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103 Cards in this Set

  • Front
  • Back

What is the difference between a network economy and a network industry?

Network economies point at the "customer" side of things; Network industries deal with the supply side (think: network infrastructure)

What is a network externality (AKA network effects)?

The value of a product or service for a user (willingness to pay) is dependent on the number of users using it.

What are some examples of network effects? (3)

1. Telephone services


2. Stock exchanges


3. Social networks

What is the most obvious remedy for solving market failures caused by network effects?

Network interconnection: mobile networks in the telecom industry, credit cards in the financial sector.

Do network effects causing market failures have to be regulated?

No; sometimes, it is better if you leave them to competitive forces (a balance between long-term and short-term efficiency may be stricken).

What is a network industry?

Businesses where the (physical) network infrastructure (fixed costs) is very important and costly compared to variable costs, and in particular to the cost of producing on more unit (marginal cost). This gives rise to a particular cost structure which shapes the market structure (natural monopolies).

Do network industries require regulation the same way that network effects do?

Absolutely not. They need to be regulated.

What are the definitions of fixed, variable, average, and marginal costs? (4)

1. Fixed: do not vary with output


2. Variable: change as output levels are changed


3. Average: total cost divided by the level of output


4. Marginal: cost of producing one more unit

What are the different types of economies that can be enjoyed? (3)

1. Economies of scale: costs are lower the bigger the output is


2. Economies of density: costs are lower the more concentrated demand is


3. Economies of scope: costs of providing two services together are lower than providing each product separately

When does a natural monopoly arise?

A natural monopoly arises when the market is served more cheaply by a single firm, rather than by a multiplicity of competing firms (cost sub-additivity).

How do natural monopolies cause market failures? (2)

1. Economies of scale the main cause


2. Economies of sclae and scope can reinforce the effect

What would the consequences of not regulating a natural monopoly be?

Exercise of market power in:


1. Price-setting


2. Output setting


3. Quality


4. Innovation

What are some of the caveats to the general rules on natural monopolies? (2)

1. May be vulnerable to tech changes and so contestable


2. Increasing returns to scale do not always and per se bring about a natural monopoly

What industries do natural monopolies commonly arise in?

1. Post


2. Telecoms


3. Hydrocarbons


4. Electricity


5. Water


6. Railroads

At what stage of the value chain do natural monopolies always appear in?

Always at the distribution (pure infrastructure) stage

If you were a goverment, how would you go about facing a natural monopoly?

1. Isolate the natural monopoly stage withing the production chain


2. Setting out a privatisation process for the natural monopoly stage, privatisation and liberalisation processes for the other stages


3. Two routes for remedies: introduction of competition law or ex-ante regulation/intervention

What are the five remedies for natural monopolies?

1. Unbundling of services


2. Competition law


3. Separation


4. Price regulation


5. Acess regulation

What decisions must be made when unbundling the services of a natural monopolist?

1. To isolate the monopolist from the rest?


2. What is the nature of the monopolist?


3. Relatioship of the monopolist with the rest of the stages?

How does competition law help resolve natural monopolies?

Attention to the economies of vertical integration:


1. Denial of essential facilities


2. Raising rivals' costs


3. Predatory practices


4. Cross-subsidizing

What is meant by the "separation" remedy for natural monopolies?

"Real unbundling" --> –Aimed at guaranteeing healthy-functioning of theoretically competitive markets throughout the chain by curbing the exercise of competitive advantages of integrated players.

What are the three types of separation for natural monopolies?

1. Accounting


2. Functional


3. Ownership

What purpose does price regulation in solving natural monopolies? (3)

1. Avoid excessive pricing on customer


2. Allow for cost recover and investment recoupment over a given period


3. Foster forthcoming investments

What options are there for price regulation for natural monopolies? (2)

1. Cost +: –calculate averagecostsand granta markupuponthem


2. Cap pricing: sets up absolutepricinglevelactingas a threshold

What is the aim of access regulation for dissolving natural monopolies?

Aimed at enabling non-network carriers access network in fair, transparent and non-discriminatory terms.

What are some examples of access regulation? (3)

1. Transparency


2. Non-discrimination


3. Access to, and use of, specific networkfacilities

In terms of natural monopolies, what is universal service?

