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Research & Academia

The Applicability of the Essential Facilities Doctrine on Network Utilities


Whether to deregulate and allow entrants to join competition can improve the social welfare or not is a profound issue for competition law authorities. If the answer is positive, then to open the market and the competition is duty-bound. However, when there is a possibility that (1) too little efficient entry into markets will occur, or (2) entry occurs when it is socially undesirable, the design of policy becomes very essential. According to this analysis, it is difficult for incumbent to adopt marginal cost pricing. Therefore, once we open the market, the situations will occur. Hence, in order to enhance the social welfare, the policy makers should adopt taxation and subsidy to compensate these two problems.

Based on the analysis, if entrants need incumbent to provide essential facilities to enter market, then the price should be based on the ECPR instead of the cost. Under this pricing rule, if the entrants “lease” the essential facilities, the rent must equal the profit incumbents lost. If the entrants share the essential facilities with incumbent by “line sharing” and whenever the entrants increase a unit of sales, the incumbent will lose one unit, the rent should be lower than lease price. That is to say, the lower the displacement of the service or products is, the cheaper the price of essential facilities should be.

As for telecommunications markets, if local loop is one of the essential facilities, when entrants ask to lease one local loop line to provide fixed-line service, the Chunghwa Telecom Co. will lose the profit of that line; therefore, the rent should be equal to a loss. On the other hand, when the entrants require sharing the local loop lines to provide DSL service, the CTC can still provide voice service. Hence, the rent should be cheaper than the lease price.

Therefore, this research suggests adopting the following principles to deal with the sharing problems of essential facilities.

  1. We can adopt the concept of essential facilities concept from US Federal Court Appeal, that is “a competitor’s inability practically or reasonably to duplicate the essential facility” and “the feasibility of providing the facility” to verify essential facilities.
  2. If under reasonable rental and leased conditions, the essential facility monopoly refuses to lease their essential facilities to competitors. It is very likely they will violate the Fair Trade Law (Article10 (1)).
  3. Reasonable rental fee should be based on ECPR.

In practical, a reasonable rent standard can be verified through the following steps:

  1. First, classify the essential facilities into two categories, which are “excludability” and “nonexcludability”.
  2. According to the ECPR, the rent of “excludability” should be: after the incumbent gives up using the facilities, (1) the profit incumbent lost, minas (2) the cost incumbent saved.

According to the ECPR, the rent of “nonexcludability” should be: after sharing the facilities with the competitors, (1) the profit incumbent lost (gained), plus (minas) (2) the cost incumbent bore.

Updated at:2008-12-19 07:43:20