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Guidelines
MALAYSIAN COMMUNICATIONS
AND MULTIMEDIA COMMISSION
GUIDELINE ON SUBSTANTIAL
LESSENING OF COMPETITION
RG/SLC/1/00(1)
| 7. |
Proposed analytical process
The Commission proposes to adopt the following three-step approach in determining
matters concerning the substantial lessening of competition. This approach will provide
clarity and transparency to the process of determination and will ensure consistent
consideration of economic regulation issues. It is to be noted that this process
as defined is intended as a conceptual and analytical framework within which evidence
can be organised. While it identifies areas of evidence which are relevant to the
case in question, the Commission may be constrained by the extent of evidence available.
This process is set out in Exhibit 1:-
Exhibit 1 Analytical framework for substantial
lessening of competition
| 7.1 |
Review the Context
| a. |
This step requires an initial assessment of
the issue, particularly whether section 133, section 139 or section 140 is relevant,
prior to conducting a full assessment. The Commission will consider the purported
importance of the issue or situation, including the circumstances in which it has
arisen (including whether a complaint has been made, and by whom), the likelihood
that Commission intervention is necessary to address it, and the likelihood that
the benefits of intervention will outweigh the costs. |
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| b. |
The Commission will make an initial judgement
on whether the circumstances of any issue related to an actual or alleged substantial
lessening of competition justify proceeding to a full investigation. The assessment
of whether substantial lessening of competition has or may occur is relevant to the
implementation of sections 133, 139 or 140. However, the procedures associated with
each section are different. |
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| c. |
When considering action under section 133,
the Commission expects that it will have been alerted in some fashion to conduct
in a market which appears to have the purpose of substantially lessening competition.
Possible actions open to the Commission are to seek interim injunctions or fines
against the conduct. |
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| d. |
When considering action under section 139,
the Commission expects that it will have been alerted to conduct in a market which
appears to have the effect of substantially lessening competition. Having determined
that a licensee is in fact in a dominant position in the relevant market, the Commission
may then direct the licensee to cease the conduct and to implement appropriate remedies. |
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| e. |
When considering action under section 140,
the Commission will have received an application for authorisation of conduct. Possible
actions open to the Commission are to issue an authorisation of the conduct, or to
refuse the application on the grounds that the authorisation would not be in the
national interest. The Commission will have regard to any benefits claimed in the
application for authorisation in making its assessment. |
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| f. |
In all cases, the Commission will make
an initial assessment of the impact of the conduct or proposed conduct on the level
of competition. In judging whether a conduct requires the Commission to proceed to
a full investigation of that conduct, the Commission will have regard to the following
criteria which it will apply as appropriate on a case-by-case basis:-
- the likelihood that continuation of the
conduct will encourage other licensees to engage in the same or similar conduct;
- whether any person has informed the Commission
of any loss or damage as a result of the conduct;
- whether the conduct has already ceased
or not;
- whether Commission action would clarify
the nature of the conduct;
- whether the conduct is likely to have
adverse impact on end-users;
- whether Commission action would serve
to alert end-users to the adverse impacts of the conduct;
- whether the costs of Commission action
would outweigh the benefits of the action; and
- the likelihood that another licensee might
take its own action over the conduct.
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| 7.2 |
Define the Communications Market
| The Malaysian context |
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| a. |
The Malaysian regulatory regime is not
confined to the telecommunications sector alone. It must have regard to all sources
of actual or potential competition in a communications market. This includes the
use of mobile and other wireless access technologies (including, for example digital
broadcasting and datacasting). It is for this reason that the Act specifically defines
a "Communications Market" as an economic market for:-
- a network service;
- an applications service;
- goods or services used in conjunction
with a network service or an applications service (eg., television and telephone
equipment, or billing services); or
- access to facilities used in conjunction
with a network service or an applications service.
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| b. |
It is important to recognise that these market
definitions do not correspond to traditional telecommunications markets. These definitions
are underpinned by a "convergence" model of communications industry activity
which recognises the trend for traditionally separate service markets to merge as
technological change generates new opportunities for competitive rivalry. A communications
market is generally larger and more competitive than a telecommunications or broadcasting
market. |
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Exhibit 2 Market and services structures in the
convergence sector |
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| "Economic Market" |
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| c. |
Reference to a "market" should be
taken as reference to a communications market for the purposes of reading this guideline.
In the exercise of its powers in the Act, the Commission has decided to adopt a definition
of "market" based on the economic concept of "substitutability".
