Christian Kirchner, Berlin Competition policy vs. regulation: Administration vs.

judiciary

What is competition policy?

Competition puts businesses under constant pressure to offer the best possible range of goods at the best possible prices, because if they don't, consumers have the choice to buy elsewhere. In a free market, business should be a competitive game with consumers as the beneficiaries. Sometimes companies try to limit competition. o preserve well!functioning product markets, authorities like the Commission must prevent or correct anti!competitive behaviour. o achieve this, the Commission monitors"

agreements between companies that restrict competition # cartels or other unfair arrangements in which companies agree to avoid competing with each other and try to set their own rules

abuse of a dominant position # where a ma$or player tries to s%uee&e competitors out of the market

mergers 'and other formal agreements whereby companies $oin forces permanently or temporarily( # legitimate provided they e)pand markets and benefit consumers

efforts to open markets up to competition 'liberalisation( # in areas such as transport, energy, postal services and telecommunications. *any of these sectors used to be controlled by state!run monopolies and it is essential to ensure that liberalisation is done in a way that does not give an unfair advantage to these old monopolies.

financial support 'state aid( for companies from +, governments # allowed provided it does not distort fair and effective competition between companies in +, countries or harm the economy

cooperation with national competition authorities in +, countries 'who are also responsible for enforcing aspects of +, competition law( # to ensure that +, competition law is applied in the same way across the +,

1.

Introduction

The relationship between competition policy and regulation has not always been clear. Conventional wisdom tends to regard both activities as noncompeting and thus complementary. But in certain phases o deregulation and trans ormation o ormer state monopolies into competitive mar!ets rivalry

between competition policy and regulation is evident. "n practice the con lict between competition policy and regulation o ten arises as one between competition authorities and sector speci ic regulatory authorities. "n order to better understand the comple# interdependence and substitution processes between competition policy and regulation it appears to be use ul to analyse their relationship - a ter a irst review o the problem in an industrial organisation ramewor! - in a new institutional economics perspective. Competition policy will be understood here as the application and en orcement o competition law by competition authorities and law courts. $egulation will be understood as sector speci ic regulation en orced by regulatory authorities and law courts. %hereas competition policy constitutes a branch o economic policy applicable to all sectors regulation concerns speci ic industries. The act that administration plays a more prominent role in case o regulation and that the judiciary is more decisive when it comes to the application and en orcement o competition law, will be ta!en into account. But conclusions on the proper relationship between competition policy and regulation cannot be derived the solely on ground o di erent en orcement mechanisms. 2. &.' Competition policy and regulation as non-competing institutional devices: the complementarity hypothesis "ntroductory $emar!s

The widely accepted traditional view that competition policy and regulation are complementary, non-competing devices may serve as a starting point o the discussion (complementarity hypothesis). Both types o economic policy are directed towards in luencing given mar!et processes. But within this broad common ramewor! they are pursuing di erent goals and ought to solve di erent problems i. "n order to better understand the relationship between competition policy and regulation it has to clari ied which solutions are o ered by both institutional devices and which goals are to be attained. *uch an analysis should start with our widely accepted positions which appear to be convincing at irst sight but which have later on to be critically evaluated: (') Competition in mar!ets or goods and services produces positive wel are e ects or a society and is an important actor in order to base the organisation o society on the undament o individual reedom. (&) " competition is e#clusively being le t to mar!et orces competition may be endangered by activities aimed at creating or strengthening mar!et power (restrictive business practices).

(+) (,)

Competition policy has to protect reedom o competition by de ining and en orcing such constraints which prevent such restrictive business practices. "n mar!ets where competition does not produce the positive wel are e ects - mentioned in (') - industry should be regulated.

