Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
market definition is weighed up in the round. For example, where
prices are likely to differ substantially from their competitive levels,
caution must be exercised when dealing with the evidence on
switching patterns as such evidence may not be a reliable guide to
what would occur in normal competitive conditions” 74 .
4.47 As noted, Sky said that we were inconsistent, in recognising uncertainties in the
precise market boundary, but having the view that a loose or vague market definition
is unhelpful. We have carefully considered the possible implications of different
market definitions, but ultimately we sought to be specific in the market definition that
we have adopted.
4.48 As regards Sky’s view on the framework for monopolistic competition, we have not
used perfect competition as our benchmark, as Sky claims. We would not expect
firms in this market to price at marginal cost as would be expected in a perfectly
competitive market. We recognise that a degree of product differentiation is
inevitable, and valued by consumers, but that this product differentiation will tend to
raise prices above competitive levels.
4.49 However, we reject Sky’s argument that monopolistic competition is a relevant
framework on the grounds that (a) this framework relies on an assumption of free
entry to the market, and we see no basis for such an assumption here, and (b)
Oxera’s analysis of profitability (see paragraphs 6.169 to 6.207) demonstrates that
profits have not been driven down to zero – or close to zero – as the monopolistic
competition model implies.
4.50 We also reject Sky’s argument that our analysis ignores the complexity of the market.
Our analysis is informed wherever practical by information from surveys which reflect
the complexity of the market, and throughout by the recognition that Core Premium
channels are bundled with other channels and other services, and sold to consumers
with heterogeneous preferences. However it is often necessary to abstract from
these complexities in order to provide a meaningful analysis of specific points.
4.51 In making this criticism, Sky described the complexities of the market in some
detail 75 . However it did not set out any arguments as to which of our findings were
likely to be incorrect as a result of a failure to reflect these complexities. Nor did Sky
make any positive suggestion as to how a market with such complexities should be
analysed.
Evidence that prices are above competitive levels
4.52 Sky describes our concerns about a possible cellophane effect as well-founded. It
said that using the HMT was difficult in such circumstances 76 . As we explained
above, evidence that Sky is earning supernormal profits would point strongly to
prices being above competitive levels. We present in section 6 new evidence on
74 OFT Guidelines on Market Definition, 2004, paragraph 5.4.
http://www.oft.gov.uk/shared_oft/business_leaflets/ca98_guidelines/oft403.pdf.
75 Sky response of 1 June 2009 to Ofcom’s Second Pay TV Consultation “Additional comments on
Ofcom’s analysis of market definition and market power in the pay TV review” paragraphs 6.5 – 6.11
76 Ibid, paragraphs 4.18 – 4.25.
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