ante Margin Squeeze Test

More documents

Recommendations

Info

<strong>Margin</strong> squeeze test:methodology Requirements (see Exhibit 4.1) 1. Pricing flexibility for the incumbent 2. Efficient competitors EEO REO 3. Attractiveness of the market 4. Availability of input data 5. Ability to produce reliable results 6. Replicability of an optimal market 7. Permits practical implementation Exhibit 4.2: Summary of qualitative analysis for reference operator Recommended approach Telecommunications regulatory agencies in the EU can employ any of the above methodologies as valid alternatives for assessing margin-squeezes. In spite of this, a TEO should be discarded straightaway owing to the fact that it requires an operator to achieve non-realistic theoretical efficiency, which is disproportionate to its decision and, furthermore, no current example can be found regarding best practice in Europe for addressing margin-squeeze in bundle tariffs. SVP Advisors therefore does not recommend the use of TEO for NITA. Earlier commentary on the choice between EEO and REO has already revealed that it is not cost and competition neutral. Thus, the scope of the exercise and regulatory objectives need to be properly addressed. There are differing perspectives regarding the effects of choosing EEO versus a REO in competition: with an EEO approach small operators, which are unable to be as efficient as the incumbent due to their smaller size and diseconomies of scale, will be incapable of competing. On the other hand, efficient operators will be able to remain in the market and maintain a reasonable margin. This choice promotes infrastructure based efficient competition and forecloses market entry. On the other © SVP ADVISORS P a g e | 18 June 2009
<strong>Margin</strong> squeeze test:methodology hand, with a REO approach smaller efficient operators will be able to enter the market. Moreover, the choice between EEO and REO depends on the scope of the exercise; whether the NRA is testing the existence of a specific competitive behaviour of the incumbent (EEO) or whether it is addressing instead the existence of a reasonable margin and attractive marketplace for an alternative operator to compete in the market (REO). From the point of view of SVP Advisors, NITA should use a REO approach in order to allow efficient operators smaller than the incumbent to enter and succeed in the market. Moreover, the REO approach addresses NITA‟s current need to evaluate whether an alternative operator can trade effectively in the Danish communications market. Acting on these reasons SVP Advisors recommends NITA to use a REO approach: costs and revenues of the incumbent operator, OLOs and, where strictly necessary, industry benchmarks are used as inputs to calibrate the costs and revenues of the REO size and market share of the REO are evaluated according to Danish market conditions inefficiencies due to economies of scale and scope of the REO are considered 4.4.2. Cost standard for assessing price-squeeze In the margin squeeze test different cost standards can be used to calculate the cost of the modelled operator. Competition law and economics have favoured costing, which is based on providing information on a determined part of costs, such as Variable Average Costs and Average Avoidable Costs standards, while regulatory economists and national regulatory authorities prefer to use methodologies based on an estimation of the costs incurred through providing the service, such as Long Run Incremental Costs and Fully Allocated Costs. The following presents the most discussed cost standards, and their characteristics: - Average Variable Costs (AVC): calculated as the variable costs divided by the output quantity (VC(q)/q), and is considered a suitable proxy for short run variable costs. - Average Avoidable Costs (AAC): the cost that could have been avoided if the firm had not produced a certain amount of output. © SVP ADVISORS P a g e | 19 June 2009
Page 1 and 2: A Report for NITA Methodology for a
Page 3 and 4: Margin squeeze test:methodology Lis
Page 5 and 6: Margin squeeze test:methodology reg
Page 7 and 8: Margin squeeze test:methodology 2.2
Page 9 and 10: Margin squeeze test:methodology ©
Page 11 and 12: Margin squeeze test:methodology In
Page 17: Margin squeeze test:methodology Thi
Page 21 and 22: Margin squeeze test:methodology Req
Page 23 and 24: Margin squeeze test:methodology han
Page 27 and 28: Margin squeeze test:methodology Req

ante Margin Squeeze Test

Create successful ePaper yourself

Delete template?

Save as template?