-osition (,) - widely accepted be ore the deregulation movement ii - may be ormulated di erently: $egulation is needed in certain cases o .mar!et ailures. li!e .natural monopolies. where competition policy is in easible. "n order to outline this - conventional - approach .competition., .competition policy. and .regulation. have irst to be placed into the ramewor! o a traditional industrial organisation analysis. &.+ Competition

Competition in a mar!et means that mar!et participants as customers have the choice between di erent suppliers and as suppliers the choice between di erent customers. The essence of competition is rivalry iii. $ivalry on one side o the mar!et means reedom o choice on the other side. Thus competition may be regarded as an instrument which simultaneously creates reedom and chec!s power, i.e. market power. &., /ilemma structures o competitive mar!ets

The relationship between mar!et participants - either suppliers or customers - may be characterised as a prisoner.s dilemma iv. *uch mar!et participants which gain mar!et power can escape this prisoner.s dilemma totally or to a certain degree. 0ar!et power may be the result o productive e iciency1 but so long as entry barriers are low or non-e#istent this type o mar!et power may be contested in a process o dynamic competition. "n the absence o superior productive e iciency mar!et power may be the result o collusive activities, which restrain competition, e.g. engaging in price i#ing, mar!et allocation, absorbing other competitors by means o a merger etc. (restrictive business practices). The result or mar!et participants on the other side o the mar!et is less reedom o choice and thus a deterioration o mar!et conditions. &.2 Competition policy

Competition policy may be regarded as that part o economic policy which aims at protecting the reedom o choice in mar!ets by preventing activities which endanger this reedom (restrictive business practices). *uch activities may be collusive activities mentioned or activities by competitors with dominant mar!et power which oreclose the mar!et by raising entry barriers.

The goal of competition policy is to !eep mar!ets ree rom restrictive practices, i.e. to protect reedom o competition against certain activities which are supposed to have negative e ects v. The underlying assumption o competition policy de ined in this way is that in the absence o such restrictive practices e ective competition will produce positive economic e ects, i.e. it will lead to an e icient use o scarce resources (allocative e iciency) vi, thus serving the general wel are. And it will serve the purpose o protecting individual liberty as well. &.3 "nherent limitations o competition policy

Competition policy as such cannot create competition. "t can only prevent or limit the e ects o certain activities which are restricting reedom o competition. Competition as such is a dynamic search process which is dependent on various institutional prere4uisites li!e private property and freedom of contract vii. "n the absence o such institutional devices there cannot be any meaning ul competition policy. There are certain limits to the e ectiveness o competition policy. The assumption - that in the absence o restrictive business practices competition will produce positive wel are e ects - may not be satis ied because o the e#istence o public goods, e#ternalities or so-called natural monopolies. These imper ections o mar!ets, o ten re erred to as mar!et ine iciencies or mar!et ailures viii. Competition in such cases is said to be in easible or technological or mar!et reasons i#. &.5 The argument or regulation o .natural monopolies.

"n the case o a .natural monopoly. - de ines as subadditivity o the cost unction over the relevant range o output # - the arguments goes that the e iciency goal cannot be attained by competition between two or more irms in the mar!et #i. Costs will be lower i only a single supplier e#ists #ii. Thus, according to conventional wisdom mar!ets, in which .natural monopolies. e#ist, should be subject to regulation in order to protect consumers and to attain the goal o allocative e iciency #iii. &.6 Conse4uences or the relationship between competition policy and regulation

According to this conventional wisdom competition policy and regulation are institutional devices which are not con licting. They are applicable in di erent settings and thus are complementary. There are mar!ets, in which

competition policy will lead to satis actory results, and other mar!ets, which need regulation in order to attain the e iciency goal. The goals to be attained by both institutional devices are overlapping but not identical. %hereas many authors argue that competition policy should serve a broad catalogue o objectives #iv others ocus on the e iciency goal #v. 7 ten the e iciency goal is being combined with the consumer protection goal #vi. "n case o regulation most authors stress the e iciency goal #vii, but goals li!e consumer protection are being brought into play as well #viii. " this - simple - analysis o competition policy and regulation is true the ollowing hypothesis may be ormulated: Competition policy and regulation are alternative and complementary institutional devices which do not compete. The answer to the 4uestion whether competition policy or regulation is the ade4uate institutional device in order to deal with issues o imper ect competition can 8 according to conventional wisdom - simply be derived rom an analysis o mar!et imper ections in a given mar!et. %hen the given mar!et turns out to be a .natural monopoly., the argument goes that regulation is the only - easible solution. "n case o public goods mar!ets are assumed not to unction properly so that political decisions on supply o these goods appears to be necessary. $egulation is supposed to bere4uired. "n case o e#ternalities institutional devices li!e property rights and9or civil liability should be applied. "n all other cases competition policy supposedly will produce satis actory results. The complementarity hypothesis, which has served in the :nited *tates o America as a justi ication or regulation o a number o industries, and which in ;ermany has been legitimising the so-called e#ceptions rom ;erman law against restraints o competition #i#, rests upon a 4uestionable methodological undament. This undament has been challenged since the early '<3=s by many scholars o economics ##. "n the light o this criticism the hypothesis that competition policy and regulation are non-competing institutional devices may have to be given up or at least have to be modi ied. The ollowing chapter will deal with two cases where there may be good reasons or competition between competition policy and regulation. 3. Competition policy and regulation as competing institutional devices

