Discussion Papers

Hasan Alkas

Rabattstrategien marktbeherrschender Unternehmen im Telekommunikationsbereich
Nr. 195 / September 1999

Summary

Price differentiation and discounting practices have increased with liberalisation of the telecommunication market in Germany. This study focuses on selective price cutting in the final service market for voice telephony and leased lines. Due to the attractiveness of market entry for newcomers especially in the market for large business customers, selective price cutting in general and optional tariff packages are focused on this group. In response to this the dominant firm has the most incentives to provide discounts in order to keep large business customers.

Discounts can be applied in various forms. Often the dominant firm offers direct rebates or optional tariffs. Optional tariffs can be based on monthly or yearly generated revenues, on the duration of call minutes and on the period of contracts or on a combination of these parameters. Other optional tariffs provide higher discounts if fixed-, mobile and /or Internet services are purchased by the same firm. The level of discounts and their combinations shows a preference for high volume customers.

It is possible that some price and discounting strategies might unfairly have a discriminatory effect on customers and hinder or eliminate competitors. Therefore criteria for assessing such strategies with regard to price discrimination and predatory pricing are necessary. Both pricing strategies require some degree of market power. Market power can arise with economies of scale and scope, a subadditive cost function and sunk costs, which might create market entry barriers for newcomers. It has to be noticed that some discounting practices, such as loyalty rebates can create a market entry barrier it self.

For the assessment of price discrimination the definition of relevant markets plays a crucial role. To prevent price discrimination in the same relevant market, a price should be explained by differences in the average incremental costs (AIC) of that service. On the top of AIC a reasonable mark-up for common costs can be allocated. The common costs can be splitted up into common costs for a group of services and in overhead costs. Whereby the allocation of overhead costs can be oriented on the demand elasticities.

In general a negative, neutral or positive judgement about price discrimination requires a detailed evaluation. From a welfare economics perspective price discrimination is positive, if it creates additional demand. This is the case if under uniform tariffs some demand is not served.

The inquiry about predatory pricing should take the reputation effect on competitors into account as well. Despite some disputes about cost concepts, AIC are more or less accepted as a basis to assess predatory behaviour. Although a case by case analysis is recommented as exception to the AIC rule. In general a price after discounts which is lower than its AIC and a reasonable mark-up for service specific common costs can be regarded as predatory.

Only German language version available.

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