Dutyimposed,normallyontheincumbent(orallproviders)toguaranteeprovisionof a particular service toanycitizen(iefixedphoneline).

How are universal services subsidised?

1. Direct financing


2. –The grantingorreservingof anotherwisefree marketactivitytotheincumbent(undesiredand sometimesillegalsolution)

Why are telecommunications networks so important?

For citizens' and economies' competitiveness --> EC predicts for 10% increase in broadband, 1-1.% GDP growth

What are the natural monopoly components in telephone, cable, and broadcast industries?

- Telephone - fixed network


- Cable - physical network (also distribution)


- Broadcast - distribution called DTT

Who are the three (general) actors in the market?

- Network providers


- Telecom retailers


- Content providers

What did the EU Green Paper on Development of Telecommunications Services and Equipment provide? (3)

1) Proposed that provision of equipment and enhanced services within MS


2) Basic services + physical networks could still be monopolised


3) However, this monopoly should be periodically investigated

What did the EU Framework Directive on 1990 introduce? (2)

1) Laid down the concept of Open Network Provision


2) The purpose was to stimulate entry into the VANS Market (Value Added Network Services) and ensure fair competition

What is the Open Network Provision?

the existing public fixed networks are to become a kind of pan-European motorway system over which any operator can run telecommunication services in the knowledge that tolls and conditions of access and use would be the same for all

What did the EU Full Competition Directive of 1990 introduce? (3)

1) Demanded MS allow free entry to all parts of telecommunications


2) Abolished all legal entry barriers, thus enabling free entry into markets for telecom services


3) Introduction of criterion of 'cost-orientation'

What did the EU Interconnection Directive of 1997 introduce? (3)

Introduction of two-tiered approach to ONP regulation SMP vs non-SMP providers Telecom network/service providers who are classified as having significant market power are subject to stricter regulation

What do the restrictions on SMP providers entail? (4)

1) General obligation to provide network access


2) Burden of proof that interconnection charges are cost-based


3) Possibility of ex-ante regulation of interconnection charges


4) Principles for cost accounting systems

What is an SMP?

An organisation with a market share of over 25% in a given telecom market (national regulatory agencies have the authority to determine whether an org has SMP)

Main difference between Dominance and SMP?

SMP provides the framework to subject an organisation to ex-ante regulation, whereas dominance is the benchmark to measure competition law infringements

What 5 points did the 2002 Telecom Directive reform state that all future regulation should have?

1) Based on clearly defined policy objectives


2) Minimum necessary to achieve objectives


3) Further enhance legal certainty


4) Aim to be technologically neutral


5) Be enforced as closely as possible to activities being regulated

How was the SMP instrument furthered in the 2002 Telecom Directives reform? (3)

1) National Regulatory Authorities (NRA) are required to notify the Commission before adopting, finding SMPs, or imposing remedies


2) The Commission has the power to veto NRAs proposed decisions on market definition and SMP, but it does not have the power to veto NRAs’ decisions on remedies.


3) NRAs can choose from a list of standard behavioural remedies

What was introduced in the 2009 telecoms reform? (2)

1) expanded the role of EU-level institutions in telecom regulation by creating the Body of European Regulators for Electronic Communications (BEREC) and extension of Commissions oversight powers


2) NRAs gained the power to impose functional separation on vertically integrated providers

What is the BEREC? (3)

1) Replaced the European Regulators Group (ERG)


2) Forum of high-ranking NRA officials who exchange best practices and issue opinions to the Commission


3) Commission not bound by BEREC's opinions, but required to take them into "utmost account"

What new powers were granted to the Commission under the 2009 telecoms reform? (3)

1) Has a 'quasi-veto' power over remedies imposed by NRAs


2) New power of last resort in cases where wide inconsistencies exist across MSs


3) NRAs gained the power to impose a structural remedy (functional separation)

What is the scope of the Commission's quasi-veto power?

1) Only with respect to market definition and SMP


2) Can make NRAs defer adopting remedies until completion of concilliation procedure


3) BEREC plays role as mediator


4) NRA does not have to implement Commission opinion, but must give reasons if not

What was covered in the 2002 Framework Directive? (2)

Covers all electrononic comms network and services. Sets out functions of NRAs

What was covered in the 2002 Authorisation Directive? (3)

1) Covers authorisation of telecom network and services.


