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Competition has three corresponding potential advantages. (1) The likelihood that the industry producer has the low marginal cost is higher than under monopoly because even if one firm fails to secure the low cost, its rival may do so. (2) The presence of a rival with correlated costs reduces the information advantage of the industry producer. And (3) any direct, operational costs of regulation (e.g., the salaries of regulators and their staff) are avoided. The first of these potential advantages of unregulated duopoly is referred to as the sampling benefit of competition. The second potential advantage will be referred to as the rent-reducing benefit of competition.
A comparison of the advantages of monopolisation and competition provides two conclusions regarding the relative performance of monopoly and competition. First, on the first hand, when demand is perfectly inelastic, competitor produces a higher level of expected welfare than does regulated monopoly. On the other, monopoly will generate a higher level of expected welfare than unregulated duopoly when demand is sufficiently elastic. Second, competition outperforms regulated monopoly when the difference between the high and the low marginal cost is sufficiently close to zero. More generally, if the fixed costs of operation are sufficiently large, regulated monopoly will outperform unregulated duopoly in the simple model analyzed here because monopoly avoids the duplication of fixed costs. When the social cost of funds is considered, monopoly offers an additional advantage over competition.
1.3.2 The paradox of regulator
In order to manage the liberalised market, the regulator must have considerable knowledge of the regulated industry. In practice, a regulator’s information can be far more limited. A regulator’s difficult task of overseeing and directing the activities of a monopoly supplier can become nearly impossible when the regulator’s information and expertise are severely limited and when he lacks the physical and financial resources to overcome these limitations. Consequently, allowing competition to replace regulatory oversight as the primary means of motivating and disciplining the incumbent supplier can be advantageous when the efficacy of regulatory oversight is severely compromised by limited regulatory resources.
1.3.3 The paradoxes to introduce competition into services market
Competition can play a particularly valuable role in disciplining and motivating the incumbent supplier to pursue the best interests of consumers, however, competition is not necessarily a panacea. Moreover, according to paradoxes in the following paragraphs, there is no idea framework to deregulate telecommunications sectors.
First, Successful liberalization is seldom as simple as removing all legal restrictions on entry into the regulated industry. Entrants face myriad economic barriers to entry, even when legal barriers are removed. These entry barriers include: (1) customer inertia due to switching costs or ignorance, for example; (2) incumbent control of key inputs that entrants require for profitable operation; and (3) the prospect of aggressive pricing by incumbent suppliers. Therefore, the liberalisation process cannot be done only by removing all legal restrictions and end there.
Second, when providing free entry to new entrants, although competitor cannot challenge the incumbent across overall markets , competitors may pursue rent by engaging in cream skimming activities. Cream skimming is the act of serving the most profitable (e.g., urban, business telecommunications) customers, and leaving the incumbent supplier to serve the less profitable (e.g., rural, residential telecommunications) customers. Cream skimming can limit the ability of the incumbent supplier to finance particularly low prices on some services with substantial profit earned on other services, and thereby undermine socially desirable pricing structures.
Third, access obligations imposed on the incumbent aims to increase market entry and therefore promote competition on the relevant market. However, this would otherwise strengthen the incentives of the incumbent to make anti-competitive activities. First, the access price offered to new entrants normally is set at, sometimes below, the cost of provision of such essential input by the incumbent. Secondly, the new entrant usually prefers to stream-picking services, which would possibly lead to unbalance of the incumbent. In addition, access obligations can also produce inefficient access in some cases and it is difficult to design access price because asymmetry of cost information between the regulator and the incumbent. Last but not least, it is always difficult to choose a optimal benchmark of access price: on the first hand, excessive access price would foreclose the market entry; on the other hand, insufficient access price would lead to inefficient access and deter the incentive to build a parallel network.
2. Legal Instruments in EC Liberalisation Process
2.1 The rationales of necessity of regulation
In the process of regulation of telecommunications sector, EC assumes that (1) there are only two liberalising instruments, say ex ante sector-specific regulation (or regulation) and ex post competition law; (2) regulation should be complemental to competition law; and (3) in the long run competition law alone should suffice to regulate the telecommunications sector . Here produces a doubt why we must refer to regulation and why competition law alone does not suffice to regulate the telecommunications market. Furthermore, the doubt became sharper especially after introducing competition law methodology into regulation by the new framework directive . As regards the question why we still need regulation in such deregulation process, it should refer to the characterisation of competition law and sector specific regulation (SSR).
2.1.1 The characterisations of competition law and regulation
Competition law and regulation differ in at least three fundamental respects. First, competition law typically deals with anti-competitive activities ex post investigations according general principles and case laws with limited scope of application. In contrast, regulatory policy often specifies ex ante detailed rules and/or particular obligations that define precisely the limits on acceptable behavior and outcomes. This difference means that in a certain case the workload of competition authorities would be far heavier than that of regulatory authorities.
Second, competition law remedies process in a static way, whereas regulatory remedies prospective. Therefore, the objective of competition law is to restore the market to be what it was prior to the emergence of anti-competitive behaviours. On the other hand, regulation aims to reform the currently unsatisfactory market structure to be more competitive. This difference leads to diverse remedies. Taking telecommunications network as an example, both competition law and regulation can touch this critical bottleneck stage when the provider pursues a monopolistic price without other competitors on the relevant market. Competition law will only be capable of reducing prices somewhat below the monopolistic level when it is a monopolistic market and ends there, nevertheless, regulation can do more that competition law do, such removing market barriers, promoting access and so on.
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