Competition policy and regulation may be competing institutional devices in situations where regulation is being cut bac! or abolished as such (deregulation) and where ormer state monopolies are trans ormed into competitive mar!ets (transformation of state monopolies). /eregulation may be understood as a move rom regulation to competition policy. The essence o a normative theory o deregulation may be

understood as the message that competition policy is the superior institutional device or the given mar!ets compared to regulation. Trans ormation o state monopolies is a dynamic process where in the initial stage most authors agree that (some sort o ) regulation is necessary in order to open up mar!ets##i. %hether, when and how in later stages o the process regulation should be replaced by competition policy is being discussed in chapter 3. " there are relevant cases in which competition policy and regulation are viable alternative institutional solutions the choice between both options is an issue which need to be based on economic theory more elaborated than the simple approaches being introduced in the introductory sections. "t is irst necessary to clari y the methodological approach. 4. ,.' Methodological approach A new institutional economics approach to competition policy

"n a new institutional economics perspective competition policy may be understood as the design o an institutional framework (competition law) together with the enforcement of such legal rules ##ii. Competition law in an institutional perspective is providing generally applicable rules which unction as constraints or competitors when they ta!e decisions on strategies on how to maintain or improve their position in a mar!et. Certain options 8 e.g. agreements to i# prices, allocate mar!ets, abuse dominant mar!et power 8 are .prohibited.. *uch .prohibition. means that competition law provides sanctions or these activities. *uch sanctions are perceived by the addressees as prices or these activities. Thus competition law has the e ect o a price system or certain activities which supposedly produce negative e ects or the unctioning o mar!ets. "n an institutional perspective a distinction between public ordering and private ordering is relevant. The lawma!er is responsible or public ordering which provides an institutional ramewor! or private actors, which engage in mar!et transactions organising their business and contracting with others. (private ordering). Both the lawma!er (or the lawma!ers) and private actors are supposed to act rationally in their own interest. $ationality is not per ect, but is bounded. "n ormation is assumed to be systematically incomplete. Transaction costs are positive ##iii. -ublic ordering thus may be understood as a learning process in which lawma!ers design institutional devices by ma!ing use o the then e#isting in ormation in a world o positive transaction costs. Actors in the legislature, in administrative en orcement agencies and in law courts are being regarded as sel -interested rational actors, whose rationality is bounded and whose in ormation is systematically imper ect. Their

