(Tacit) Collusion and Bundling an Analysis of the Ziggo-Vodafone Joint Venture

Master thesis Economics

Mergers, (Tacit) Collusion and Bundling An Analysis of the Ziggo-Vodafone Joint Venture.

Author: Supervisor: Kevin Westerveld Dr. A.M. Onderstal

April 18, 2017 Contents

1 Introduction 2

2 Literature review 5 2.1 Bundling and price discrimination ...... 5 2.2 Unilateral eﬀects ...... 6 2.3 Coordinated eﬀects ...... 9 2.4 Non-horizontal merger guidelines ...... 13 2.5 Conclusion ...... 14

3 The model 16 3.1 The model ...... 16 3.2 Unilateral eﬀects ...... 17 3.3 Coordinated eﬀects ...... 18 3.4 Conclusion ...... 21

4 An analysis of the Ziggo-Vodafone joint venture 22 4.1 Dutch telecommunication markets ...... 22 4.2 Unilateral eﬀects ...... 28 4.3 Coordinated eﬀects ...... 39 4.4 Conclusion ...... 42

5 Conclusion 44

1 1 Introduction

Telecommunication services, like (mobile) telephony, television and internet, play a fundamental role in modern economies. In 2014, the added value of the Dutch telecommunication markets was almost 8 billion euros, 1.2 percent of GDP (CBS, 2016). The telecommunication services change rapidly due to developments in networks and infrastructures. Firms with cable infrastructures are now able to supply triple-play packages with broadband internet, fixed telephony and television. From 2006 KPN (the owner of the Dutch DSL-network1) can supply television in addition to fixed telephony and internet using the DSL-network. Nowadays, telecommunication firms supply also quad-play bundles (triple-play bundles including mobile telephony). Table 1 shows that the number of bundles in the EU as a percentage of household has been growing. From 2011, the percentage of dual-play bundles is decreasing. The penetration of triple and quad-play has been increasing since 2007. In the Netherlands, there were more than six million multiplay subscriptions with broadband internet, fixed telephony, mobile telephony or television in the first quarter of 2016 (ACM, 2016c). Competition authorities are dealing with the question what the effect is of bundling on competition in the telecommunication markets2. Competition authorities must assess the mergers in the telecommunication markets. Recently, the British competition regulator called the Euro- pean Commission to block the merger between two telecom firms: Three and O2 (Guardian, 2016). The European Commission emphasizes that telecom mergers can result in a reduction of competition and that pro-competitive regulation will benefit consumers. Nevertheless, a degree of consolidation can also bring benefits. Cross-border consolidation can facilitate the integration of networks in Europe (Ansip, 2015). This thesis describes the effects of mergers and joint ventures on telecommunication markets. These markets are characterized by firms that provide bundles of telecommunication services. The horizontal and non-horizontal guidelines of the European Commission (2004) give a guidance whether mergers are compatible with the common market and not result in an impediment of effective competition. Market shares and concentration levels are important first indicators in these merger assessments. In addition, Ivaldi et al. (2003) describes market characteristics that potentially affect competition

1DSL stands for Digital Subscriber Line. This is a communication medium used to transfer digital signals over the standard telephone lines. 2The Dutch competition authority started a discussion on internet with the statement: ‘Bundling ensure that fewer consumers are willing to switch between telecommunication companies’ (ACM, 2016a)

2 Table 1: Penetration of bundles in EU27 as a percentage of households.

TV: Subscription television, FT: Fixed telephony, MT: Mobile telephony, BB: Broadband services. 2007 2009 2011 2014 TV+FT+MT+BB 1 1.5 2 4 Total quad-play 1 1.5 2 4 TV+FT+MT 0 0.5 0 0 TV+FT+BB 4 8 10.5 11 TV+MT+BB 0 0.5 0 1 FT+MT+BB 2 2 2 4 Total triple-play 6 11 12.5 16 TV+FT 3 2.5 2 2 TV+MT 1 1 1 0 TV+BB 3 4 4.5 5 FT+MT 1 1 1 1 FT+BB 13 15 17 14 MT+BB 1 2 2 2 Total dual-play 22 25.5 27.5 24

Total 29 38 42 44 Source: E-communications household survey by European Commission (2007), European Commission (2008a), European Commission (2012) and European Com- mission (2014).

3 because of coordination between competitors. The bundling of products and services can give different insights in these merger assessments. The main question we address is: What is the effect of mergers on competition in telecommunication markets? We focus on the Dutch telecommunication markets assuming that Dutch telecommunication firms supply bundles of services if they have the opportunity to do so. We will describe the unilateral effects and the coordinated effects on the competition in these markets. We apply existing theories of unilateral and coordinated effects on telecommunications markets. Our results may also apply to other markets in which bundling of goods and service is common. We use a theoretical model to describe the effects of the joint venture between Ziggo and Vodafone in a case study. In February 2016, Ziggo (a subsidiary of Liberty Global) and Vodafone announced to merge their Dutch operations (Vodafone and Liberty Global, 2016). The main business line of Ziggo includes broadband internet, fixed telephony and television. Whereas Vodafone’s main business line is their mobile network. KPN, the main competitor of Ziggo and Vodafone, supplies internet, fixed telephony, television and a mobile network. Before the merger KPN has a monopoly position on the bundle market, because it can supply all the goods. After the merger, the integrated firm Ziggo-Vodafone can compete with KPN on the bundle market. In this thesis, we will assess the competitive effects of this joint venture in the Dutch telecommunication markets. The structure of this thesis is as follows. In section 2, we will survey the literature on the impact of mergers in the telecommunication markets. In section 3, we will use a theoretical model to examine the unilateral and the coordinated effects of a joint venture in a heterogeneous Bertrand price competition game. In section 4, we will study the Ziggo-Vodafone joint venture in the Netherlands and assess the potential effects for competition.

4 2 Literature review

In this section, we will give an overview of literature related to bundling, merger assessments and collusion in the telecommunication markets. In section 2.1, we will describe literature related to bundling and price discrimination, because this is commonly used in the current telecommunication markets as discussed in the introduction. The horizontal merger guidelines give a guidance for the assessment of merging parties which are potential or actual competitors on the same relevant markets (European Commission, 2004). The merger guidelines distinguish two ways in which a merger can enhance market power: unilateral effects3 and coordinated effects. Literature related to anti-competitiveness due to unilateral effects from horizontal mergers will be described in section 2.2. The elimination of competition through a merger, can result in market power without a change in the behavior of other firms. The anti-competitive effects in this manner are called unilateral effects. Literature related to anti-competitiveness due to coordinated effects will be described in section 2.3. Mergers can result in anti-competitive effects by increasing the risk of coordination and accommodating behavior among rivals. Anti-competitive effects from this manner are referred to as coordinated effects. In section 2.4, we will describe the main economic concern of the non- horizontal guidelines: the likelihood of foreclosure. The non-horizontal merger guidelines by the European Commission describe how the Commission assesses mergers of firms that are active on different relevant markets (Euro- pean Commission, 2008b). In section 2.5, we will give a brief conclusion of literature related to bundling, merger assessments and collusion in the telecommunication markets.

2.1 Bundling and price discrimination Bundling as a price discrimination technique was first suggested by Stigler (1963). He showed the potential benefits for monopolies to sell bundles of goods rather than selling them as separated goods. The author was triggered by the antitrust cases about block-booking of movies, the supply of a combined package of movies to exhibitors. He described that the owner of two films uses the popularity of one to force the exhibitor to buy the other as

3Also often called ‘non-coordinated’ eﬀects

5 well. Suppose there are two films and that we assume that some buyers prize one film much more relative to the other. Person A would pay 8 for film X and 2.5 for film Y. Person B would pay 7 for film X and 3 for film Y. Suppose the seller sets a price of 7 for film X and earns 14. For film Y, the seller sets a price of 2.5 and earns 5. The total earnings of selling both films are 19 if the seller sets the prices for the films separately. With block-booking the seller sets a price of 10 and he earns 20. This paper showed the importance of economic theory of bundling in relation with competition policy for the first time. According to Nalebuff (2002), the economic theory of bundling has more and more moved from classrooms and academic journals to the public policy area. Nalebuff worked as an economic expert for the merging firm GE- Honeywell. GE’s business included everything from plastic and television to financial services, aircraft engines, medical imaging and lighting. Honey- wells business developed a leadership position in aerospace. In this merger case, the relationship between the merging firms was not horizontal (competitors), nor it was vertical (little overlap between two companies). The focus was on conglomerate effects, the two products are used together by a common customer. The proposed merger passed the examination of the US department of justice, however the European antitrust authorities blocked the merger. The European Commission argued that the combination of the two firms would result in the creation of a dominant position. The conglomerate effects would enable the merged firm to abuse their market power to the products of others, for example by foreclosing the competitors. This would have diminished competition and affecting adversely the quality and consumer prices (European Commission, 2001).

2.2 Unilateral effects In the previous section, we showed that bundling of products and services played an important role in the European Commission’s merger assessment of the GE-Honeywell merger case. Nowadays, bundling plays an important role in the telecommunication market as discussed in the introduction. In this section and section 2.3, we will describe the merger guidelines of the European Commission. The horizontal merger assessment of the European Commission basically consists of: (i) the definition of the relevant market and (ii) the competitive assessment of the merger (European Commission, 2004). To define the relevant market, the European Commission identify the actual competitors of the merging parties, who can constrain the behavior of the merging parties. In the European Commission’s notice on the definition of the relevant

6 market (European Commission, 2011), the Commission uses two dimensions to deﬁne the relevant market: the relevant product market and the relevant geographic market. The relevant product market is deﬁned as follows:

A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer by reason of the products’ characteristics, their prices and their intended use.