Two goods or services will be treated as being in the same market if, and only if,
they are substitutable for a purpose. Within the bounds of a market, substitution
between goods and services occur in response to changing prices. It is these possibilities
of substitution which prevent a firm from changing its prices without provoking a
response from other suppliers in the market. |
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| d. |
This approach is consistent with the approach
adopted in a wide range of jurisdictions. In OFTEL's Guidelines on the Operation
of the Fair Trading Condition, the UK telecommunications regulator stated that:-
"The approach to market definition
... focusses on the existence of constraints on the price-setting behaviour of firms
... A main consideration is the ease with which it is possible to substitute relevant
services is response to movements in prices. There are two main aspects to consider:
how far it is possible for customers to substitute other services or products for
those in question, and how far suppliers not presently providing the products and
services in question can readily do so ..."
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| e. |
In Hong Kong, in the Office of the Telecommunications
Authority (OFTA)'s Guidelines to Assist the Interpretation and Application of the
Competition Provisions of the FTNS Licence, the following approach has been adopted:-
"... the TA will adopt the economic
concept of a 'market' as it has been applied in antitrust law. That is, the TA will
use the generally accepted test of 'substitutability' or 'cross-elasticity' in both
demand and supply. Essentially, a market is an area of close competition or potential
competition, and defining a market involves assessing which products are close enough
substitutes to be said to be competing in the same market".
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| f. |
The Australian courts have developed a
similar interpretation of Australian trade practices legislation. In a decision by
the Australian Trade Practices Tribunal, it was stated that:-
"A market is the area of close
competition between firms, or putting it a little differently, the field of rivalry
between them ... Within the bounds of a market there is substitution: substitution
etween one product and another, and between one source of supply and another, in
response to changing prices. So a market is the field of actual and potential transactions
between buyers and sellers amongst whom there can be strong substitution, at least
in the long run, given a sufficient price incentive ... Whether such substitution
is feasible or likely depends ultimately on customer attitudes, technology, distance
and cost of price incentives. ... in determining the outer boundaries of the market
we ask a simple but quite fundamental question: if the firm were to 'give less and
charge more', would there be, to put the matter colloquially, much of a reaction?"
(Queensland Co-op Milling Association Ltd v Defiance Holdings Ltd)
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| g. |
Substitutability, therefore, has both a demand-side
and a supply-side dimension. The main considerations are the ease with which purchasers
are able to replace particular goods or services used for a purpose with substitutes,
and the ease with which suppliers currently producing substitutes for a purpose can
produce the particular goods or services in question. Purchasers and suppliers who
are able to make these substitutions are operating in the same market. |
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| h. |
The demand side form of substitution is dependant
on how easily customers can substitute the products in question for those of a similar
nature, which can be referred to as the cross-elasticity of substitution between
products. It is essential that the transfer between the products can be undertaken
by the consumer with relative ease, the costs and effort must be minimal. Note that
it is not required that the products be perfect substitutes, but must fulfil the
purpose of the original product. The existence of such products may restrict the
price setting behaviour of the firms in the market to a certain extent, but again,
this is dependent on the factors mentioned in the above discussion. |
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| i. |
On the supply side, substitutability is dependent
on the ability of other firms not already providing the goods and services in question
to do so. This is known as the cross-elasticity of supply. In order for there to
be a high degree of substitution in this case, other firms must be able to begin
supply with relative ease. Hence, the market boundaries on both supply and demand
sides are defined by the other products available that can act as substitutes for
the product. Such products provide direct competition. |
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| j. |
The identification of the relevant purpose
is fundamental to the definition of the market. Goods or services which are substitutable
for one purpose may not be substitutable for another purpose. The identification
of the relevant purpose must be performed in the light of the conduct being examined,
the scope of the impacts which the conduct may have, and the importance of the purpose
in question in the light of the policy goals set out in this guideline. |
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| k. |
An example is whether conduct by a supplier
of apples should be regarded as conduct within the market for apples, or the market
for fruit, or the market for food. Any or all of these market definitions may be
relevant, depending on the impacts the conduct has in each market and the significance
of those impacts. |
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| Factors affecting substitutability and
market definition |
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| l. |
Substitutability may be limited by a large
number of factors. Amongst the most important are:-
- that two goods or services may not be
substitutable for a particular purpose (although this does not rule out the possibility
that they may be substitutable for some other purpose). In this case the two goods
or services are in different product markets;
- that two goods or services may be geographically
separated, and hence unavailable for substitution. In this case the two goods or
services are in different geographical markets; and
- that two goods or services may not be
available at the same time, and hence unavailable for substitution.