2) Harmonised market for electronic telecom networks and services


3) Main innovation is replacement of individual licenses with general authorisations

What was covered in the 2002 Access Directive? (4)

1) Establishes rights and obligations for operators and undertakings seeking access.


2) Imposes extra obligations on SMP operators


3) Framework to encourage competition


4) Set out possible remedies

What was covered in the 2002 Universal Service Directive?

1) ensure that telecom services are made available to all (price + access)


2) Compensation mechanisms for operators with universal service obligations

What was covered in the 2002 Privacy and Electronic Communications Directive?

Concerns the processing of personal data relating to the delivery of communications servicesprotecting data from being destroyed, stolen, altered, etc.

What problems arise with vertically integrated incumbent operators? (monopolists) (3)

1) How to preserve competition where it is possible


2) Clear trade-off between reducing discrimination and irrecoverable efficiencies


3) Need to look at access-based competition vs efficiency lost with vertical separation

How does the Commission advocate remedies for monopolists? (5)

Functional, not structural separation


1) Creation of wholesale division


2) virtual separation


3) business separation


4) business separation with localised incentives


5) legal separation

What problems arise from market definition, market evolution, and SMPs? (2)

1) Progressive shrinking of possible markets subject to regulation. 18 in 2002 to 4 in 2014


2) NRAs can incorporate new markets, but must follow rules

What rules must NRAs follow to incorporate a new market? (3)

1) presence of high and non-transitory structural, legal or regulatory barriers to entry


2) market structure does not tend towards effective competition


3) competition law alone is insufficient to adequately address market failures

What problems arise from access and interconnection issues?

Vertical (margin squeeze) and horizontal issues (termination rates).

What requirements are there for remedying access and interconnection issues? (3)

1) Access obligations to essential facilities


2) Public discolsure of information - transparency


3) non-discrimination

What problems arise from pricing issues? (2)

1) Involves price-fixing, cost-orientation (w/ analytical accountancy), avoidance of excessive pricing and uncompetitive mergers


2) Tension b/w short-term efficiency of low prices and long-term dynamic efficiency of network innovation and investment

What pricing mechanisms are available to pricing issues? (3)

1) fixed-price cap (more client protective, easier to enforce, leads to sub-optimal solutions)


2) cost-plus mechanism (maximum markup % over cost level, it fosters investment, requires tight control of info and oversight)


3) Timely revisions are needed in any case

What problems arise from endogenous network competition? (4)

1) Within networks of same technology


2) Technology and cost evolution plays a role, remember 'contestability' of natural monopoly


3) tradeoff between access/price regulation and investment fostering


4) clear policy switch in Europe, less stringent access/price regulation and more scope to invest in high capacity networks