activities are interdependent, so that each group o actors may in luence competition policy but is dependent on reactions rom other players. 7ne characteristic eature o competition policy in practice is its ocus on law-ma!ing and law-en orcement. >n orcement o legal rules o competition law ta!es place in an interplay between the competition authority and law courts when the latter ones have to ind whether a decision o the competition authority o how to apply competition law in a concrete case is correct in the legal sense. But competition law may also be en orced by law courts without the intervention o the competition authority when law courts have to hear cases brought orward by such actors who claim that they have been harmed by unlaw ul activities which are not in accordance with e#isting competition law. Both en orcement devices are more or less controlled by the judiciary. The role o administrative authorities is to pic! such cases which are deemed to be important or the application and development o competition policy. These authorities enjoy a right o initiative which due to their resources they can utilise in order to investigate is a power ul instrument. ?evertheless, the law courts have the last word, unless the lawma!er - a ter court decisions, which are supposedly not in line with the lawma!er.s objectives - intervenes. Competition policy in this new institutional economics perspective may be understood as a game between lawma!ers, administrators, law courts and private actors. All actors in this game are understood to pursue their own interest1 they act in a world o incomplete in ormation and positive transaction costs. Their rationally is bounded. According to the institutional economics-approach there is no pre-de ined public interest ##iv. ?either administrative authorities nor law courts are assumed to pursue such a public interest but persons acting on behal o these authorities pursue their own objectives. 7n the other hand they are not ree to pursue any objective subjectively perceived as advantageous or themselves. They are acting as agents or citi@ens (who are the principals)1 their activities are monitored and controlled by given political devices which de ine their responsibility and accountability vis-A-vis the principals. Because o the in-built wea!nesses o e#isting governance structures there is a systematic deviance rom the objectives actually pursued by the agents and those o the principals. This is true or political actors - e.g. at the level o lawma!ing - and especially on the level o administrative authorities. "n case o competition law, where application o legal rules is being en orced by law courts, also the judges o these courts may be viewed as agents acting on behal o the citi@ens as principals. The eedbac! between the interests o the principals and the activities o law courts, i.e. judges, is more complicated than that between lawma!ers, member o administrative authorities and the citi@ens. This is due to the act that one o the essential elements in a legal system is the independence o the judiciary. The eedbac! between judges and the interests o citi@ens thus cannot be one o direct accountability but is being determined by the methods o applying the law in concrete cases. "n case law systems the relevant methodological tools de ine the binding orce o precedents and the rules on distinguishing in act and in

law. "n systems o statutory law the relevant methodological tools are the methods o interpretation which have to be used by law courts. %hereas administrators tend to legitimise their activities by stressing that they pursue positive goals - li!e allocative e iciency and9or protection o consumers. interests - lawma!ers tend to justi y their activities asserting that they are serving the public good (;emeinwohl, bonum commune). /ue to their constitutionally protected independence law courts enjoy more discretionary power vis-A-vis the citi@ens as principals. "n a system o statutory law they are bound by given statutory law (positive law). But statutory law is open to interpretation. Thus methods o interpretation are o utmost importance. "n competition law where economic rationale and terminology is being trans erred rom economic theory - industrial organisation - into legal terminology those who interpret statutory competition law tend to develop legal theories on competition law which are connected to economic theory but which are to a certain degree autonomous. "n order to de end this autonomy it ma!es sense or law courts not to translate economic objectives directly into legal concepts. This may be one o the reasons why in legal theory - even in the case o competition law 8 allocative e iciency as the ultimate goal o competition law is rather being regarded with suspicion. Baw courts rather tend to put competition law into the general legal ramewor! thus being able to bring in other .values. li!e . reedom o contract. or .social justice.. An institutional approach necessarily ma!es a clear cut distinction between a positive and a normative approach. %hereas the ormer one analyses the given e ect o alternative institutional arrangements and9or the creation and change o such institutional arrangements, the latter one produces arguments or choosing between competing institutional solutions. This institutional economics-approach may be applied to regulation as well. 0ost elements o the institutional approach are the same whether applied to competition policy or regulation. But there are some speci ic eatures o an institutional economics-approach to regulation which have to be discussed below.

,.&

$egulation in a new institutional economics perspective

Applying the new institutional economics-approach to regulation means at irst a clear distinction between a positive theory of regulation - which e#plains why and how e#isting regulatory structures have been developed ##v and how the e#isting regulatory instruments wor! in practice ##vi 8 and a normative theory of regulation which discusses the justi ication o regulation ##vii and9or the merits o competing regulatory regimes and9or the rationale o a choice between regulation and application o competition law ##viii.

