Competition Commission Inquiry Investigation between Verizon and Vodafone - Case Study Example

Industrial Organisation By + Introduction The case study I chose for this report was the Verizon Vodafone appeal case against the Office of communications and the British telecommunications company that was decided by the competition commission. The main backbone of this case was the setting up of new charges that were seen to be hindering the competitiveness of other firms that were in the industry. The commission therefore tried to find out if there was in deed any justification for setting those prices or they were simply placed with the hidden agenda to remove any unnecessary competition. During the appeal, Ofcom argued that the costs which the appellants had indicated should be removed from the TI basket were in the excess and were therefore described as the disputed common costs. It further stated that it had tried to balance from certain policy objectives that formed an integral part of its statutory duties. These included the promotion of sustainable and efficient competition. These duties included the promotion of sustainable and efficient competition, provision of regulatory certainty by being consistent in their approaches and to ensure sustainability of businesses by ensuring BT could recoup its initial investment costs. In regards to the question as to whether the price control that was set on TI were set at an inappropriate level since Ofcom did not allocate these costs away from the TI services in proportion from the forecast consumer migration but only due to the promotion to forecast customer migration from TI to Ethernet services. It was held that there was no discrepancy that could be established by looking at the manner in which the TI costs could be forecast. This was in regards to the reasons that were set out by the appellants. The second issue was whether the price control on the TI services had been set at an inappropriate level due to errors committed by Ofcom. The commission found out that there had been no error in the way Ofcom had allocated its costs. The third issue was whether the price control that was set on the TI services had been set at levels which were inappropriate. This was because the decision by Ofcom not to allocate costs that were common away from the TI services in direct proportion to the forecast customer migration was not consistent with the regulatory approach and objectives and was not justified. The commission held that there was no indication whatsoever that the approaches used by Ofcom were wrong in any way as they could be justified. Discourse Given the facts of the case there are several economic theories that I can use to base my argument on whether I agree with this rulings by the competitions inquiry or not. The first theory that I will use is the Market power theory (Anthony & Biggs 1997). This refers to the ability of a single company to manipulate the prices by influencing the supply or demand of certain products. These types of companies are able to set the prices of the items while at the same time maintaining the leading portion of market share. According to Ofcom this characteristic could have been observed in the operations of the telecommunications company and therefore they saw it necessary to levy the extra charges so as to improve competition among the competing firms. It is obvious that Verizon has an obvious advantage in the market and as such they can maintain the appropriate market lead. However, it is wrong to imply that they can influence the prices so as to get a competitive edge since they already have the leading market share. On the contrary, it seems as if the commission wants to help other firms gain a share of the market instead of letting things operate as per the market. An oligopoly refers to a market where there are only a small group of firms but there is are at least 2 dominant firm that exists over the others. Unlike in a monopoly situation, there is not any single firm that can claim to be the market leader but the rate of competition between them is so high so that there is equal distribution of market leadership among both of them. In an oligopoly structure, each of the firms has a large market share and as such can easily affect the market share by its actions. Given this scenario, it is very difficult for a new firm to enter such a firm as it may take them quite a while to get the market interested in their products. There is a high level of brand loyalty in these circumstances. Due to the dominant nature of the few firms that are in this market, the firms will have to spend heavily on advertising so that they can maintain relevance and lose out to the competitors. Diagram showing behavior of dominant firms (Vogel 2001) In the diagram above, a dominant supplier or firm might fix the price at Pm, distribution of the company output may be driven by a pre negotiated basis. Although the firm is a maximizing entity, its output may be limited to the pre agreed amount, however, another company may come on board and increase the outputs while selling at a price lower than that of the dominant company, they are capable of achieving big profits but only in the long run because the dominant players in the field can also adjust their prices appropriately. In a duopoly situation, there are only two large firms that dominate the entire industry (Taylor 2008). This is different from a monopoly where only one company that is a dominant player in the industry is. Duopoly is just another form of oligopoly since it also involves a few dominant firms. The table below shows profits that are due to a monopoly The area ACB is the dead weight loss. This refers to additional costs that are placed on the society due to the inefficiencies that arise due to use of the monopoly system (Throsby 2000). Considering the Nash equilibrium, where both the companies in a particular industry employ certain strategies. However, there is no incentive for any company to change their actions (Swann 2009). The various players will be at equilibrium when a change in strategy would mean that there would be a reduction in their profits while their competitors would still maintain the market lead. Given the situation in the telecommunications business, the act of Ofcom will severely affect the operations of the Verizon Company and as a result they may be forced to change their strategy. This change in strategy is what will give the competitors an undue advantage and they will have an opportunity to gain a bit of market share. The Nash equilibrium is important as it shows that the strategy in use by a company is very important in terms of profitability since it guides the core operations of the firm. Economies of scale refer to the ability of a firm to gain advantage by being able to operate on a large scale. For manufacturing firms this implies that they might have to produce goods in large numbers as this reduces the unit costs of each item. The operations of a telecommunications firm can also be affected by economies of scale as the company can invest heavily in a wide range of equipment that will ensure that all operations in regards to the network of the company go smoothly. In as much as there will be a heavy initial investment it is expected that in the long run the costs of running the operation will reduce significantly and the business will reap the profits from such a move (Arnold 2010). There are various factors that contribute to the success of a business. These are not guaranteed for by the management but rather arise in the normal course of business. An example is the benefits gained by brand loyalty that has been developed over numerous years of providing quality services. In the course of business the company might have also established certain ways of conducting business that they did not initially know of. These are the absolute cost advantages that a company can gain from being in the market for a long time and they give it a competitive edge over the competitors. Conclusion The telecommunications industry in the UK has a few major players. However, there is an overruling body that ensures that the operations of these companies are checked. This is so as to protect the consumers from greedy businesses that have to make profit in any way possible. It is evident that Verizon was the dominant player and if these fees were not increased there was a likelihood that their profits would soar high. This can be a biased view on the operations of the company since they had incurred a lot of costs in terms of investments and as such the profits could be well earned. They had also been in the business long enough and could have established ways by which they could operate more efficiently and this marked the source of their success. I do not agree with this line of thought and therefore agree with the commissions’ view that the charges imposed by Ofcom were legitimate. The company is fighting with Ofcom so as to reduce its costs and not to protect the consumers; they can claim that this cost will have to be passed down to the consumers but looking at their arguments there is no justification for such an increase. It is indeed true that they have incurred some expenses in setting up their operations and to improve the quality of services offered but this should be of benefit to all the consumers and not used as a basis to demand alternative preferential treatment. The role of Oxfom is to protect the interests of the consumers and looking at this case it is doing exactly that by promoting competition between the firms. When competition is maintained at a good level the quality of services go up but the prices come down because by nature consumers target maximum marginal utility for their money and if their money and if this can be achieved by using low cost products then they are much happier and save on expenses. Bibliography ANTHONY, M., & BIGGS, N. L. (1997). Mathematics for economics and finance: methods and modelling. Cambridge [u.a.], Cambridge Univ. Press. Arnold, Roger A. (2010). Economics (With Video Office Hours Printed Access Card). South-Western Pub. Banerjee, A., & Duflo, E. (2011). Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. New York: PublicAffairs. BLACK, J., HASHIMZADE, N., & MYLES, G. D. (2012). A dictionary of economics. Oxford, Oxford University Press. HALL, R. E., & LIEBERMAN, M. (2010). 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