Complaint alleging predatory price-setting by Chunghwa Telecom in its third rate adjustment scheme
Case:
Complaint alleging predatory price-setting by Chunghwa Telecom in its third rate adjustment scheme
Key Words:
predatory pricing; mobile telephone
Reference:
Fair Trade Commission Decision of September 22, 1999 (the 411th Commissioners' Meeting)
Industry:
Relevant Laws:Telecommunications Industry (6320)
Articles 10, Subparagraph 2 of the Fair Trade Law
Summary:
1. Private mobile phone enterprises filed a complaint against Chunghwa Telecommunication
Co., Ltd., ("Chunghwa Telecom"), the content of which is summarized
as follows: The review committee of the Directorate General of Telecommunications
(DGT) under the Ministry of Transportation and Communications approved the third
rate increase proposal submitted by Chunghwa Telecom. The adjustments to the
mobile phone rates were as follows: (1) general preferential rate plan: monthly
charges: NT$600, connection charges during regular hours: NT$0.10 per second,
connection charges during discount hours: NT$0.05 per second; (2) local preferential
rate plan: monthly charges: NT$420, connection charges during regular hours:
NT$0.08 per second, connection charges during discount hours: NT$0.05 per second;
(3) economical preferential rate plan: monthly charges: NT$200, connection charges
during regular hours: NT$0.15 per second, connection charges during discount
hours: NT$0.08 per second; (4) discount plan for long-time customers and large
accounts: 20 to 40% off their monthly charges; (5) preferential plan for subscriber-to-subscriber
connections: NT$0.05 per second. The rates under the "general preferential
rate plan" were 9% lower than the prevailing rates of the private operators,
while the rates under the "economical preferential rate plan" were
30% lower than those of the private operators. The complainants alleged that
Chunghwa Telecom used predatory prices and cross-subsidization to offer discounts
to customers, thereby restraining competition and competing unfairly.
2. Predatory pricing refers to the practices where an enterprise with superior
market position sets prices lower than costs at the expense of short-term profits
to exclude other competitors or obstruct potential competitors from entering
the market, with the goal of solidifying its market position and obtaining long-term
profit. Use by a monopolistic enterprise of predatory prices to exclude other
competitors may violate Article 10, Subparagraphs 1 and 2, of the Law. Whether
a price is predatory may be determined by inspecting three factors: cost, net
profit, and effect on the competition.
Inspecting cost refers to comparing the price of a particular service with the
"incremental cost" of providing such a service. "Incremental
cost" refers to the direct added cost of a particular service minus the
common cost. If the profit obtained from the provision of a service is higher
than the "incremental cost" of the business operation, then the business
operation will gain economic profit. On the other hand, if the profit obtained
from the provision of a service is lower than the "incremental cost"
of the business operation, a loss is incurred. A reasonable business will price
its services at least equally to the "incremental cost" of providing
such services. Therefore, if the prices of telecommunication services are lower
than the "incremental costs" of providing such services, further checks
should be made to determine whether the prices are predatory prices that exclude
competitors from the market.
Inspecting net profit means looking at the effects of a price reduction on the
profitability of a business. If the profitability of a business is not significantly
reduced due to the price reduction, i.e., if the price reduction brings increased
demand and the resultant increase in revenues is sufficient to cover the profit
lost due to the price reduction, the price reduction should be considered ordinary
price competition. Also, when determining whether price-setting is predatory,
the actual effect on or loss sustained by the competition due to the price reduction
should be taken into account as well.
3. Investigation showed that following the adjustment to Chunghwa Telecom's
mobile phone rates, the rates for subscriber-to-subscriber connections, subscriber-to-telephone
connections, and subscriber-to-other-private-mobile-phone connections continued
to be higher than the "complete attributed costs" and "incremental
costs" of the various types of telecommunications services. Chunghwa Telecom
also charged an additional NT$200 to NT$600 in monthly subscription charges.
Moreover, according to the financial information provided by Chunghwa Telecom,
the rate reduction did not significantly reduce the profitability of the company's
mobile phone services. In accordance with statistics compiled by the Ministry
of Transportation and Communications, after Chunghwa Telecom implemented its
rate reduction in February 1999, the numbers of subscribers of the private mobile
phone companies continued to grow rapidly, indicating that the price reduction
did not significantly exclude competition. Thus Chunghwa Telecom's third rate
adjustment scheme could not be deemed a predatory act of setting prices lower
than costs. In summary, the available facts and evidence did not support a determination
that Chunghwa Telecom's third fare adjustment scheme violated the Law.
Summarized by Liao Hsien-chou
Supervised by Ch'en Hui-ping
Appendix:
Chunghwa Telecommunication Co., Ltd.'s Uniform Invoice Number: 96979933