The relevant geographic market is defined as follows: The relevant geographic market comprises the area in which the firms concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homogeneous. Both the definition of the product and the definition of the geographical market are used to establish the relevant market for a given competition issue. Pereira and Vareda (2013) described that the increasing number of bundles require adjustments in the framework of the relevant product market for individual services. The relevant product market is the smallest set of products in which a hypothetical monopolist can rise prices. Bundles create complexities in defining the relevant market, because it involves the determination of the substitutability between products of the same type and the substitutability between products of different types. The problem is not the increase in the number of products because of the introduction of bundles, but the type of the bundle products. This problem can be solved through a careful definition of the choice alternatives. In a technical article by Pereira et al. (2013) the estimates show that the demand for triple-play products (fixed voice, fixed broadband and subscription television services) is elastic. The demand estimates are used for implementation in the different SSNIP test. The three versions indicate that triple-play products of fixed voice, fixed broadband and subscription television are a relevant product market in Portugal. In addition, Pereira and Vareda (2013) describes that the evolution of bundle markets will undergo three phases: (i) Development, (ii) Transition and (iii) Maturity. The development period is the period where bundles have been introduced, but consumers still prefer to buy telecommunication services as individual products. It is likely that these products are not a single relevant product market and thus should be analysed within the defined individual product markets. The transition phase is the period where consumers

7 already prefer to buy bundles, but several consumers still prefer individual products. It is likely that bundles constitute new markets that coexist with the traditional individual markets. The maturity phase is the period where most consumers prefer bundles. It is likely that the individual products will cease to exist. After defining the relevant product and geographic market, the horizontal and non-horizontal merger guidelines describe the potential effects of mergers in the relevant market. Consumers benefit from effective competition. It results in low prices, high quality, a variety of goods and services and innovation. The power of firms to diminish those benefits is defined as ‘increased market power’. In the assessment of a merger, the European Commission compares the degree of competition before and after the merger. The first indication of the degree of competition are the market shares of the firms and concentration level of the market. The merged firm market shares are calculated as the sum of their pre-merger market shares. The European Commission uses the Herfindahl-Hirschman Index (HHI), to calculate the concentration level in a market.

N X 2 HHI = si (1) i=1

Where si is the market share of firm i in the market, and N is the number of firms. In addition, the difference in the HHI as a result of the merger is an important first indicator of the potential increased market power.

∆ = HHIpost−merger − HHIpre−merger (2)

The European Commission does not have concerns with a post-merger HHI below 1.000. In addition, the European Commission does not have concerns with a post-merger HHI between 1.000 and 2.000 and a ∆ below 250. There- after the European Commission does not have concerns with a post-merger HHI above 2000 and a ∆ below 150 (European Commission, 2004). The European Commission describes that these HHI levels and deltas may indicate absence of competition concerns. However, they do not give rise to a presumption of the existence or absence of competition concerns. In the horizontal merger guidelines, the European Commission list several factors that may inﬂuence whether unilateral eﬀects are likely.

8 2.3 Coordinated effects In the previous section, we described the unilateral effects of a merger. In this section, we will describe the coordinated effects of a merger. The framework of the assessments of coordinated effects also applies for the non-horizontal merger guidelines (European Commission, 2008b). The elimination of firms in markets can increase the likelihood of collusion after the merger. ‘The Eco- nomics of Tacit Collusion’ describes the relevant factors for the sustainability of tacit collusion. Tacit collusion refers to an outcome (e.g. prices or quantities) that are equal to collusion but involve no communication between the parties4 (Ivaldi et al., 2003). The intuition is that firms can maintain higher prices by tacitly agreeing that any deviation from collusive equilibrium (e.g. a lower price) would trigger retaliation. The retaliation must imply a significant profit loss for the deviating firm compared to the profit that it would have obtained from collusive outcome. Retaliation mechanisms should satisfy two condition to prevent firms from deviating from the collusive outcome: 1. The profit loss imposed on a deviant firm by retaliation must be sufficiently large to prevent deviations. 2. It must be in the interest of the firms to carry on the retaliation once a deviation has occurred. Deviation from the collusive outcome results immediately in positive profits for the deviating firm, however retaliation occurs in the future. The stability of collusion depends on the relative importance of current and future profits. Collusion is sustainable if and only if firms put sufficient weight on future profits, i.e., if their discount factor is not too small. The analysis of the coordinated effects is based on the folk theorem where we assume that future profits are discounted by firms in an infinite repeatedly game. In that case, collusion is feasible in equilibrium if the discount factor of all firms is larger than the critical discount factor. The critical discount factor is the minimum discount factor to allow all firms to sustain to the monopoly outcome: d c ∗ πi − πi δi = d n (3) πi − πi d Where πi is the profit of firm i when deviating from collusive agreements, c n πi is the profit of firm i when colluding and πi is the profit of firm i when firms are in Nash equilibrium. 4Ivaldi et al. (2003) argue that tacit coordination would be a better term. We use the term tacit collusion, because this is commonly used in economic literature.

9 There are many market characteristics that affect the sustainability of collusion. In the following part of this section, we will briefly explain the most important characteristics that affect the sustainability of collusion for the telecommunication markets.

The number of competitors. The number of competitors in the market can influence the sustainability of collusion. Many competitors make it more difficult to reach agreements. Thereafter, firms must share the collusive profit with more firms. This results in a larger gain for deviating firms and reduces long-term benefit from maintaining collusion. Collusion is more difficult to sustain when there are more competitors.

Asymmetry in market shares. More asymmetric market shares hinder collusion, because in a situation with asymmetric market shares the smallest firm has more to gain from deviation. However, market shares are endogenous. When market shares are asymmetric we would suspect different costs or differentiated goods and services. The asymmetry in market shares may show more profound asymmetries, that makes collusion more difficult to sustain.

Cost asymmetries. With asymmetric costs the likelihood for sustainable collusion is smaller in contrast to symmetric costs. First, it is more difficult for firms to agree on a price with asymmetric costs. Firms with lower marginal costs prefer lower prices than the high cost firms. Second, low cost firms are more difficult to punish, because they might profit more from undercutting their rivals and they have less to fear from possible punishment. To ensure the low-cost firm to stick to the collusive behavior, firms can give the low-cost firm a larger profit. This helps the incentive for the low- cost firms, but also change the incentive for the high-cost firm. Therefore, while market shares are endogenous, it can provide indirect evidence of more profound asymmetry that hinder collusion.

Asymmetric capacity constraints. The previous reasoning is also related to other differences in cost structure, like production capacities. Firms with capacity constraints has less to gain from an undercut of the collusive price. However, capacity constrained firms also reduce the ability of retaliation of other firms. Hence, the effect of symmetric capacity constraints on sustainability of collusion is unambiguous. Less ambiguous is the effect of asymmetry in capacities. Increasing the capacity of one firm at the expenses of another, reduces the ability for the small capacity firm of retaliation.

10 Product differentiation. With vertical differentiation in a market, like a firm with a ‘better’ product, the likelihood of tacit collusion is similar to that of asymmetric costs of production. The ‘better’ quality firm gains more from cheating and has less to fear from retaliation.

Entry barriers. Collusion is more difficult to sustain when there are high barriers to entry. First, in a situation with low entry barriers, large profits (prices) would trigger entry and reduces the profits of collusion. Second, the prospect of entry in the future reduces the retaliation (it reduces the cost of deviation), because in the future there will be entry. This makes collusion more difficult to sustain.

Demand growth. It is more difficult to sustain collusion when the deviating short-term gains are small compared to future costs of retaliation. Con- sequently, in markets with high entry barriers, collusion is easier to sustain in markets with growing demand, and more difficult to sustain in declining markets. In markets with low entry barriers, high demand can result in entry of firms and makes collusion more difficult to sustain.

Frequent interaction, price adjustments and market transparency. Frequent interaction and price adjustments makes collusion easier to sustain. Firms can retaliate quicker to a deviation from the other firms with frequent interaction. Frequent price adjustments result in quicker retaliation and that the cheating firm is unable to take advantage a long time. Collusion is more difficult to sustain when there is lack of transparency on prices and sales.

Multi-market contract. Collusion is easier to sustain when firms are active on several markets. First, firms have more interaction on several markets. Second, one firm may have a competitive advantage in one market, while the competitor has an advantage in another market. The asymmetry in market shares is restored in such a case.

In the previous part of this section, we described the most important market characteristics that aﬀect the sustainability of collusion. Mergers and joint ventures potentially inﬂuence these market characteristics. For instance, mergers can result in a reduction of competitors, more symmetry in market shares and less capacity constraints. Compte et al. (2002) explored tacit collusion with (asymmetric) capacity constraints from a more applied perspective to contribute to merger analysis. The model allows the authors to show the impact of changes in the distribution of capacities, i.e. mergers,

11 split-overs and transfers. This helps to study merger analysis compared to symmetric capacity constraints. The central question in the model is: given a distribution of capacities, for which values of the discount factor is collusion sustainable? The impact of the changes in capacities on the minimal threshold is analyzed. A simplistic example of the model by Compte et al. (2002) is given by Ivaldi et al. (2003). Consider a duopoly, where two firms have asymmetric capacity constraints: one firm benefits from a larger capacity (KL) compared to the other firm (KS). Suppose there are no variable costs, the demand is inelastic and without capacity constraints the firm can sell a quantity of D at any lower price than r. If the firms sustain collusive price pc = r with market 5 shares αL and αS = 1 − αL , each firm i gets a profit of αiD/(1 − δ). Firms can sell at full capacity, but that is followed by retaliation. This retaliation is also affected by the capacity constraints. Large firms are more able to punish smaller firms than the reverse. It is more likely that larger firms cheat: more short-term gains and less to fear from retaliation by smaller firms. In standard price competition, the profits are proportional to production capacities. Short term gains are also proportional to the capacities, so the overall discount factor is proportional to the production capacities. To sustain collusion, it is necessary to give the firm with large capacity a larger market share. Compte et al. (2002) generalize the result to an arbitrary number of firms with the KS as the aggregate production capacity of all the smaller firms (expect the larger one). If the aggregate capacity does not exceed the market size, the total capacity of the firms does not affect the likelihood of collusion. When the small firms can together supply the entire market, the threshold depends on the total capacity and not on the distribution. Retaliation possibilities are max- imal and any further expansion of the capacity only increase the incentives to undercut their rivals without increase impact in retaliation power. Asymmetric capacities make indeed collusion more difficult to sustain when the aggregate capacity is limited. However, asymmetry may help collusion when the aggregate capacity is larger than market size. The results provide guidelines for competition policy, especially for merger policy, that differ from static analysis such the standard concentration tests (HHI).