As argueed above the assumption o sel -interested (bounded) rational behaviour is combined with that o systematically incomplete in ormation and positive transaction costs. As in competition policy there is no pre-de ined public interest in a new institutional economics-approach. $egulation in an institutional economics perspective might be seen as an activity in which lawma!ers, administrators and - to a certain degree - judges are engaged in public control of business activities. 0ar!et orces are totally or at least to a certain degree replaced by an administrative decision process. Bawma!ers, administrators and judges - as agents - have to justi y their 8 costly 8 activities vis-A-vis the citi@ens, i.e. the principals, in the light o a positive balance between social bene its and social costs. *uch a calculation has to ta!e into account the cost o regulation as well. " regulation which is being justi ied by e#isting .mar!et ailures. the problem arises that one cannot compare the e#isting mar!et imper ections with per ect mar!ets. *uch per ect mar!ets would be a good benchmar!1 but they do not e#ist. *uch a comparison thus would lead to a nirvana approach. And it has to ta!e into account that there are imper ections in state activities as well which may produce high - o ten invisible - costs. A cost-bene it analysis o pros and cons o regulation in a speci ic mar!et has to weigh bene its and costs not just in a static model but has to ta!e into account the impact o regulation on innovation as a driving orce o uture bene its as well. "t has to be remembered, that all the relevant decisions - at the level o lawma!ing, administration, and application o law by law courts - ta!e place in a world o systematically incomplete in ormation. *uch an institutional economics-approach to regulation is ar away rom conventional wel are economics approaches to regulation ocussing on e iciency implications o regulation and sometimes con using the positive and the normative approach. 7n the other side an institutional economics-approach cannot be reduced to a simple positive analysis o the relevant actors o e#isting regulatory structures. A normative analysis o alternative institutional devices is necessary in which regulation and competition policy are analysed in a comparative setting. This type o normative comparative institutional approach then may serve as a basis or choosing between competition policy and regulation in given mar!et situations. 5. Competition policy and regulation in a deregulation process

A deregulation process can be understood as an attempt to replace (sector speci ic) regulation by the application o general rules o competition law. "n some cases that process just leads to a mitigation o e#isting regulation. /eregulation then means a change in the institutional ramewor! or a given industry. The players in the mar!et are con ronted with a di erent set o rules and with di erent en orcement procedures.

As has been mentioned deregulation may be justi ied in the light o de iciencies o e#isting regulation. The positive theory of regulation##i# has ormulated many o these arguments which then have been turned into political activities. But a deregulation process may be driven by legal changes outside the reach o the national lawma!er and regulator. "n the case o regulated industries in 0ember *tates o the >uropean :nion which had been e#empted rom national competition law the competition law o the >uropean Community does not contain such e#emptions and is pre-empting national competition law when restrictive practices a ect the trade between 0ember *tates (Art. 6' par. ' >C). %hile more and more mar!ets have thus been covered by Community competition law rather than by national law, e#isting national regulation which was compatible with national competition law was not in accordance with >uropean competition law. This legal change orced the 0ember *tates to drastically adjust national regulation to the new supranational legal ramewor! or to abandon regulation as such and replace it by the application o general competition law. " a 0ember *tate has opted or deregulation national and >uropean competition law may both be applicable to the deregulated industry. >uropean competition law is con ined to transactions which are o >uropean concern, i.e. which a ect trade between 0ember *tates, whereas national competition law remains applicable to purely national cases. $eplacement o (national) regulation thus is a complicated process. The relevant actors in the ield o public ordering are lawma!ers, competition authorities and the judiciary on the national and the >uropean level. %hereas at the national level law courts play a decisive role in the en orcement o competition law, at the >uropean level it has been the Commission which had played the decisive role in en orcing competition law in the past. This has been due to the speci ic structure o Art. 6' >C. This article contains two tests. According to paragraph ' certain restrictions o competitions are being prohibited whereas according to paragraph + the provisions o paragraph ' may be declared inapplicable under certain conditions (e#emptions). The power to grant e#emptions has been vested in the Commission between '<3& and 0ay &==,. >#emptions under the very broad and vague wording o Art. 6' par + >C have rarely been challenged by the a ected mar!et participants be ore the law courts. This means that a change rom (national) regulation to the parallel application o national and >uropean competition law cannot be understood as a substitution o administrative procedures by legal procedures - administration vs. judiciary - but rather as a comple# process in which national administrative procedures are replaced by national legal procedures and by >uropean administrative procedures. Transactions which a ect trade between 0ember *tates and which are covered by >uropean competition law are in most cases the more relevant and important one. Thus it may be argued that more a less one type o administration is being replaced by another. But then it is necessary to ma!e a clear distinction between administrative procedures o regulatory authorities and

