberalization of the industry to establish competition, analysis of EU competition policy may provide some clues to answer these questions.

1.1. EU COMPETITION POLICY AND WORKABLE OR EFFECTIVE COMPETITION

Competition policy is often referred to as symmetric regulation that provides firms with a level playing field, as it regulates their behavior and conduct in the market.² According to Chang (1997): “Regulation is usually defined as the government (or the state) directly prescribing and proscribing what private sector agents can and cannot do, so that their actions do not contradict the ‘public interest’” (p. 704). Regulating market competition is based on the idea that the market is imperfect and there are incidences of market failures. The state is therefore given the responsibility to correct these imperfections and failures to align the private interest with that of the public, at least in theory (Trebing: 1969, pp. 87–8).

Many countries around the world adopted competition law to stimulate and protect competition after the 1970s. Between 1945 and 1973, only 27 countries in the world had competition policy. This number suddenly jumped to 70 by the end of 1996 (Palim, 1998, pp. 105–45). Over 90 countries had competition law and policy by 2002 (Kolasky, 2002). In the process of spreading competition law and policy to other countries, the EU has played a major role, by obliging candidate countries to adopt its competition policy as part of acquis communautaire (the body of common rights and obligations which binds the member states together within the EU), as well as by promoting the idea of a multilateral agreement on competition within the World Trade Organization (WTO) (Holscher & Stephan, 2004; Monti, 2003a).

A free market economy was identified as the appropriate economic system for the European Economic Community (EEC) in the treaty establishing the EEC by the founding member states. For Sauter (1998): “The economic order protected by a liberal economic constitution is essentially that of a private law society (based on freedom of contract) supplemented by minimal public intervention. Within this framework, competition plays a central role” (p. 47). Nevertheless, the Commission of the European Communities (CEC) found that a laissez-faire model of a capitalist market was not a panacea for all problems due to its self-destructive nature (1958, p. 59).

For correcting market failures, the European Commission often perceives competition policy as the EU’s central public policy. As such, it lies at the centre of the EU constitution. “Competition policy is therefore both a Commission policy in its own right and an integral part of a large number of European Union policies” (CEC, 1997, p. 17). Indeed, as a structural policy, it is the central public policy to which other EU policies have to adjust to ensure consistency (CEC, 1980, p. 11). In sum, EU competition policy is a public policy tool to realize the goals of the EU. It is the central public policy that determines the direction of all other policies as well. Wilks and McGowan (1996) characterized EU competition policy as “one element determining the evolution of European capitalism, an element with a potential to take pre-eminence over other areas of Community law” (p. 226). Thus, understanding EU capitalism entails comprehending its competition policy in the first place.

The history of EU competition policy starts with the history of European integration. The EU itself was founded by the six West European states of France, West Germany, Italy, Belgium, the Netherlands and Luxembourg as the European Economic Community (EEC) with the signing of the EEC Treaty in 1957. Competition policy was so important for the founding member states that they included competition rules (Articles 81 to 89 or ex-Articles 85 to 94) to regulate the markets in the EEC Treaty. EU competition policy is one of the earliest supranational policies in the EEC, along with the common agricultural and cohesion policies, according to Mahant (2004). The EU was created with the Treaty on European Union (TEU) signed on February 7, 1992, which came into effect in November 1993. The current membership of the EU is 27 after the accession of 12 new members, mainly from Central and Eastern Europe, in May 2004 and January 2007 respectively (Dinan, 2004).

The importance of EU competition policy has amplified with the twin processes of deepening market integration and geographical enlargement over the past quarter century. As one of the central supranational public policies, EU competition policy has several objectives including market integration; maintaining undistorted competition; ensuring the ‘right amount of competition’ in order for the EEC Treaty requirements to be met and its aims attained; diffusion of economic power; and other broader public interest aims such as pre...

Table of contents

• New Political Economy
• Contents
• List of Figures
• List of Graphs
• List of Tables
• Abbreviations
• Preface
• Acknowledgments
• 1 Introduction
• 2 Theories of Market Competition
• 3 Competition Law and Policy in the EU
• 4 EU Telecommunications Policy
• 5 Implementing EU Competition Law in Telecommunications
• 6 EU Telecommunications Equipment and Services Market Analysis
• 7 Concluding Remarks
• Notes
• Bibliography
• Index