5The total capacity is assumed to be larger than the market size, otherwise there is no competition

12 2.4 Non-horizontal merger guidelines The previous sections described the unilateral effects and coordinated effects of a merger. These effects apply for both horizontal as non-horizontal mergers. In this section, we will describe the main concern of non-horizontal mergers: foreclosure. The non-horizontal merger guidelines by the European Commission (2008b) describe that non-horizontal mergers are not a threat for effective competition unless the merging parties have a significant degree of market power. Market shares and concentration levels provide first indicators of the market power. The European Commission is unlikely to find concerns in non- horizontal mergers, when the market share of the merged firm in each of the markets is below 30 percent and the post-merger HHI is below 2.000. The market shares and concentration levels are a first indicator of market power, however the thresholds do not give rise to a legal presumption. Conglomerate mergers are one of the broad types of non-horizontal mergers. These types of mergers are mergers between firms that are neither horizontal nor vertical in relationship. For instance, mergers involving suppliers of complementary products. The unilateral effects of conglomerate mergers arise when these mergers give rise to foreclosure. The European Commis- sion describes foreclosure as any instance where the access for competitors to supply markets is eliminated or hampered because of a merger. Tying and bundling are practices that often have no anti-competitive consequences, however in certain circumstances these practices result in a reduction of rival’s ability to compete. The European Commission’s assessment of the conglomerate mergers consists of three steps. First, whether the merged firms are able to foreclose its rivals. Second, whether it would have economic incentives to foreclose its rivals. Third, whether the foreclosure strategy would have a significant detrimental effect on competition (European Commission, 2008b). The ability of the merging parties to foreclose competitors is by condition- ing the sales in a way that link the products in separate markets together by bundling. The European Commission describes that the effects of bundling can only be expected when at least one of the merging parties’ products is viewed by many consumers as important and there are few alternatives for that product. Further, a large common pool of customers for the single products is necessary for foreclosure to be a potential concern. The incentive for firms to foreclose rival firms depends on the profitability of bundling. Bundling can result in losses for the merged firms as several customers is not interested in bundles. For the merged firm, there is a trade- off between the possible costs and the possible gains from expanding market

13 shares or perhaps the ability to raise price due to the firm’s market power. The guidelines show that foreclosure can only significantly impede effective competition if a sufficiently large fraction of market output is affected. If there remain single-product players in these markets, it is unlikely that competition will deteriorate from bundling. Bundling can result in a reduction of sales for the single-component rival in the market. For competition policy, this is not itself a problem. Conglomerate mergers may produce cost savings in the form of economics of scope. Product value for the customers can result from better compatibility and quality assurance of complementary components. This economics of scope is necessary but not sufficient to provide efficiency justification for bundling.

2.5 Conclusion In this section, we described existing literature related to bundling, unilateral effects, coordinated effects and foreclosure. Bundling as a price discrimination technique was first suggested by Stigler (1963). He described that the owner of two films uses the popularity of one to force the exhibitor to buy the other as well. The GE-Honeywell merger case showed the link between bundling and merger assessments. The proposed conglomerate merger passed the US merger examination, however the merger was blocked by the European Commission. The combination of the two firms would enable the merged firm to abuse their market power to the products of others. The horizontal merger assessment by the European Commission consists of: (i) the definition of the relevant market and (ii) the competitive assessment of the merger. The definition of the relevant product market requires adjustments because of the increasing number of bundles. The problem can be solved with a careful definition of the choice alternatives (Pereira and Vareda, 2013). In the competitive assessment of horizontal mergers, the Eu- ropean Commission compares the degree of competition before and after the merger. The first indication of the degree of competition are the market shares and concentration levels of the market. In addition to the unilateral effects, mergers can result in anti-competitive effects by increasing the likelihood of coordination among rivals. Tacit collusion refers to an outcome that is equal to collusion but involve no communication between the parties. The intuition is that firms can maintain higher prices by tacitly agreeing that any deviation from collusive equilibrium would trigger retaliation. Mergers and joint ventures can influence market characteristics that affect the likelihood of sustainable tacit collusion. Compte et al. (2002) explored tacit collusion with (asymmetric) capacity constraints from

14 a more applied perspective to contribute to merger analysis. The non-horizontal merger guidelines by the European Commission describe how the Commission assesses mergers of firms that are active on different relevant markets. The European Commission’s assessment of these mergers consists of three steps. First, whether the merged firms are able to foreclose its rivals. Second, whether it would have economic incentives to foreclose its rivals. Third, whether the foreclosure strategy would have a significant detrimental effect on competition (European Commission, 2008b).

15 3 The model

In this section, we will use a theoretical model to analyse the merger of two telecommunication firms operating in a bundled good setting. The model is inspired by the Ziggo-Vodafone joint venture in the Netherlands. The Dutch telecommunication markets are characterized by firms that bundle their goods and services. Before the merger, the merging firms were able to supply one of the two goods (pure components). After the merger, the integrated firm can supply the pure components as well as the bundle. We will use a theoretical model to show the potential unilateral and coordinated effects of a merger in a bundled good setting. In section 3.1, we will describe the model in detail. We will give an analysis of the unilateral effects of a merger in section 3.2. In section 3.3, we will give an analysis of the coordinated effects of a merger in a bundled goods setting. We will give a brief conclusion of the effects of a merger in section 3.4.

3.1 The model We analyse the merger by using a simplistic theoretical model. Consider three markets where firms compete on prices (Bertrand competition): broadband internet, mobile network and the bundle market. Before the Ziggo-Vodafone joint venture, the broadband internet market was characterized by two firms: Ziggo and KPN. The mobile network market consists of two firms: KPN and Vodafone. Before the merger, the bundle market is a monopoly, with KPN as the monopolist. Consider an economy with N consumers where the number of consumers is even with N ≥ 2. The consumer values are shown in table 2. We assume that the purchase of both services from one single telecommunication provider is beneficial for consumers (b). In the Netherlands, consumers prefer bundled communication services, because it is more convenient because of the single invoice and because they have the perception that bundles are cheaper than paying for each service separately (European Commission, 2012). In this model, we assume that b is larger than 0. The purchase of both services from different telecommunication providers does not bring additional benefits for consumers. VI and Vm are the consumers’ willingness to pay for respectively, internet and mobile network. For the sake of simplicity, we make the arguably strong assumption that VI and Vm are identical and positive for all consumers. The firms compete on prices and maximize profits. The firms set a price independently of other firms for the internet, mobile and bundle as long the firm can supply the service. Consumers maximize their consumer surplus that equals the value of the service minus the price of the service. In a situation where

16 Table 2: Consumer values before merger

Consumer values Internet Mobile network Bundle good KPN VI Vm VI + Vm + b Ziggo VI - - Vodafone - Vm - the consumer surplus is equal over multiple ﬁrms, the consumers are equally divided by the products. .

3.2 Unilateral eﬀects Before the merger We analyse the eﬀects on prices before and after the merger. Before the merger, Bertrand competition results in the following prices in the pure components markets:

I I Pbefore = c (4)

M M Pbefore = c (5)

I M Where Pbefore and Pbefore are the before merger equilibrium prices for broadband internet and mobile telephony. And where cI and cM are the marginal costs for respectively, the broadband internet product and mobile telephony. Consumers beneﬁt from the supply of the bundle from one supplier, the supplier of the bundle is aware of this and supplies the bundle for the following equilibrium price:

B I M Pbefore = c + c + b − (6)

B Where Pbefore is the before merger equilibrium price for the bundle and is the smallest possible monetary unit and 0 < < b. The consumers in this market beneﬁt more from the bundle compared to the sum of the beneﬁt of both goods separate6. The consumers buy the bundle and the pure components will not be sold.

6The consumer surplus of the bundle is larger than the sum of the consumer surplus of both goods in the separate market.

17 Table 3: Consumer values after merger

Consumer values Internet Mobile network Bundled good KPN VI Vm VI + Vm + b Ziggo-Vodafone VI Vm VI + Vm + b

After the merger After the merger, the merged ﬁrm Ziggo-Vodafone can supply the bundle. The consumer values are shown in table 3. Bertrand competition in the three markets result in the following equilibria prices:

I I Pafter = c (7)

M M Pafter = c (8)

B I M Pafter = c + c (9) I M B Where Pafter, Pafter and Pafter are the post-merger equilibrium prices for re- ceptively, the broadband internet product, mobile telephony and the bundle. The additional beneﬁt for consumers of purchasing both products from one single provider (b) plays an important role in the welfare analysis of a merger in a bundled good market. A relatively large b will inﬂuence the equilibrium price of bundles before and after the merger:

B B P rice − difference = Pbefore − Pafter (10) = (b − + cI + cM ) − (cI + cM ) (11) = (b − ) (12)

3.3 Coordinated effects In this section, we will analyse the coordinated effects of a merger on the sustainability of tacit collusion. The critical discount factor for firm i (minimum discount factor to allow firms to sustain monopoly outcome) is calculated in the following way:

d c πi − πi δi = d n (13) πi − πi d Where πi is the profit of firm i when deviating from collusive agreements, c n πi is the profit of firm i when colluding and πi is the profit of firm i when firms are in Nash equilibrium.

18 We compare the highest critical threshold of sustainable collusion of all the firms (δ∗) before and after the merger. A change that causes δ∗ to increase makes collusion more difficult to sustain. Reversely, a decrease of δ∗ makes collusion more sustainable. The questions arise: for which values of the discount factor is tacit collusion sustainable and what is the effect of a merger?

Before the merger We need to calculate the profits of the firms to compare the critical thresholds (δ∗). Consider two representative consumers and their willingness to pay for the services before the merger are represented in table 2. To sustain collusion, we assume that the firms divide the consumers in a way that KPN attract half of the consumers and Ziggo and Vodafone attract half of the consumers. In that situation, the equilibrium joint profit maximizing prices are represented in equations 14 to 16.

