Michael Baye and Patrick Scholten prepared this case to serve as the basis for classroom… 1 answer below »

Pricing at Deutsche Telekom
Michael Baye and Patrick Scholten prepared this case to serve as the basis for classroom discussion rather than to present economic or legal fact. The case is a condensed and slightly modified version of the public copy documents involving the Commission of the European Communities’ Case Comp/C-1/37.451, 37.578, 37.579 – Deutsche Telekom AG.
Overview of Germany’s Telecommunication Industry
Deutsche Telekom (DT) owns and operates the fixed telephone network in Germany. DT’s local networks consist of a number of local loops, which are the physical circuits connecting subscriber’s to the fixed public telephone network. Prior to 1996, the German State wholly owned DT and was responsible for building the fixed telephone network with public resources, which it did over a long period of time. On November 18, 1996, a 25 percent equity share in DT was sold to private investors in order to generate over DEM 20.1 billion in capital to fund further expansion of its network. After DT took over VoiceStream/Powerel in 2000, the German State surrendered part of their holdings. Today, 56.95 percent of DT is owned by institutional and private investors, 30.92 percent by the German State and 12.13 percent by the German recovery bank – Kreditanstalt für Wiederaufbau.
Prior to the enactment of the Telecommunications Act on August 1, 1996, DT was a legal monopoly in the provision of retail fixed-line telecommunication services. To compete with DT, new entrants needed to invest large sums of capital to develop a network infrastructure (optical fiber, cable television, power lines, etc.) to provide retail telecommunication services. Overcoming the economies of scale experienced by DT along with its extensive nationwide coverage made entry by new firms unprofitable.
The 1996 Telecommunication Act, however, required DT to allow new competitors direct access to its infrastructure and thereby created more competition in the provision of retail access to telephone services. While DT is the only operator with nation-wide network coverage, post Telecommunication Act, it faces varying degrees of competition in the provision of telecommunication infrastructure (wholesale access to its network) and in the provision of retail telephone services. The Telecommunication Act leveled the competitive playing field by permitting financially weaker competitors to gain direct access to the German retail market through DT’s network. The rules that govern telecommunication services in Germany are regulated according to access type. That is, the rules governing retail access are different from those regulating wholesale access.
This case examines alleged unfair pricing practices against DT by competitors and retail customers after the Telecommunications Act of 1996. The primary charge against DT is that the margin between the prices DT charges competitors for unbundled access to local
Managerial Economics and Business Strategy, 5e Page 1

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