Pay TV phase three document - Stakeholders - Ofcom

Responses to our consultation
Pay TV phase three document – non-confidential version
4.231 Sky considered that Ofcom’s consumer research into the likely response to a
hypothetical price rise is strong evidence that consumers are very price-sensitive. It
acknowledged that stated preference bias (where respondents overstate their likely
responses to hypothetical questions) can be a problem with this type of research
although it argued that it was not sufficient to ‘reverse’ the findings. In its view, we
should accept that the findings indicate consumers are highly price elastic unless we
provide evidence on the existence of cellophane fallacy pricing or stated preference
bias. Sky believed that Ofcom’s assessment of profitability suggests that prices are
not excessive and are therefore competitive 178 .
4.232 However, in a subsequent submission 179 , Sky described our concern about the
cellophane fallacy as “well founded”. Sky said 180 that while the implications of the
cellophane fallacy were generally recognised, there was no consensus on how to
deal with it. It cited an OFT discussion paper 181 which argued that the inherent
uncertainty introduced by cellophane fallacy meant one should be “conscious of the
potential weakness of the dominance analysis”. Sky said that this recommendation
was in stark contrast to Ofcom’s approach, in that Ofcom recognised the cellophane
fallacy problem but had “a high degree of confidence in its conclusion that Sky holds
a dominant position in each of the two narrow markets that it has defined”.
4.233 BT, however, agreed with Ofcom that cellophane fallacy pricing is likely to be a
problem when considering the switching responses of consumers. 182
Our current view
4.234 We considered Sky’s argument that, because of the cellophane effect, we should be
cautious in concluding that Sky is dominant in the narrow markets we have defined.
We recognise that the cellophane effect leads to a degree of uncertainty, and
because of this uncertainty, we have not relied exclusively on analysis of stated or
actual switching behaviour. Rather, we have considered a broad range of evidence.
4.235 However, we note that the cellophane effect will, if not taken into account, lead one to
define markets too broadly. As such, the greater the cellophane effect, the more an
analysis of switching behaviour will tend to overstate the breadth of the market, and
therefore to understate the degree of dominance.
4.236 We have estimated the minimum consumer elasticity that would be required to
constrain a monopolist retailer from increasing prices above current levels. For the
reasons set out in paragraphs 4.43 to 4.46 we interpret evidence of consumer
elasticity with caution. In order to estimate likely elasticity we examined research
provided to us by Sky. The results are shown in Figure 24 below.
178 Sky response to Ofcom’s First Pay TV consultation Annex 2paragraph2.3-2.18.
179
Additional comments on Ofcom’s analysis of market definition and market power in the pay TV
review, Sky, 1 June 2009, paragraph 3.18.
180 Ibid, paragraph 4.20.
181
The role of market definition in market power and dominance inquiries, Economic Discussion
Paper 2, OFT, July 2001.
182 BT response to Ofcom’s First Pay TV consultation paragraph58.
101