I I Pbefore∗ = V (14)

M m Pbefore∗ = V (15)

B I m Pbefore∗ = V + V + b (16)

I M B Where Pbefore∗, Pbefore∗ and Pbefore∗ are the collusive prices before the merger for respectively, the broadband internet product, mobile network and bundle. We know that the before merger Nash equilibrium prices from equation 4, 5 and 6. Firms can deviate from the collusive agreement to price just below the collusive price () and obtain both consumer groups. The is ignored in the following parts, because it is the smallest possible monetary unit. We can derive each ﬁrm’s critical threshold for sustainable collusion before the merger.

d c πKPN − πKPN δKPN = d n (17) πKPN − πKPN 2(VI + Vm + b) − (VI + Vm + b) = (18) 2(VI + Vm + b) − b (VI + Vm + b) = (19) 2(VI + Vm + b) − b

19 d c I I πZig − πZig 2V − V 1 δZig = d n = I = (20) πZig − πZig 2V − 0 2

d c m m πV od − πV od 2V − V 1 δV od = d n = m = (21) πV od − πV od 2V − 0 2

The critical threshold for sustainable collusion for Ziggo and Vodafone does not depend on b. The critical threshold for KPN depends on b. From equation 19 it follows that if b is larger than 0 the critical discount factor for KPN 1 ∗ is > 2 before the merger. The critical discount factor for the market (δ ) before the merger is equal to the critical discount factor of KPN (δKPN ) if b is larger than 0.

After the merger After the merger, the critical thresholds for Ziggo and Vodafone are not diﬀerent to the situation before the merger and represented in equation 20 and 21. The critical threshold for KPN is calculated in equation 22.

d c I m I m πi − πi 2(V + V + b) − (V + V + b) 1 δi = d n = I m = (22) πi − πi 2(V + V + b) − 0 2 1 δ∗ = δ∗ = δ∗ = Zig V od KPN 2 After the merger, the critical discount factor for KPN, Vodafone and Ziggo 1 is equal to 2 . Collusion is equally sustainable for all the firms after the merger. The decrease in the critical discount factor for KPN makes collusion easier to sustain. The reduction in the critical discount factor, increases the likelihood that prices will increase because of collusion. The results are in line with former literature that describes the effect of market symmetry on the sustainability of tacit collusion. The additional benefit of consuming a bundle, b, plays an important role in the coordinated effect. A relatively large b makes collusion more sustainable after a merger compared to the situation before the merger.

(V I + V m + b) 1 = ≥ (23) 2(V I + V m + b) − b 2 ∗ ∗ = δbefore ≥ δafter (24)

20 3.4 Conclusion The model shows two contradicting economic effects of a conglomerate merger in markets where consumers prefer buying bundles instead of single services. On the one hand, the merger results in positive unilateral effects with a lower equilibrium price of the bundle. On the other hand, the merger results in negative coordinated effects because of a lower critical discount factor for the original monopolist. This increases the likelihood of tacit collusion in these markets. The overall effect of the merger is ambiguous and depends on the specific market characteristics of the markets. In the next section, we will take a closer look at the market characteristics of the Dutch telecommunication markets to show the unilateral and coordinated effects of the Ziggo-Vodafone joint venture.

21 4 An analysis of the Ziggo-Vodafone joint venture

On 15 February 2016, two telecommunication companies, Vodafone Interna- tional Holdings B.V. and Liberty Global Europe Holding B.V., announced to merge their operating businesses in the Netherlands to form a 50:50 joint venture. Based on the regulatory approval and required steps, Liberty Global and Vodafone anticipated that completion will take place around the end of 2016 (Vodafone and Liberty Global, 2016). On 3 august 2016, the Euro- pean Commission cleared the creation of the joint venture, conditional on Vodafone divesting its fixed telephony line (European Commission, 2016). In this section, we give an analysis of the competitive assessment of the Ziggo-Vodafone joint venture7. The analysis is based on the horizontal and non-horizontal merger guidelines of the European Commission and our model in section 3. The guidelines by the European Commission and our model distinguish two different effects of a merger: the unilateral and coordinated effects. The structure of this section is as follows. In section 4.1, we will describe the Dutch telecommunication markets. In section 4.2, we will analyse the (potential) unilateral effects of the joint venture. In section 4.3, we will describe the market characteristics that affect the coordinated effects as a result of the joint venture. We will give a brief conclusion of the competitive assessment of the Ziggo-Vodafone joint venture in section 4.4.

4.1 Dutch telecommunication markets In this section, we will describe the Dutch telecommunication markets. First, we will give a brief historical overview of the markets followed by an overview of the diﬀerent infrastructures nowadays. Last, we will give a description of the merging parties.

History This section contains a brief historical overview of the Dutch telecommunication markets. The ﬁrst Dutch telecommunication service was the postal service and resulted in the creation of ‘The Postal law’ in 1807. The law organized the state monopoly position for postal services, where only the Dutch state had the rights to collect, transport and distribute post (NRC, 1999). In 1852, the Dutch state started with the construction, distribution and exploitation of national telegraph lines followed by the telephony network in 1881 (KPN, 2016a). The postal services and telephony service joined together and resulted in the creation of PTT (State company of Postal,

7Liberty Global is active in the Netherlands with the brand name ‘Ziggo’.

22 Telegraph and Telephone). From 1980, the European Union supported the liberalization and privatization of the telecommunication markets. On 1 Jan- uary 1989, PTT is transformed to KPN (Royal PTT Nederland NV). From 1994, the shares of KPN were negotiable on the stock market in Amsterdam. The government was not any longer the only shareholder, but it still had a golden share that allowed the government to have a veto (KPN, 2016a). The introduction of internet caused the separation of the postal services and telecommunication services into PTT Postal and PTT Telecom (KPN, 2016a). The telecommunication part of the firm continued as KPN NV. In 2006, the Dutch government sold their last shares of KPN. This resulted in a privatized KPN (Trouw, 2006). The first Dutch television broadcast was on 2 October 1951. The dis- turbed incoming antenna signal resulted in the creation of Central Antennas Installations (CAI). These networks connected households to a commonly used antenna system with use of the coax cable. In every municipality, a CAI infrastructures was constructed that combined networks for neighbor- hoods, villages and whole municipalities. These coax cable infrastructures became the ‘traditional’ television infrastructure. The ownerships of these CAI infrastructures moved from consumers and housing co-operations to governments. Casema (Central Antenna System Exploitatie Maatschappij) was the first operating cable company founded in 1972. More and more government owned CAI infrastructures were taken over by private companies. The introduction of fiber in combination with the coax cable infrastructure created a network that could provide a television signal, broadband internet connection and telephony line. The traditional monopolies of KPN in the telephony market and the cable firms in the television market were under pressure in 2006. The technological developments created the possibility to supply triple-play packages (broadband internet, fixed telephony and television) with the cable and with the KPN telephony infrastructure (DSL-infrastructure). SEO (2006) described in their essay which types of government regulation were appropriate when all consumers have access to the DSL and cable infrastructures. The theory of market mechanisms show that markets can have market failures. Examples of market failures are public goods, market power, external effect and asymmetric information. With intervention governments try to reduce these market failures. However, this can also result in government failures. For instance, efficiency problems, information problems, reduction of investments and rent- seeking. Telecommunication networks have economics of scale, density advantages and combination advantages. If the advantages work, a national telecommunication firm will occur. The likelihood that those firms abuse their market power through monopoly prices and reduction of innovation is

23 high. Access regulation and price regulation are appropriate interventions in that case. From January 2015, KPN is obliged to give other firms access to their DSL and fiber infrastructure. The Dutch competition authority (ACM) em- phasized that two suppliers, KPN and Ziggo, bring not enough effective competition. The likelihood that KPN had a dominant market position on the fixed telephony market and business market was high without regulation. Thereafter, the competition authority concluded that there are characteristics that are conductive to a joint dominant position of KPN and Ziggo in the broadband internet market. The ACM imposed KPN to fulfill reasonable requests for the provision of access to their DSL and fiber infrastructure. Ac- cess regulation makes it for other parties possible to supply competitive offers to consumers by using the KPN infrastructure. The regulation is beneficial for consumers due to the increase of suppliers and the competitive prices (ACM, 2015). The first mobile telephony conversation was in 1973 and invented by Martin Cooper who worked for Motorola. The introduction of the GSM (Global System for Mobile Communications) brought the mobile telephony to consumers in 1994. In the Netherlands PTT started with the first operational GSM-network followed by Libertel (Vodafone), because PTT did not have a monopoly position on the GSM network. The first mobile frequencies were provided by the Dutch government for free. The increased popularity of GSM resulted in the decision by the Dutch government to create an auction to expand the network and increase the competition on the GSM network. Thereby, the auction resulted in revenues for the Dutch government. The latest auction of the Dutch GSM network was in 2012. Providers could bid for frequencies on the 2G, 3G and the fastest 4G network that are valid for 17 years. Five firms signed in for the auction: KPN, Vodafone, T-Mobile, Tele2 and UPC/Ziggo. KPN, Vodafone, T-Mobile and Tele2 obtained the network rights for the networks. UPC/Ziggo did not obtain network licenses and stated that the price is too high in comparison with the additional revenues for the firm (Telecompaper, 2012). The auction resulted in an unexpected high revenue for the Dutch state of 3,804 billion euro (NRC, 2012).