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| m. |
These three factors of substitutability
correspond to the three most important aspects of market definition:-
- the product dimension, which requires
the identification of the bundle of goods or services supplied by the firm and by
actual or potential sources of alternative supply.
- the geographic dimension, which
involves the identification of the area or areas over which a firm and its rivals
are able to compete, and to which customers can practically turn given a sufficient
price incentive. This price incentive may result in a customer switch to an actual
rival, or may encourage entry by a potential rival.
- the time dimension, which involves
the identification of the period over which substitution possibilities should be
considered. Generally the Commission will consider substitution possibilities over
the long term, but foreseeable, future.
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| n. |
When determining markets for the purpose of
examining the level of competition, it is necessary to identify the conduct supposed
to affect the level of competition, and determine markets in a way which provides
insight into the impact of that conduct. A too-narrow determination can suggest substantial
lessening of competition where there is none, and a too-wide definition can suggest
that there is not substantial lessening of competition when there actually is. |
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| o. |
In many cases, the Commission expects that
the best evidence for determination of markets will come from suppliers and purchasers
themselves, who are best placed to be aware of their rivals and their supply choices
respectively. From time to time the Commission may use its powers of inquiry and
investigation to gather such evidence for the purposes of determining a communications
market. |
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| 7.3 |
Assessment of Conduct
The Commission regards the pricing and supply-related behaviour of licensees as relevant
factors in assessing a dominant position in a communications market. These behaviours,
which are indicative of a position of dominance, are addressed below:
| Pricing behaviour |
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| a. |
Once the market has been defined, the Commission
will determine whether the situation justifies action under the Act. In the case
of conduct purported to have the purpose of substantially lessening competition,
the Commission will be required to apply "test" criteria developed in paragraph
(c) to (r) below. |
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| b. |
In the case of an application for authorisation
under section 140, this will require the Commission to make a forward-looking assessment
both of whether the proposed conduct will or may substantially lessen competition,
applying the criteria of section 6, and of the benefits of the conduct in the light
of the national policy objectives. An assessment of the net benefits of the conduct
will then be made. |
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| The Meaning of "Competition" |
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| c. |
OFTA has defined competition in its Guidelines
to Assist the Interpretation and Application of the Competition Provisions of the
FTNS Licence as follows:-
"The TA ... takes as its starting
point that competition is a process whereby there is rivalry in a market between
suppliers in relation to certain types of goods or services provided to consumers,
the prices at which they are supplied and the additional services which are offered
or supplied".
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| Supply behaviour |
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| d. |
The close relation between "competition"
and "market" definitions is apparent from this definition. In particular,
the concept of rivalry between firms underpins both concepts. |
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| e. |
The definitions of market quoted earlier all
included potential rivalry, in addition to actual rivalry, as a source of substitutes.
In these jurisdictions, the availability of potential substitutes is regarded as
an important source of rivalry and hence competition. The Commission adopts a similar
view. Both actual and potential rivalry are important constraints on firm behaviour
in a competitive market, although one or other factor may be more important, depending
on the circumstances. |
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| f. |
Competition is the process of actual or potential
rivalry between firms in a market. The level of competition in a market is simply
the level of this rivalry. "Lessening competition" therefore means a reduction
in the level of actual or potential rivalry between firms in a market. |
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| g. |
The Commission's view is that its role is
to protect competition, namely the process of rivalry between firms. It is not the
role of the Commission to protect any particular participant in that rivalry. |
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| Actual rivalry |
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| h. |
Factors which the Commission will normally
regard as indicators of the actual level of competitive rivalry in a market include:
- The number of independent suppliers
The greater the number and independence
of suppliers in a market, the more likely suppliers are to be direct rivals and the
higher the level of competition is likely to be.
- The degree of market concentrationThe
lower the degree of market concentration, the less the relative market share of competitive
rivals. In these circumstances it is more likely that rivals will be forced to respond
independently to price signals and that levels of actual competition will be higher.
- The level of product or service differentiation
The less the level of product or service
differentiation, the greater the ease of substitutability and the greater the number
of rival sources of supply. This generally results in a higher level of competition.
- The extent of vertical integration with
firms in upstream and downstream markets
Vertical integration can provide opportunities
for an integrated firm to extend market power in one market into the market in question.
This might include conduct which impacts on the independence its rivals, for example
by manipulating prices in intermediate markets or by imposing conditions in intermediate
markets. This could lead to lower levels of rivalry and competition.