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administrative procedures by the >C competition authorities. %hereas the ormer ones ocus on e# ante regulatory devices the latter concentrate on critical cases e# post. %hereas the ormer one cover all transactions o the industry at sta!e, the latter one is a selective approach. 7ne may regard the administrative procedures o the >C Commission as 4uasi-legal procedures. A ter 0ay ', &==, the picture may by changed to a certain degree because $egulation ?o. '5 o '<3& which sets out the rules o the procedures or the application o Articles 6' and 6& is being replaced by Council $egulation (>C) ?o. '9&==+. According to Art. ' paragraph & o the new regulation the system o e#emptions is being replaced by a system o legal e#ceptions. This means that the courts have to interpret Art. 6' par. + as a legal e#ception. ?evertheless, according to Art. '= o $egulation '9&==+ the Commission may under certain conditions decide that Art. 6' >C will not be applicable to a given transaction. . Competition policy and regulation in a trans!ormation process

Trans orming ormer state monopolies into competitive mar!ets today is an essential part o economic policy in the >uropean :nion and its 0ember *tates. *uch trans ormation ta!es place mainly in so-called networ! industries (li!e electricity, natural gas, telecommunication). Cormer .natural monopolies. have to bro!en up or paving the way or mar!et integration on a >uropean level. /uring the trans ormation process the relative weights o regulation and competition policy are changing. "n order to better understand the comple# problems o such trans ormation processes and the role o regulation and competition policy or their success the case o the telecommunication sector will be ta!en as an e#ample ###. The concept o brea!ing up ormer monopolies in the ield o telecommunication is being based on the assumption that whilst the e#isting in rastructure will - or a given period o time - be a monopoly competition may be introduced in downstream mar!ets. "n the telecommunication sector the argument goes that mar!ets or telecommunication services (product mar!ets) should be opened up, even i the networ! in rastructure remains at the hands o a monopolist. But then access to such networ!s (access mar!et) has to be regulated. Thus regulated access appears to be indispensable or trans orming ormer state monopolies into competitive mar!ets. *tate ownership and monopoly thus are being abolished but not state in luence as such. Access regulation is replacing the state in luence being e#ercised via state ownership. $egulation comes into play because the introduction o competition on product mar!ets can only be achieved by regulatory devices. *uch regulatory devices are 4uite similar to an instrument in competition law, the access to socalled essential acilities (essential acilities doctrine) ###i. /espite this act those who are planning and realising the trans ormation are concentrating on

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regulation. The argument is, that competition law may be strong enough to control mar!et power - and may be bottlenec!s - in e#isting mar!ets, but is in easible in a situation where the mar!et as such (i.e. the product mar!et) has to be created. Curthermore regulation provides the necessary e#-anteinstruments whereas competition policy is an e#-post-mechanism. %hereas the case or regulation in access markets seems to be o no major concern ###ii there is a second ield where regulation or competition policy are viable alternatives: "n downstream markets the ormer monopolists enjoys a monopoly in the irst stage a ter the abolishment o the legal monopoly and the introduction o competition by means o access regulation. 0ar!et power o the owner o the networ! could be controlled by sector speci ic regulation or by means o competition policy. At irst glance one is inclined to argue that it is more e ective to protect the new entrants, which are gaining access to downstream mar!ets via access regulation, by means o regulation than by means o competition law. But it has to be ta!en into account, that access regulation is ocussing on bottlenec!s which are networ! speci ic eatures whereas mar!et power in downstream mar!ets no longer is a networ! speci ic problem when the access problem is being solved ###iii. The choice between competition policy and regulation or dealing with problems o downstream mar!ets seems to water down to a problem which device is supposed to be more e ective. This simple de inition o the problem may be challenged i the dynamic process o trans orming state monopolies into competitive mar!ets ###iv is being analysed in more detail. Trans ormation o state monopolies into competitive mar!ets is a dynamic process which ta!es place in a number o distinct stages. "n the irst stage, when access regulation opens up downstream mar!ets to new entrants, the position o the ormer monopolist will be contested by competitors which have to rely undamentally on conditions or entry into downstream mar!ets granted by access regulation. " the conditions o such regulation prove to be avourable new entrants have an opportunity to establish themselves in the downstream mar!ets. But here they are con ronted with competition rom the ormer monopolist. Dis position may be wea!ened by the act that a ormer monopolist normally - having been organised as a branch o public administration or as a state-owned company - is not it or competition, that organisational structures and labour conditions are disadvantageous or the new role o a competitor in a mar!et competing with new entrants. 7n the other hand there may be economies o scale, positive e ects o vertical integration on the side o the ormer monopolist which may not easily being matched by the new competitors. "n such an environment it is decisive whether or not the ormer monopolist may drive the new competitors out o the mar!et or whether he himsel cannot survive in that mar!et due to the comparative disadvantages mentioned. "n such a situation it ma!es a di erence whether downstream