24 Telecommunication infrastructures In the previous section, we described a brief historical overview of the telecommunication services in the Nether- lands. Nowadays, the telecommunication markets consist of several services that can be supplied in different ways. In this section, we will give an overview of the infrastructures and telecommunication services nowadays. There are three infrastructures with various owners that can be used to supply fixed telecommunication services: DSL, cable and fiber infrastructure. DSL is a technique that makes it possible to use the copper telephony line for fast internet and digital telephony. DSL providers also supply television, this is called IP-TV (Consumentenbond, 2016a). The owner of the Dutch DSL infrastructure is KPN. The coax cable infrastructure is the ‘traditional’ television infrastructure. Nowadays, the cable infrastructure is also able to supply broadband internet and fixed telephony. Ziggo is the owner of the cable infrastructure in the Netherlands. The latest infrastructure that supplies fixed telecommunication services is the fiber infrastructure. With use of the fiber infrastructure broadband internet, fixed telephony and television services are available. KPN is the owner of the fiber infrastructure8. For television services, there are two other infrastructures. Digitenne (owned by KPN) provides television services through the ether with a receiver. CanaalDigitaal provides television with use of satellites. Currently, there are two main types of mobile networks: the 3G and 4G networks. KPN, Vodafone and T-Mobile own 3G and 4G networks, Tele2 only owns a 4G network. These firms allow other providers to use their network, those providers are called mobile virtual network operators (MVNO). A MVNO is a company that does not own a network, but provides telecommunication services with use of the network of other firms. Examples of Dutch MVNO’s are Ziggo, Telfort, Lebara, Ben, AH Mobile, Hollandsnieuwe and Simyo. Tele2 provides 4G mobile telephony services with their own network, but for 2G and 3G network services Tele2 uses the network of T-mobile. Some of the virtual network providers are subsidiary firms of the network owned firms. Telfort and Hi are part of KPN (KPN, 2016b). Hollandsenieuwe is a daughter firm of Vodafone (Consumentenbond, 2016b). From 2013, Ziggo is an MVNO that uses the network of Vodafone for their mobile services (Ziggo, 2013). The top six rows in table 4 show the types of infrastructures in relation with the number of connections in the broadband internet and television markets. In the broadband internet market, the percentage of fiber infrastructure connections has been increasing. The percentage of consumers that

8Reggefiber is the owner of the fiber infrastructure. KPN is the owner of Reggefiber (Nu.nl, 2014).

25 use cable and DSL infrastructures for broadband internet is decreasing. Nev- ertheless, the market shares of these infrastructures are larger compared to the new ﬁber network. Table 4 show that in the television market the cable infrastructure is the most used infrastructure. In the ﬁrst quarter of 2016, more than half of the consumers (56 percent) used the cable infrastructure, compared to 33 percent of the consumers that use DSL, digitenne or the satellite. The data usage of consumers in the mobile network market has been increasing, especially the volume of 4G data is growing which is a logical consequence of a faster connection. The amount of SMS services is decreasing. In the market for multiplay connections the total number of connections has been increasing from 2014-Q4. The triple-play and quad-play connections are increasing compared to the dual-play that is decreasing the last two quarters.

The merging parties The previous sections described the developments and the current infrastructure of the Dutch telecommunications markets. In this section, we will describe the role of the merging parties in the telecommunication markets. Ziggo is with other brands like Virgin Media, Unitymedia, Telent, UPC, VTR and Liberty a consumer brand of Liberty Global. Liberty Globals operations cross 14 countries, with 57 million television, broadband internet and telephony services at December 31, 2015. Before it was part of the Lib- erty Global group, Ziggo is founded through multiply mergers with @Home, Casema and Multikabel (Ziggo, 2016). In November 2014, Ziggo merged with UPC. UPC (United Pan-European Communications) was a subsidiary of Liberty Global. Vodafone is one of the world’s largest telecommunication firms. The firm has mobile operations in 26 countries and partners with mobile networks in 57 countries. In addition to the mobile networks, Vodafone has fixed broadband operations in 17 markets. In the Netherlands, Vodafone announced to invest in the fixed broadband market in October 2014 (Telegraaf, 2014). The firm had 461 million mobile customers and 13 million fixed broadband customers worldwide in December 2015 (Vodafone and Liberty Global, 2016).

26 Table 4: Broadband internet and television connections per type in the Netherlands. The volume of mobile networks and the number of multiplay connections in the Netherlands.

Broadband internet connections 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1 DSL 43% 42% 42% 41% 41% 40% Fiber 10% 11% 11% 12% 13% 14% Cable 48% 47% 47% 47% 47% 46%

Television connections 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1 DSL, Digitenne, Satelite 33% 33% 33% 33% 33% 33% Fiber 8% 9% 9% 10% 10% 11%

27 Cable 59% 59% 58% 57% 57% 56%

Volume mobile networks 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1 SMS x 1.000.000 912 867 967 960 834 760 Minutes x 1.000.000 6.720 6.844 7.185 6.755 7.167 7.233 Data (3G) MB x 1.000.000* 19.598 20.966 11.981 12.137 13.255 12.537 Data (4G) MB x 1.000.000 14.727 18.372 21.338 22.426

Number of multiplay connections 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1 Quad play 447 479 536 579 608 674 Triple play 3.750 3.787 3.791 3.822 3.857 4.033 Dual play 1.758 1.757 1.766 1.737 1.768 1.623 Total 5.955 6.023 6.093 6.138 6.233 6.330 Source: Telecommonitor 2016 (ACM, 2016c) *Before 2015-Q2 there was no difference in the estimation of 3G and 4G data. 4.2 Unilateral effects In the previous section, we described the Dutch telecommunication markets and the role of the merging parties in these markets. In this section, we will assess the potential unilateral effects9 of the Ziggo-Vodafone joint venture. We will start with defining the relevant markets for the Ziggo-Vodafone joint venture as described in section 2.2. We will use the market shares of the firms and the concentration levels of each of the defined markets as a first indicator of a potential dominant position. Thereafter, we will describe the factors in the Dutch telecommunication markets that can influence whether horizontal mergers are likely to have unilateral effects. Last, we will use the non-horizontal merger guidelines from section 2.4 to assess whether the joint venture will result in unilateral effects because of foreclosure.

Definition of the relevant market The European Commission assess whether mergers are compatible with the common market and not result in impede of effective competition. A dominant position is a primary form of such competitive harm. The European Commission defined a dominant position as follows (European Commission, 2004):

a situation where one or more undertakings wield economic power which would enable them to prevent eﬀective competition from being maintained in the relevant market by giving them the opportunity to act to a considerable extent independently of their competitors, their customers and, ultimately, of consumers

In section 2.2, we show that the first step in the assessment of mergers and joint ventures is to define the relevant markets. In addition, we show that bundles create some difficulties in defining the relevant market, because it involves the determination of the substitutability between products of the same type and the substitutability between products of different types. Pereira and Vareda (2013) extend the tools of the SSNIP (Small but Significant Non-transitory Increase in Price) tests to deal with these difficulties. We assume that the Dutch telecommunication markets are in the transition phase described in section 2.2. In this phase, consumers already prefer telecommunication services in bundles, but several consumers still prefer individual products. In this phase, it is likely that the bundles will constitute new and separate relevant product markets that coexist with the traditional individual product markets. In addition, we assume that the substitutability of services between the broadband internet service, fixed telephony service, television

9Also often called ‘non-coordinated’ eﬀects

28 service, mobile network service, triple-play bundles and quad-play bundles is small. Therefore, we assume the following relevant product markets: the broadband internet market, the fixed telephony market, the television market, the mobile telephony, the triple-play market and quad-play market. New developments in the telecommunication services and changing consumer behavior will change the substitution rates in the future. For instance, the relevant market for television services can change with the introduction of online television on-demand with faster broadband internet. In addition, mobile 4G network can be used for phone calls with Skype that can be a substitute for fixed telephony connections and mobile telephony calls. The relevant geographic market comprises the area in which the firms concerned are involved in the supply of services and in which the conditions of competition are sufficiently homogeneous (European Commission, 2011). We define the geographic market for broadband internet, fixed telephony and television connections on national level. For specific products, like 4G-networks and fiber infrastructures the geographic markets are smaller, because the limited geographical availability of those services. However, we assume that the geographical availability of these products will increase soon. The geographic market is not broader, e.g. European level, because it is in most cases not possible to use services of foreign telecommunication providers.

Market shares and concentration levels In the previous section, we defined the following relevant markets: broadband internet, fixed telephony, television, mobile network, triple-play and quad-play markets. In section 2.2 and section 2.4, we show that the horizontal and the non-horizontal merger guidelines use the market shares of the firms and the concentration levels of markets as the first indicator of the degree of competition. In the next section, we will use the market shares of the firms in the defined telecommunication markets to calculate the concentration levels. The concentration levels and market shares will give us a first indicator of the potential unilateral effects of the Ziggo-Vodafone joint venture in the Dutch telecommunication markets.

Broadband internet market The market shares in the broadband internet market are represented in table 5. KPN and Ziggo are the largest firms with each a market shares between 40 and 45 percent of the total number of connections. The two largest firms have together a market share of at least 80 percent. Thereafter, KPN and Ziggo are independent of other firms with their own DSL and cable infrastructure. Tele2, Vodafone and some other firms are active in the broadband internet market with use of DSL-

29 Table 5: Market shares broadband internet (number of connections)

2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1 KPN [40-45%] [40-45%] [40-45%] [40-45%] [40-45%] [40-45%] Ziggo [45-50%] [40-45%] [40-45%] [40-45%] [40-45%] [40-45%] Tele2 [0-5%] [0-5%] [0-5%] [0-5%] [0-5%] [0-5%] Others [5-10%] [5-10%] [5-10%] [5-10%] [5-10%] [5-10%] (incl. Vodafone) Data provided by the Dutch competition authority in Q1-2016 (ACM, 2016c). infrastructure of KPN. According to ACM (2016c) the HHI of this market is 3,870 in the ﬁrst quarter of 2016. Since 2014, the HHI in this market was not lower than 3,800. The delta of the HHI as a result of the joint venture depends on the market shares of Vodafone and Ziggo. We assume that the market share of Vodafone is between zero and ﬁve percent. The market share of Ziggo is between 40 and 45 percent. The maximum delta of the HHI of this joint venture will be:

Delta(HHI) = 502 − 452 − 52 = 450 (25)

The combined market share of the merging parties is between 40 and 50 percent, the HHI of the market is 3,870 and the delta of the HHI is between 0 and 45010.

Fixed telephony market The market shares of the number of single connections for the fixed telephony market are represented in table 6. At least four out of the five consumers with a fixed telephony connection are customer of KPN. Ziggo is the second largest firm with a market share between 10 and 15 percent. Both firms are independent of other firms, because they have their own DSL and cable infrastructures. Vodafone supplies their fixed telephony connection with use of the infrastructure of KPN. We calculate the concentration level in this market with the HHI in two different ways. First, in a symmetric way, where we use the lowest possible market share of the largest firms and the highest possible market share of the smallest firm. Second, we calculate the market shares in an asymmetric way with the highest possible market shares of the largest firms and the lowest market shares of the smallest firm. This methodology helps us to calculate the range

10An estimated Vodafone market share of zero percent, consequently results in a minimum HHI delta of zero points.