- The nature and enforceability of any arrangements
between firms in the market which restrict their independence of action
Agreements between rivals to cooperate
on certain matters can reduce the level of rivalry and hence of competition in the
market. Such agreements can only have these impacts when participants cannot readily
defect from them.
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| Potential rivalry |
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| i. |
Actual factors are not the only ones which
must be considered. Potential sources of rivalry can also play an important role
in influencing the behaviour of market participants. The knowledge that raising prices
might attract new firms to a market can constrain pricing, even in the absence of
actual competitors. |
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| j. |
This point is particularly important in a
developing market such as Malaysia, where a significant proportion of the addressable
market does not yet have access to communications services. All things being equal,
the barriers to entry in such markets are lower than they would be if Malaysia enjoyed
ubiquitous infrastructure. |
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| k. |
Factors which are indicators of the potential
level of competitive rivalry in a market include:-
- The height of barriers to market entry
and exit
Lower barriers to entry and exit will generally
mean a higher propensity for potential rivals to enter the market in response to
the commercial opportunities created by the actual rivals’ conduct in the market.
Both barriers to entry and exit are relevant. An inability to exit a market can discourage
potential investors just as effectively as a barrier to entry if it exposes the investor
to the risk of financial loss.
- The presence or absence of technology
and market developments which are leading or are likely to lead to substitutes.
The circumstance of rapid technological
change in a market suggests that substitutes for a particular purpose may be more
readily available in either the short or the long run. This factor will be particularly
persuasive where such substitutes are actually available.
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| "Substantially" |
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| l. |
The term "substantially" has
antecedents in Australian trades practices law. In Cool & Sons Pty Ltd v O'Brien
Glass Industries Ltd, the Australian Federal Court described "substantially"
in "substantially lessening competition" in the following terms:-
"It must be capable of being fairly
described as a lessening of competition that is real, or of substance as distinct
from a lessening that is insubstantial, insignificant or minimal."
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| m. |
In the Explanatory Memorandum to the Trade
Practices Revision Bill 1986, it was stated that:-
"... in the context of section
46 [which refers to 'substantial lessening of competition'], 'substantial is intended
to signify 'large or weighty', or 'considerable, solid or big' ".
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| n. |
In one of the most considered comments
on this issue, Smithers J outlined the following approach to the degree of lessening
of competition required to constitute a substantial lessening:-
"To my mind, one must look at the
relevant significant portion of the market, ask oneself how and to what extent there
would have been competition therein but for the conduct, assess what is left, and
determine whether what has been lost in relation to what would have been is seen
as a substantial lessening of competition. ... it is the degree to which competition
has been lessened which is critical, not the proportion of that lessening to the
whole of the competition which exists in the total market. Thus a lessening in a
significant section of the market, if a substantial lessening of otherwise active
competition may, according to circumstances, be a substantial lessening of competition
in a market". (Dandy Power Equipment Pty ltd & Anor v Mercury Marine Pty
Ltd, 1982 ATPR sec 40-315)
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| o. |
In the Malaysian context, the significance
of any reduction in the level of competition will be determined in the context of
the objects of the Act and the national policy objectives set out in the Act. Where
the conduct has a significant negative impact on those policy objectives and goals,
it will be judged a significant lessening of competition for the purposes of section
133. |
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| p. |
A reduction of the number of suppliers in
a market does not, of itself, constitute a substantial lessening of competition,
or even necessarily a lessening of competition. A judgement about the impact of a
reduction in the number of suppliers can only be made in the light of its impact
on the level of rivalry in the relevant market or markets. |
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| q. |
Further, the reference to "consumer choice"
in the Explanatory Statement necessarily cannot mean that a certain number of suppliers
must be maintained, since that is impossible to guarantee in the normal course of
events in any case. The Commission's view is that "choice" in this context
refers to the potential to choose between suppliers, rather than having access to
a certain fixed number of suppliers. |
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| r. |
Conduct which appears to have little short
run impact can have significant long run impact and the Commission will usually only
have regard to purposeful conduct with long run impact. However, short run impact
will be considered where they are likely to have long run consequences for the level
of competition in a communications market. |
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| 7.4 |
This Guideline comes into
effect on February 1st 2000 and TRD 008/98 (ANTI-COMPETITIVE BEHAVIOUR IN THE
TELECOMMUNICATION INDUSTRY) will cease to have effect from the same date. |
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DR SYED HUSSEIN MOHAMED
Chairman
Malaysian Communications and Multimedia Commission
Kuala Lumpur |
 
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