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mar!ets are under a regime o sector-speci ic regulation or general competition law. *ector-speci ic regulation o downstream mar!ets is e ective inso ar as the regulatory authority can simultaneously employ instruments o access regulation and control o mar!et power in downstream mar!ets. "t has the opportunity to use these instruments in a way that new entrants cannot be driven out o the mar!et. This .advantage. o double regulation - i.e. o access and downstream mar!ets - may turn into a disadvantage i institutional aspects are brought into play. "n a regime o sector-speci ic regulation the regulatory authority 8 in charge o access regulation 8 is tempted to protect the new entrants merely on the ground o improving competition on downstream mar!ets. Access regulation and protection o new competitors in downstream mar!ets are two devices in order to guarantee the success o the trans ormation process. *uch a concept may be help ul in the irst stage o trans ormation1 but it becomes more and more critical in later stages. By concentrating on competition on downstream mar!ets 8 and neglecting potential competition on the level o networ!s - a vicious circle may threaten the dynamic evolution o competition in the overall mar!et development. Competition on downstream mar!ets depends to a certain degree on conditions o mar!et access. The more avourable these conditions are, the less incentive the new entrants have to invest into in rastructure which would enable them to compete in the level o the networ! as well. *uch entrants are totally dependant on access regulation and on protection on the downstream mar!et as well. The regulatory authority has an incentive to protect the new entrants on those downstream mar!ets in order not to endanger the trans ormation process. The overall incentive to invest into innovations at the networ! level are being reduced. The potential o introducing competition at the networ! level thus cannot be tested in practice. The regulatory authority may have an incentive to engage in this static approach o regulation because it thus may protect its own position over a long period o time. *o long as competition is con ined to downstream mar!ets and access to these mar!ets depends on access regulation regulatory authorities enjoy a very strong position. ?ew entrants on the other side are dependent on the double regulation mentioned above. They can only survive in such an institutional ramewor! i regulation is being guaranteed or a long period o time. >ven the ormer monopolist may be interested in such a regulatory deadloc! i in accordance with the capture theory the relation between the regulatory authority and the addressee o regulation can be EimprovedF. The 4uestion then arises whether and how such a regulatory deadloc! may be prevented or inished. The relationship between competition policy and regulation may play a major role here. " regulation is being con ined to problems o networ! speci ic mar!et power all problems o mar!et power in downstream mar!ets should be handled by competition authorities applying the tools o general competition law i the access problem is being handled e ectively by sector-speci ic regulation. " investment in in rastructure leads to the erosion o bottlenec!s sector-speci ic regulation can be abandoned here as

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well. :nder such institutional constraints new entrants could no longer hope that their mar!et position 8 based on regulated access 8 would be protected against competition o the ormer monopolist merely on the ground o !eeping them in the mar!ets. They would be con ronted with an institutional ramewor! which is common in other mar!ets as well. Thus there would be strong incentives to en orce the own mar!et position by turning rom pure intranet-competition to a mi# o intranet-competition and competition between networ!s thus leading to a competition in downstream mar!ets which is based on in rastructure. *uch a regulatory approach which combines sector-speci ic regulation and the step-bystep introduction o competition policy depends on some modi ications o the regulatory approach o access regulation. *uch regulation should ta!e into account the incentives or engaging not only in competition in downstream mar!ets as such but the incentives to engage in investments or orming an in rastructure basis or such competition as well. ". Concluding remar#s