30 Table 6: Market shares ﬁxed telephony market(number of single connections)

2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1 KPN [80-85%] [80-85%] [75-80%] [80-85%] [75-80%] [80-85%] Ziggo [10-15%] [10-15%] [10-15%] [10-15%] [10-15%] [10-15%] Tele2 [0-5%] [0-5%] [0-5%] [0-5%] [0-5%] [0-5%] Others [0-5%] [0-5%] [0-5%] [0-5%] [0-5%] [0-5%] (incl. Vodafone) Data provided by the Dutch competition authority in Q1-2016 (ACM, 2016c). of the HHI. For the calculation of the concentration levels, we assume that the other ﬁrms have a very small market share of almost zero percent11.

HHI(symmetric) = 802 + 12.52 + 52 = 6, 581.25 (26)

HHI(asymmetric) = 852 + 12.52 + 02 = 7, 381.25 (27) The market concentration level (HHI) is between 6,581.25 and 7,381.25. The market share of Vodafone in the ﬁxed telephony market is between 0 and 5 percent. The market share of Ziggo is between 10 and 15 percent. The maximum delta of the HHI of this joint venture will be:

Delta(HHI) = 202 − 152 − 52 = 150 (28)

The combined market share of the merging parties is between 10 and 20 percent, the HHI of the market is between 6,581.25 and 7,381.25. The delta of the HHI is between 0 and 15012.

Television market The market for television subscriptions is domi- nated by two firms: Ziggo and KPN. The market shares are represented in table 7. Ziggo is the largest firm with a market share between 50 and 55 percent. KPN have a market share between 30 and 35 percent. Canaal Dig- itaal is the third largest firm with a market share between 5 and 10 percent. Some other firms have together a market share between 5 and 10 percent. The Dutch competition authority, ACM (2016c), reports that the HHI of the television market is 3,951 in the first quarter of 2016. Vodafone is active on

11According to European Commission (2004), a lack of information of very small firms may not be very important because it does not affect the HHI significantly. 12An estimated Vodafone market share of zero percent, consequently results in a minimum HHI delta of zero points.

31 Table 7: Market shares television (number of subscriptions)

2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1 Ziggo [55-60%] [50-55%] [50-55%] [50-55%] [50-55%] [50-55%] KPN [30-35%] [30-35%] [30-35%] [30-35%] [30-35%] [30-35%] Canal Digitaal [5-10%] [5-10%] [5-10%] [5-10%] [5-10%] [5-10%] Others [5-10%] [5-10%] [5-10%] [5-10%] [5-10%] [5-10%] (incl. Vodafone) Data provided by the Dutch competition authority in Q1-2016 (ACM, 2016c). the television market with use of the KPN DSL-infrastructure. We assume that the market share of Vodafone in the television market is between zero and ﬁve percent. The market share of Ziggo is between 50 and 55 percent. The maximum delta of the HHI as a result of the proposed joint venture will be: Delta(HHI) = 602 − 552 − 52 = 550 (29) The combined market share of the merging parties is between 50 and 60 percent, the HHI of the market is 3,951 and the delta of the HHI is between 0 and 55013.

Mobile telephony market Table 8 shows the market shares (the number of connections) in the mobile market. KPN is the largest firm, Vodafone is the second largest firm and T-mobile is the third largest firm. All the MVNO’s together, have a market share between 20 and 25 percent. Tele2 has a market share between zero and five percent. In a report by ABN AMRO, the estimated market share of Ziggo in the mobile segment was one percent in August 2016 (ABN AMRO, 2016). The estimated market share by Telecompaper of Ziggo Mobile was five percent in June 2015 (Emmerce, 2015). For the calculation of the concentration levels, we assume that the other MVNOs have a very small market share of almost zero percent. Just like the calculation of the HHI in the fixed telephony market, the HHI in this market is calculated in a symmetric way and an asymmetric way.

HHI(Symmetric) = 302 + 202 + 202 + 52 = 1, 725 (30)

HHI(Asymmetric) = 352 + 252 + 152 + 02 = 2, 075 (31)

13An estimated Vodafone market share of zero percent, consequently results in a minimum HHI delta of zero points.

32 Table 8: Market shares mobile market (number of connections)

2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1 KPN [30-35%] [30-35%] [30-35%] [30-35%] [30-35%] [30-35%] T-Mobile [15-20%] [15-20%] [15-20%] [15-20%] [15-20%] [15-20%] Vodafone [25-30%] [25-30%] [25-30%] [20-25%] [20-25%] [20-25%] Tele2 [0-5%] [0-5%] [0-5%] [0-5%] MVNO’s [20-25%] [20-25%] [20-25%] [20-25%] [20-25%] [20-25%] (incl. Ziggo) Data provided by the Dutch competition authority in Q1-2016 (ACM, 2016c).

The market share of Vodafone is between 20 and 25 percent. The estimated market share of Ziggo in the mobile market is between one and ﬁve percent. The delta of the HHI is between: Delta(HHI) = 302 − 252 − 52 = 250 (32)

Delta(HHI) = 212 − 202 − 12 = 40 (33) The market shares show that the joint venture will result in a concentration with a market share between 21 and 30 percent. The market concentration HHI will be between 1,725 and 2,075 and a delta between 40 and 250.

Quad-play market Most providers can supply multi-play bundles to consumers with use of the networks and infrastructures of competitors. KPN is the only supplier of quad-play bundles with their own infrastructures. Ziggo, Vodafone, Tele2 and Telfort can supply quad-play bundles with use of the infrastructures of rival firms. Telecompaper estimated that the market share of KPN in the quad-play market is 87 percent and the market share of Ziggo is 11 percent (Telecompaper, 2016). We assume that the market shares of the other small firms do not affect the HHI significantly. With use of the estimated market shares the HHI of the quad-play bundle market is calculated below:

HHI = 872 + 112 + 02 = 7, 690 (34) The delta of the HHI depends on the market share of Vodafone and Ziggo in the quad-play market. The maximum market share of Vodafone in the quad-play market is two percent. In this maximum case, the delta of the HHI will be: Delta(HHI) = 132 − 112 − 22 = 44 (35)

33 Table 9: Summary of Ziggo-Vodafone combined market share, the concentration levels (HHI) and the delta of the concentration level (HHI) as a result of the proposed joint venture in the telecommunication markets

Combined Delta HHI market share (HHI) Broadband internet [40-50%] 3,870 [0-450] Fixed telephony market [10-20%] [6,581.25-7,381.25] [0-150] Television market [50-60%] 3,951 [0-550] Mobile telephony market [21-30%] [1,725-2,075] [40-250] Quad-play market [11-13%] 7,690 44 Triple-play market [62-72%] 4,573 [0-1,240]

Triple-play market Telecompaper (2016) estimated that Ziggo is the largest firm in the triple-play market with a market share of 62 percent. KPN is the second largest firm with a market share of 27 percent. Some of the other firms in this market are Tele2 and Vodafone. We assume that the market shares of the other small firms do not affect the HHI significantly. The HHI of the triple-play bundle market is calculated below.

HHI = 622 + 272 + 02 = 4, 573 (36)

The maximum market share of Vodafone in this market is 10 percent. In this maximum case the delta of the HHI will be:

Delta(HHI) = 722 − 622 − 102 = 1, 240 (37)

Table 9 shows a summary of the combined market shares of the joint venture, the HHI of the markets and the delta of the HHI as a result of the joint venture in all the deﬁned telecommunication markets. The horizontal merger guidelines by the European Commission in section 2.2 describe that it is unlikely to identify horizontal competition concerns in a market with a post-merger HHI between 1,000 and 2,000 and a delta below 250. The HHI of all markets are above 2,000, except the mobile telephony market. The HHI of the mobile telephony market is between 1,725 and 2,075. It is likely that the HHI is below 2,000 and the delta below 250. In that case, it is unlikely that the joint venture results in horizontal competition concerns in this market. In addition, the horizontal merger guidelines describe that it is unlikely to identify horizontal competition concerns in markets with a post-merger HHI above 2,000 and a delta below 150. In the ﬁxed telephony market and the

34 quad-play bundle market the HHI is above 2,000 and the delta is between 0 and 150. According to the horizontal merger guidelines it is unlikely that the joint venture results in competition concerns. In the broadband internet market, the television market, and the triple-play market the HHI deltas varies between zero and above 150. Based on the market shares and concentration levels, we cannot conclude that it is likely that there are horizontal competition concerns, because the possibility that the delta is below 150. However, we also cannot conclude that it is unlikely that there are potential horizontal competition concerns, because the possibility that the delta is above 150. The non-horizontal merger guidelines by the European Commission in section 2.4 describe that it is unlikely to find competition concerns when the post-merger market share in each of the markets is below 30 percent with a post-merger HHI of 2,000. The combined market shares of the proposed joint venture exceed 30 percent in the broadband internet market, television market and the triple-play market. Even though the horizontal merger guidelines do not have concerns in the mobile market, the fixed telephony market and the quad-play bundle market, we assume based on the non-horizontal merger guidelines that it is not unlikely that there are competition concerns in the Dutch telecommunication markets. In the next section, we will assess potential factors of the Dutch telecommunications markets that influence the likelihood of unilateral horizontal effects.