What are the network industries?
communications, water, energy, transport, rely on some form of physical distribution network
What is a natural monopoly?
a situation where the market can be most cheaply supplied by a single firm.Left to itself, its likely to charge excessive prices
How can you determine a natural monopoly?
When the average cost falls as the network increases and grows, so that the marginal cost is lower than the average cost (i.e. economy of density & economies of scale)
What two factors determine a natural monopoly?
1) Economies of scale2) Economies of scope - cheaper for one firm to supply, than two or three
What are the implications for pricing of services provided by a natural monopoly?
1) what price would emerge in the absence of intervention? (unregulated monopolist would charge higher price)2) What prices should regulation try to attain? (if NRAs must ensure that the firm breaks-even for private sector owners, then lowest price is average cost. If not, the ideal is marginal cost)
What are Ramsey Pricing?
1) the inverse elasticity rule - raises individual prices above marginal cost in according to each service's price elasticity of demand2) if demand is elastic, then price should be lower than the average proportionate mark-up over marginal costs3) if demand is inelastic, then price should be higher than the average proportionate mark-up4) this enables common costs to be recovered in a way to minimise the harmful effects of distortion
What is separation in network industries?
restructuring natural monopolies through regulation by imposing a different structure and allows for multiple companies to take part in the value chain
What are the forms of separation? (3)
1) Ownership separation - one of the activities is divested or sold off2) functional separation 3) accounting separation
What is functional separation? (2)
1) redesigning the firm’s business processes and managerial incentive systems to force the separated business to behave more independently2) now under last resort under EU regulation for telecoms
What is accounting separation? (3)
1) firm is required to produce separate profit-and-loss and balance-sheet information for different components of the business2) will expose where profits are being made and if there is cross-subsidisation or discrimination3) will not expose non-price discrimination
Why must regulators make capital investments in natural monopolies contestable? (2)
1) there is no scope for efficient duplication 2) There may be scope for 'competition in the market' (i.e. rivalry among firms for the right to install and operate the asset
What are the benefits of making capital investments contestable? (4)
1) better specification of projects and increased cost efficiency2) better alignment of investment to customer priorities3) improvements to innovation and dynamic efficiency 4) comparative information on the performance of different firms in the same activity, regulator can use it to demand cost reductions
What are the downsides to making capital investments contestable? (4)
1) reduction in scale and scope economies arising from separating a previously integrated operation2) more complex and costly coordination3) delays in procurement processes arising from the organisation of contests and increased risk in the execution phase 4) may be changes in total cost of capital
What are the two forms of tender used for contestability?
1) tenders for the project are conducted by the incumbent (monopolist)2) tenders for the project are conducted by an external party (regulator, gvt body, independent system operator)
Disadvantages of mandatory outsourcing by the monopolist (2)
1) most regulated sectors already have a significant degree of voluntary outsourcing2) it is not clear that regulatory bodies have the skill and insight to assess the efficiency of outsourcing by a regulated company
Advantages of using an external party for tenders (3)
1) ensure that non-incumbents will be considered 2) might ensure that a project actually takes place, by relaxing capital constraints, etc.3) allows for a bidder to win and introduce a new alternative network owner
Disadvantages of using an external party for tenders (3)
1) whether the incumbent (monopolist) is allowed to tender itself at any stage - they have the experience, but may also discourage others from applying 2) not clear that regulatory bodies have the skills to assess competing tenders 3) has historically frequently added significant delays and costs
What is universal service?
means that the service must me made available to all households within a given areas and that i should be made available at a uniform and affordable price
What must you keep in mind when discussing Environmental regulatory law? (4)
1) not an economic market2) Limits of cost and benefit analysis3) Constant evolving knowledge4) Aesthetic and other values attached to it
What are the four EU Environmental Principles?
1) Principle of subsidiarity2) Principle of precaution3) Principle of integration (cross-application)4) Polluter pays principle
What is the precuationary principle?
1) Decisions must be made in light of the best scientific knowledge in the field.2) Always err on the side of caution, take the more protective option
What is the integration (x-application) principle?
Environmental protection requirements must be integrated into the definition and implementation of Community policies and activities.
What is the polluter pays principle?
Environmental damage should as a priority be rectified at source and that the polluter shall pay
What are the main EU legislative instruments? (4)
1) Environmental Impact Assessment (EIA) Council Directive2) Disclosure of Environmental Information Directive3) Environmental Liability Directive4) Integrated Pollution Prevention and Control Directive
What regulatory tools are available for Environmental policies? (5)
1) Policy - 7th Environmental Action Plan2) Incentives - taxes (+ and -) state aids?3) Standardisation - EMAS label regulation4) Command and control - licenses and fines5) Private enforcement - polluter pays
What does the European Environmental Agency do? (3)