The relationship between competition policy and regulation turns out to constitute a highly comple# problem. The process o deregulation - replacing regulation by competition policy - poses a much more complicated problem than normally e#pected. "n a process o trans orming state monopolies into competitive mar!ets the initial introduction o sector-speci ic regulation may easily result in a regulatory deadloc! which can only be prevented or inished i prudent regulatory devices are being combined with the early introduction o competition policy in downstream mar!ets.

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Kahn (1970), p. 2; Scherer/Ross (1990), p. 8; Car !on/"er o## (2000), pp. 732, 782. Kahn (1970), pp. 3, 11; Scherer/Ross (1990), pp. 7, 8. iii S!i$ er (1987), p. 531. i% &o'ann, S(chane) (2000), pp. 35 * 38, 241 * 246. % +i ec)e (1980), p. 8. %i Car !on/"er o## (2000), p. 732; Ker,er (2003), pp. 310 * 314. %ii Ker,er (2003), pp. 301, 302. %iii Car !on/"er o## (2000), p. 783; Kaser'ann/-a.o (1995), pp. 9, 12. i/ Kaser'an/-a.o(1995), p. 441. / 0er$/1schirhar! (1988), p. 51. /i Kahn (1970), pp. 11 an2 123*4; 0er$/1schirhar! (1988), p. 21. /ii Kahn (1970), p. 11; Si2a), Sp( ,er (1998), p. 20, 1iro e (1988), pp. 19 * 20. /iii Kahn (1970), p. 11; 0re.er (1982), p. 15; Si2a), Sp( ,er (1998), p. 20. /i% Sch'i2! (2001), pp. 28 * 32; 3h er'ann, 4a(2a!i (e2s.) 1998, pp. i5 * 5ii; see a so !he 6or)in$ papers on 7co'pe!i!ion po ic. o,8ec!i%es7 in !he 3h er'ann, 4a(2a!i (e2s.) (1998) ,. 9enn. (1998); Cas!e:a2a(1998); ;e s (1998); ;orna c<.i) (1998); Ko,a.ashi (1998); -a!!e (1998); =e%en (1998); Scha(, (1998); +o # (1998)2. /% "osner (1976); Ker,er (2003), pp. 310*312. /%i 3h er'ann, 4a(2a!i (1998), p. i/. /%ii Re$( a!ion an2 !he e##icienc. $oa > Kahn (1970), p. 11; Sch'a ensee (1979), p. 18; 0er$/1schirhar! (1988), p. 236. See a so Kaser'an/-a.o (1995), p. 75. /%iii 0er$/1schirhar! (1988), p. 285; /i/ 3''erich (1987); Spa !ho## (1987); 3ic)ho# (1993). // 0er$, 1schirhar! (1988), p. 287; S!i$ er (1971); "osner (1974); "e !<'an (1976); ?e'se!< (1968). //i Knieps (2001,), pp. 95 * 100. //ii Kirchner (1997), pp. 42. //iii Kirchner (1997), pp. 34 * 37. //i% Kirchner (2002), pp. 170 * 173. //% S!i$ er (1971); 0er$, 1schirhar! (1988), p. 287; +ei<saec)er (1982). //%i Kaser'an/-a.o (1995), pp. 432 * 457. //%ii Kahn (1970), pp. 3, 11; Scherer/Ross (1990), pp. 7, 8; Knieps (2001a), pp. 79*82. //%iii @''en$a e! a . (2001), pp. 52 * 55; Knieps (2001), pp. 89 * 90. //i/ "e !<'an (1991); 0er$/1schirhar! (1988), p. 287. /// @''en$a e! a . (2001). ///i Ker,er (2003), p. 347. ///ii Knieps (2001,). ///iii Knieps (2001,). ///i% @''en$a/Kirchner (2002), pp. 354, 355.
ii