Horizontal effects In the previous section, we used the market shares of the firms and the concentration levels of the markets to give a first indicator of potential market power. We assume that it is not unlikely that there are competition concerns in the Dutch telecommunication markets. In this section, we will describe factors in the Dutch telecommunication markets that influences competition as a result of a horizontal merger. The horizontal merger guidelines by the European Commission describe several factors that can influence whether horizontal merger are likely to have positive or negative competitive effects (European Commission, 2004). First, the joint venture will remove competitive constraints between Voda- fone and Ziggo in all markets where they are competitors prior to the joint venture. For instance, in the situation before the joint venture a price increase of a service by Vodafone would result in a loss of sales for Vodafone through a loss of consumers to Ziggo and other competitors. The joint venture will remove this competitive constraint. However, the market shares of Vodafone and Ziggo show that they are relatively small rivals of each other. The main competitor of Ziggo is KPN in the broadband internet, fixed telephony, television and the multiplay bundle

35 markets. In all these markets, the market share of Vodafone is relatively small. In the market for mobile telephony, the main rival of Vodafone is KPN. In this market, the market share of Ziggo is relatively small. We assume that Vodafone and Ziggo are in none of the telecommunication markets the main rival of each other. The joint venture will reduce competitive constraints between the two providers, however the reduction will be small. Second, in markets where firms have larger market shares, the likelihood that firms will pose market power is high. For firms with a large market shares it is more likely to profit from higher prices from a larger consumer base, despite of the reduction of consumers from that price increase. For example, the likelihood that a large market share firm profit from their price increase despite of the loss of consumers is larger compared to a price increase of a firm with a small consumer base. The joint venture will increase the combined market share of Ziggo- Vodafone. Table 9 shows that the combined market share of the proposed joint venture is at least 50 percent in the television market and the triple- play market. In addition, the market share of Ziggo-Vodafone is between 40 and 50 percent in the broadband internet market. In these markets, it is more likely that Ziggo-Vodafone will pose market power. On the other hand, the combined market shares of the proposed joint venture in the markets for fixed telephony, mobile telephony and quad-play services is below 30 percent. Thereby, the main competitor of Ziggo-Vodafone, KPN, is the largest firm in all these markets. The joint venture can result in a stronger competitive power against the largest firm. Third, the horizontal merger guidelines describe that joint-ventures are more likely to have anti-competitive effects in markets where firms are close substitutes. The higher the substitutability between merging products, the more likely it is that merging firms will raise price. In situations where there are consumers with their first choice for a service of Vodafone and their second choice for a service of Ziggo, it is more likely that the merging parties will increase the price. Ziggo is an MVNO provider that uses the network of Vodafone. Therefore, it can be suggested that Ziggo is a close substitute of Vodafone and that it is likely that the merging parties will increase the price of the mobile service. However, we assume that the substitution rates between all the providers in the mobile network market are close to each other. The mobile 3G and 4G networks are similar for all providers and the prices of their mobile services are close to each other. We do not assume that a price increase of Vodafone or Ziggo results in a significant increase in the sales of the other merging firm, compared to the sales of the other providers.

36 Fourth, it is possible that the variety of products and services will decrease due to the introduction of the joint venture. This can increase the market power and potentially result in harm for consumers. Vodafone uses the DSL-infrastructure of KPN to supply bundles with broadband internet, fixed telephony and television services. In the situation after the joint venture it is for consumers not possible to buy this specific bundle of products, because Ziggo-Vodafone will use the coax cable infrastructure of Ziggo for broadband internet, fixed telephony and television. However, consumers can still separately buy the services from the DSL-infrastructure of KPN and the mobile service of Vodafone.

Non-horizontal effects In the previous section, we described the effects of the joint venture related to the unilateral horizontal mergers guidelines. In this section, we will assess the joint venture with use of the non-horizontal guidelines by the European Commission described in section 2.4. In certain circumstances bundling can result in a reduction of the ability of rivals to compete. There is a possibility that the merged firm will foreclose rivals from buying a product of them. This may reduce the competitive pressure and potentially result in an increase of the price. On the other hand, section 3 shows a model that describes the positive unilateral effect of bundling as a result of a merger. In this section, we will assess these non-horizontal effects of the Ziggo-Vodafone joint venture. The Ziggo-Vodafone joint venture can be seen as a conglomerate merger. That are mergers between firms that are in a relationship which is not horizontal nor vertical. Vodafone and Ziggo are horizontal in a relationship in the single product markets where they are competitors. In addition, Voda- fone and Ziggo are vertical integrated. Ziggo uses the mobile network of Vodafone to supply quad-play bundles and single mobile telephony network. Vodafone uses the DSL infrastructure of KPN to supply broadband internet, fixed telephony and television services. Other MVNO providers are using the mobile network of Vodafone, for example hollandsnieuwe. The non-horizontal assessment of the European Commission consists of three steps described in section 2.4. The assessment consists whether the firm can foreclose its rivals, whether it would have economic incentive to do so, and whether a foreclosure strategy would have a detrimental effect on competition. In the Ziggo-Vodafone case, the merging parties can bundle their products. The market shares of the quad-play bundle market show that Ziggo already bundle their own products with the mobile network of Vodafone. Thereafter, the two main products of Ziggo and Vodafone, the services from

37 the coax cable infrastructure for Ziggo and the mobile network of Vodafone, are viewed as important by many consumers. In addition, the market shares of both firms in these single product markets are large. We assume that the Ziggo-Vodafone joint venture can foreclose its rivals. The incentive for firms to foreclose rival firms depends on the profitability. The bundle premium in the Netherlands shows that consumers are willing to buy the bundle. More consumers prefer buying bundles instead of single services. Thereafter, prior to the joint venture Ziggo is using the mobile network of Vodafone for a specific cost. The joint venture will internalize this cost. It is likely that bundling after the joint venture is more profitable for Ziggo-Vodafone. We assume that foreclosure will not impede effective competition in the Dutch telecommunication markets. In every single product market, there are alternative firms. The main competitor, KPN, is obliged to give competitors access to their DSL and fiber infrastructure. In the market for mobile telephony KPN, T-Mobile and Tele2 have a mobile network that can be supplied to other firms. The joint venture will affect a large fraction of market output, but there are still other firms providing single services. Section 3 shows that a conglomerate merger can also benefit consumers with a lower price for the bundle product. The model assumes that the additional benefit of consuming a bundle is larger than 0. It is likely that this assumption is valid for the Dutch consumers. More than half of the Dutch consumer stated that communication packages (bundles) are more convenient because the single invoice. One third of the consumers stated that bundles are cheaper than paying separately for each service. With the assumption that the additional benefit of a bundle is larger than 0, the model shows the effects of a joint-venture on the competition in a bundled good setting, such as the Ziggo-Vodafone joint venture in the Dutch telecommunication markets. Prior to the joint venture KPN is the only firm that supplies a quad-play bundle with their own infrastructure. Other firms can only supply quad-play bundles with use of the infrastructure of others. In combination with the bundle premium this result in a price that is higher than the marginal costs of the products. The reason for this is that consumers prefer the bundle more than the two goods separately and KPN is the only firm that can supply the bundle. After the merger, there is more competition on the market for quad-play bundles. KPN and Ziggo-Vodafone compete on prices and this will result in a lower equilibrium price for bundles compared to the situation before the joint venture. The model in section 3 shows that the Ziggo-Vodafone will have a pro-competitive unilateral effect on the Dutch telecommunication markets.

38 4.3 Coordinated effects In section 4.2, we show the potential unilateral effects of the Ziggo-Vodafone joint venture based on the market shares of the firms and concentration levels of the market. So far, we ignored the coordinated effects of the joint venture. The European Commission describes in the horizontal and non- horizontal merger guidelines the potential negative effects of a merger for the likelihood of tacit collusion (European Commission, 2004) (European Com- mission, 2008b). In section 2.3, we described the market characteristics that influence the coordinated effects. In this section, we will describe the market characteristics of the Dutch telecommunication markets that influence the sustainability of tacit collusion. Thereby, we will show the potential effect of the Ziggo-Vodafone joint venture on these characteristics.

The number of competitors and asymmetry. Table 5 in section 4.2, shows the market shares of the firms in the broadband internet market. The two largest firms, KPN and Ziggo, combine a market share of at least 80 percent. The joint venture will decrease the number of competitors and will increase the asymmetry in market shares, because Ziggo-Vodafone will be the largest firm. Table 6 shows the market shares of the fixed telephony market. KPN is the largest firm with a market share between 80 and 85 percent. Ziggo is the second largest firm with a maximum market share of 15 percent. The joint venture will result in a decrease in the number of competitors. The two largest firm will be more symmetric, because the market share of Ziggo- Vodafone will increase and the market share of KPN remains the same. How- ever, for the smallest firm compared to the two largest firms the asymmetry will be larger. Table 7 shows the market shares of the television market. Ziggo is the largest firm with a market share between 50 and 55 percent. KPN is the second largest firm with a maximum market share of 35 percent. The joint venture will reduce the number of competitors and increase the asymmetry in market share, because the largest firm will become larger. Table 8 shows that KPN is the largest firm in the mobile network market. Vodafone is the second largest firm in the market. The joint venture will decrease the number of competitors in the market. Thereafter, the asymmetry between the two largest firms will be smaller. However, for the smaller firms compared to the two largest firms the asymmetry will be larger. Section 4.2 describes that Ziggo is the largest firm in the market for triple-play bundles. KPN is the second largest firm in this market. The joint venture will increase the asymmetry of the firms. Further, the joint venture

39 will increase the number of independent firms in the quad-play bundle market and thus increase the symmetry. In the situation before the merger KPN is the only independent firm that can supply a quad-play bundle. The Ziggo- Vodafone joint venture will be the second independent firm on the quad-play bundle market. The joint venture will reduce the number of competitors in all the single telecommunication markets. This influences the likelihood of tacit collusion in two ways. First, coordination in those markets is easier with less competitors. For all the other firms, it is easier to find ‘focal points’ in terms of prices and quantities. Second, in the post-joint venture situation the collusive profits will be divided by one firm less. The incentive for firms to deviate from the collusive outcome will decrease and the benefits of collusive profits will increase. On the other hand, in the market for quad-play bundles the number of independent competitors will increase because of the joint venture. Indepen- dent firms can supply bundle products with their own infrastructures without the use of infrastructures of other firms. The market structure changed from a monopoly to a duopoly, with KPN and Ziggo-Vodafone. The likelihood of sustainable tacit collusion is decreasing in this market. However, our model in section 3 shows a contradicting effect of the joint venture. The likelihood of sustainable tacit collusion increases because of an increase in the number of competitors and symmetry of the two largest firms in the quad-play bundle market. Before the joint venture the critical discount factor for KPN was larger compared to the situation after the joint venture. The joint venture increases the symmetry in the quad-play bundle market and resulted in a decrease of the critical discount factor for the original monopolist. The model assumes that the critical discount factor makes collusion easier to sustain after the joint venture. The joint venture increases the asymmetry in market shares in the telecommunication markets. The two largest firms will be larger in contrast to the smaller firms. Literature described that asymmetry in market shares may show more profound asymmetries that makes collusion more difficult to sustain. We assume that it is likely that the dependence of a telecommunication infrastructures can be such a factor that influences the asymmetry in market shares and thus the sustainability of collusion in the telecommunication markets. In all markets the independent firms are the firms with the largest market share. The limited power of the small independent firms to punish the large firms can result in the fact that it is possible that the two large firms tacitly agree with each other. In the markets for fixed telephony, mobile network and quad-play bundles, the joint venture will increase the market symmetry of the two largest firms.