1) Help Community and MS make informed decisions2) Integrating environmental considerations into policies3) Moving towards sustainability
What is the Emissions Trading System?
- works on the 'cap and trade' principle- cap is set to limit the greenhouse gases that can be emitted- cap is reduced over time so total emissions fall
How does ETS work?
- companies buy or receive emission allowances which they can trade- buy limited amount of int'l credits for emission-saving projects - limit on total caps ensures there is not excess pollution
What changes came in the ETS third phase?
ETS launched in 2005, in its third stage now from 2013 to 2020.Changes: 1) single, EU wide cap on emissions2) auctioning, not free allocation, is now default method for allocating allowances3) more sectors and gases included in scope
What were in the main facts in United Kingdom v European Central Bank 2011?
1) ECB posted on website "Eurosystem Oversight Policy Framework"2) ECB believed the monitoring of systems was an extension of responsibilities given to them with TFEU3) Policy framwork had two key components: securities settlement systems and central counterparty houses (CCP)
What are central counterparty houses (CCP)?
CCPs ensure the clearing of certainover-the-counter derivative transactions by bearing and managing the credit risk of the parties to a transaction
What is the Eurosystem Oversight Policy Framework?
Euro system’s role was to oversee the payment, clearing and settlement of systems.
What was the United Kingdom claiming against the Eurosystem Oversight Policy Framework?
1) the ECB drew the conclusion that infrastructures that settle euro-denominatedtransactions should be legally incorporated in the euro area with full managerial and operationalcontrol and responsibility, over all core functions, exercised from within that area.2) UK claims the ECB lacks competence to impose a location requirement in respect of CCPs
Judgment of the General Court for United Kingdom v European Central Bank?
It annulled the Eurosystem Oversight Policy Framework published by the ECB, which requires central counterparties to be located in the Eurozone.
What was the ratio decidendi for United Kingdom v European Central Bank? (2)
1) ECB lacked competence to regulate the activity of security clearing systems 2) ECB's competence was limited to to payment systems alone by Art. 127(2) TFEU
What is the background to United Kingdom v European Parliament and Council? (2)
1) In wake of financial crisis, EU passed many regulations. Regulation 236/2012 regulates short selling and certain aspects of credit default swaps2) Art. 28 of that reg. gave ESMA the power to intervene, under certain conditions, through legally binding acts in the financial market of a MS if 'threat to orderly functioning, integrity of markets, or stability of whole or part of EU financial system'
What did United Kingdom claim against European Parliament and Council?
It wanted to annul the regulation based on arguments that ESMA was vested with powers contrary to the Meroni and Romano judgments and Articles 290 & 291 TFEU
What was the judgment of the United Kingdom v European Parliament and Council case?
1) it rejected UK's claim and solidified the legality of using specialised agencies to deal with issues which require a certain level of expertise.
What were the three main aspects of the judgment/ratio decidendi of the UK v EU Parliament and Council?
1) Compatability of EU's delegation of powers to ESMA with the Meroni and Romano judgments2) Compatability with Articles 290 and 291 TFEU3) Compatability with principle of conferral of powers in relation to article 114 TFEU
What was the judgment of the Meroni and Romano Cases?
1) A delegation of power that is too broadly and insufficiently defined is prohibited 2) Agencies cannot adopt normative measures
How did the judges apply the Meroni Judgment to UK V EU Parliament and Council? (3)
1) Article 28 of Regulation 236/2012 does not go beyond the bounds of the regulatory framework established in the ESMA Regulation2) ESMA has various substantial and procedural limitations and is subject to judicial review 3) Therefore, the system was compatible with the Meroni judgment
How did the judges apply the Romano Judgment to UK V EU Parliament and Council? (2)
1) When Romano passed, it was in part because there would be a risk of lack of judicial superversion by the Courts. However, since then, Lisbon Treaty passed and it allows judicial review of acts of agencies of other bodies.2) It fell within the scope of Romano, because clearly defined executive powers were delegated (not quasi-legislative nature). But, 263 and 277 TFEU permits EU bodies, offices, agencies to adop acts of gen. application
How did the judges apply Article 290 and 291 TFEU to UK V EU Parliament and Council? (3)
1) United Kingdom argued that the articles only permit delegation of powers to the Commission, therefore the leg. cannot delegate powers to adopt measures of gen. application to agencies.2) Court refuted and stated that the articles do not represent a 'closed system'3) ESMA has a high degree of professional expertise and work closely together in the pursuit of the objective of financial stability within the Union, therefore it cannot be regarded as undermining the rules on delegation of powers.
What are the two conditions in Article 114 TFEU in order for an act to be adopted? (the legal basis for harmonising rules to establish the internal market) (2)
1) measures for the approximation of the provisions in MS 2) the object of act is the establishment and functioning of internal market
How did the judges apply the two conditions of Article 114 TFEU to UK V EU Parliament and Council?
1) First condition: ‘the concept of ‘measures for the approximation’ must be interpreted as including the EU leg.'s power to lay down measures relating to/individual measures concering a specific product or class of products 2) Second: ESMA's activity in particular related to reacting to market behaviour with cross-border implications (which NRAs alone could not resolve) threatening the integrity of financial markets or the stability of the financial system