40 The joint venture will result in a larger second largest firm Ziggo-Vodafone. In that case, the joint venture increases the sustainability of tacit collusion for those two firms. The symmetry between the two independent firms in market shares may show that the dependence of their own infrastructure is an important factor in the assessment of competition in this market.

Cost asymmetries. The joint venture will create an independent player Ziggo-Vodafone that uses their own cable and mobile network. For the two largest ﬁrms, the cost asymmetries will be smaller. Vodafone does not have to use the DSL-infrastructure of KPN, but can use their own Ziggo-Vodafone cable infrastructure. This will make tacit collusion between KPN and Ziggo- Vodafone easier to sustain. With symmetric cost it is easier to agree on a price.

Entry barriers. The telecommunication markets are characterized by the large capital investments to develop a new infrastructure. This makes the entry barriers large, because new entrants need large investments. In markets with large entry barriers it is easier to sustain tacit collusion.

Demand growth. The telecommunication markets become more important for consumers. Telecommunication services are a necessity of life (ACM, 2016b). We assume that the demand for telecommunication services is growing, because it is more important for the society. Collusion is easier to sustain in growing markets, because the proﬁts of today are smaller compared to to- morrows proﬁts.

Frequent interaction, price adjustments and market transparency. In all the telecommunication markets, firms interact frequently. In addition, the prices of all the firms are publicly available on the internet. The markets are extremely transparent and the firms interact frequently. The frequent interaction and price adjustments makes collusion easier to sustain.

Product differentiation. The product differentiation in the telecommunication markets is small. The difference between the products supplied by KPN and Ziggo-Vodafone is the way the signal is distributed. The products and services are comparable. The joint venture will make the products more comparable with the introduction of Ziggo-Vodafone’s quad-play bundles with their own infrastructures. Tacit collusion is easier to sustain with comparable products.

41 Multi-market contract. Collusion is easier to sustain if the firms are active on several markets. The telecommunication markets in the Netherlands are characterized by firms that supply multiply telecommunication services. The joint venture Ziggo-Vodafone will supply broadband internet, fixed telephony, television, mobile telephony and multiplay bundles. In these markets Ziggo-Vodafone competes and interacts with KPN. Those multi-market con- tracts make collusion easier to sustain.

4.4 Conclusion The market shares and the concentration levels indicated that it is not unlikely that there are competitive concerns related to the proposed joint venture. There are several factors that can influence whether horizontal merger are likely to have positive or negative competitive effects. First, the horizontal merger removes competitive constraints between Vodafone and Ziggo, nevertheless this effect is small because of the small rivalry between Ziggo and Vodafone. Second, the large market shares of the proposed joint venture in the television market, the triple-play market and the broadband internet market, will increase the likelihood of market power of Ziggo-Vodafone. However, in the markets for fixed telephony, mobile telephony and quad-play bundles the largest firms is KPN. In these markets the proposed joint venture will increase competitive pressure. Third, we do not assume that the merging parties are close substitutes and therefore will increase the price. Fourth, the joint venture reduces the variety of products, because it is no longer possible to buy a bundle with the mobile network service of Vodafone and the DSL-infrastructure service of KPN. Nevertheless, consumers can still buy this bundle of products separately at KPN and Vodafone. We assume that the potential negative horizontal effects of the joint venture will be small. Prior to the merger, Ziggo is using the mobile network of Vodafone. The merging parties are vertically integrated. In addition to the horizontal merger guidelines, it is therefore necessary to assess the merger using the non-horizontal merger guidelines. The main economic concern of the non-horizontal merger guidelines is foreclosure of rivals. The proposed joint venture can bundle their products and foreclose its rivals. Thereafter, we assume that it is profitable for Ziggo-Vodafone to bundle their services. Nev- ertheless, we assume that foreclosure will not impede effective competition, because in every single product market there are alternative firms. Moreover, the model in section 3 shows that the joint-venture will increase the competition in the quad-play bundle market and decrease the equilibrium price of the quad-play bundle.

42 In addition, mergers can result in an increase in the likelihood of coordination among rivals, the coordinated effects. In the single telecommunication markets the Ziggo-Vodafone joint-venture results in a reduction of the number of competitors. This increases the likelihood of tacit collusion. Moreover, the model in section 3 shows that the likelihood of sustainable tacit collusion increases because of an increase in the number of competitors in the quad-play bundle market. Before the joint venture, the critical discount factor for KPN was larger compared to the situation after the joint venture. Thereafter, the characteristics of the telecommunication markets show that the likelihood of sustainable collusion in the telecommunication markets is high. In the Dutch telecommunication markets there are a low number of competitors, small cost asymmetries, large entry barriers, increasing demand, frequent interaction, publicly available prices and multi-market interaction. All these market characteristics increase the likelihood of sustainable tacit collusion. The overall effect of the Ziggo-Vodafone joint venture on the competition in the telecommunication markets is ambiguous. The unilateral effects show that the proposed joint venture will result in a decrease of the quad-play bundle price and benefit consumers. On the other hand, the coordinated effects of the proposed joint venture show that the likelihood of tacit collusion will increase. Further research should estimate the unilateral and coordinated effects in a bundled good setting with a structural model. This methodology will help us to conclude which of the two effects is the strongest.

43 5 Conclusion

In this thesis, we have assessed the competitive effects of mergers in telecommunication markets. Nowadays, these markets are characterized by firms that supply bundles of services to consumers in contrast to a single service. The increasing popularity of these bundles require the consideration of the related effects of bundling on the assessments of mergers and joint ventures in these markets. We analyse a merger by using a simplistic theoretical model. The model is inspired by the Ziggo-Vodafone joint venture in the Dutch telecommunication markets. Consider three markets where firms compete on prices: broadband internet, mobile network and the bundle market. Before the merger, the broadband internet market was characterized by two firms: Ziggo and KPN. The mobile network market consists of two firms: KPN and Voda- fone. Before the merger, the bundle market is a monopoly, with KPN as the monopolist. We assume that the purchase of both services from one single telecommunication provider is beneficial for consumers (b). The purchase of both services from different telecommunication providers does not bring additional benefit for consumers. The firms maximize profits and set a price independently of other firms for the internet, mobile and bundle as long the firm can supply the service. Consumers maximize their consumer surplus that equals the value of the service minus the price of the service. The results of our model show two contradicting economic effects of a merger in a bundled good setting. Consumers can benefit from the merger in a bundled good setting, where we assume that b is larger than 0. The firms are aware of the bundle premium and in a monopoly situation prior to the merger the monopolist sets a price of the bundle just below the sum of the marginal costs of both services and the bundle premium. In the post-merger situation, the bundle market is a duopoly with KPN and Ziggo-Vodafone. Bertrand competition will result in a price of the bundle that equals the marginal costs of both services. The price of the bundle will decrease, as a result of the merger. On the other hand, our model shows that a merger of firms in such a setting can increase the sustainability of tacit collusion. The critical discount factor of the original monopolist in the bundle market decreases and makes tacit collusion easier to sustain in these markets. The proposed Ziggo-Vodafone joint venture helps us to study the effect of a merger or joint venture in a bundled good setting. We assess the proposed joint venture with use of the horizontal and non-horizontal merger guidelines by the European Commission and distinguish two different effects of a merger: unilateral effects and coordinated effects.

44 Based on the market shares and concentration levels, we conclude that it is not unlikely that there are competition concerns in the Ziggo-Vodafone joint venture case. Nevertheless, we conclude that the negative horizontal unilateral effects are small. First, the rivalry between Ziggo and Vodafone is small, therefore the reduction of competitive constraints is small. Second, in the markets for fixed telephony, mobile telephony and quad-play bundles, the joint venture will increase competitive pressure on the largest firm, KPN. Furthermore, the negative non-horizontal effects of the Ziggo-Vodafone joint venture are small. Foreclosure will not impede effective competition, because in every single product market there remain alternative firms. In addition, our model shows that the joint venture will result in a lower equilibrium price for the quad-play bundle, because of the introduction of Ziggo- Vodafone in this market. Finally, we assess the coordinated effects of the Ziggo-Vodafone joint venture. The characteristics of the telecommunication markets show that the likelihood of sustainable tacit collusion is high. In the Dutch telecommunication markets there are a low number of competitors, small cost asymmetries, large entry barriers, increasing demand, frequent interaction, publicly available prices and multi-market interaction. All these market characteristics increase the likelihood of tacit collusion. In addition, our model shows that the joint-venture will increase the likelihood of tacit collusion. The critical discount factor of KPN decreases and makes tacit collusion easier to sustain. The proposed joint venture will result in a decrease of the quad-play bundle price. On the other hand, the proposed joint venture will increase the likelihood of tacit collusion. The overall effect of the merger on the competition in the telecommunication markets is ambiguous. Further research should estimate the unilateral and coordinated effects in a bundled good setting with a structural model. Slade (2004) shows how one can distinguish econometrically between both effects in the U.K. brewing industry. These techniques can be used to evaluate price-cost margins and to decompose these into unilateral and coordinated effects. This methodology can help us to conclude which of the two effects is the strongest.

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