Competition Policy Report:

A market which the Competition Commission has recently investigated:

The Movies on Pay TV Market

Summary of the Issues Statement:
 BSkyB hold the licensing rights to 6 top Hollywood studios and therefore control the
distribution of their recent films in the UK Movies Pay TV market
 In January 2007, BT, Setanta, Top Up TV (TUTV), and Virgin Media made a preliminary
submission to Ofcom, alleging that competition in the Pay TV industry was not working
properly, and asked Ofcom to refer the industry to the CC (Competition Commission) for
investigation.

 BSkyB resisted these allegations until 2009 when Ofcom produced their third Pay TV
consultation where they had reason to believe that “Sky had an incentive to restrict the
exploitation of its rights to offer recent movies to consumers by SVOD (Subscription Video-
on-Demand) in order to protect its linear movie channels. Consequently, Ofcom was
concerned that innovation in the development of SVOD services could be stifled. This
concern led Ofcom to believe that there may be a case for targeted intervention in the sale
and purchase of SVOD rights, and it suggested that making the SVOD rights available
separately from the linear rights could allow other companies to acquire SVOD rights and
establish new services to consumers.”1
Reference: http://www.competition-commission.org.uk/inquiries/ref2010/movies_on_pay_tv/index.htm

The role of the Competition Commission (CC) in regulating monopoly power

“The Competition Commission (CC) is an independent public body which conducts in-depth inquiries
into mergers, markets and the regulation of the major regulated industries .” From 2010 Annual Report
(page 5) by CC link: http://www.competitioncommission.org.uk/rep_pub/annual_rev_archive/pdf/annual_report_2010.pdf

The role of the Office for Fair Trading (OFT) in regulating monopoly power
“The Office of Fair Trading obtains and reviews information relating to merger situations and, where
necessary, refers any relevant mergers to the Competition Commission (CC) for further
investigation.” From the Office of Fair Trading Website.

In summary: The Office of Fair Trading monitors potential mergers and activities performed by
monopoly power (as defined by the 2003 report) which are passes on to the CC after they become
active cases. The OFT acts as an agent that works with project existing in between reported cases
and any actions where the subject might face prosecution.

Explain the case against monopoly power: impacts on consumers, competitors, suppliers,
social welfare and efficiency
The standard argument against monopolies is that in these types of markets, abnormal
(supernormal) profits can be reduced and these come at the cost of consumer surplus , productive &
allocative effiency.

These disadvantages are by monopolies abusing their “price maker” position by increasing price to a
level that is above marginal and average costs. This results in a fall in consumer surplus and the
1

http://www.competitioncommission.org.uk/inquiries/ref2010/movies_on_pay_tv/pdf/issues_statement_hous
estyled.pdf
 overproduction at this new price level. Under these conditions, there may be an economic case for
some form of government intervention to limit or reduce the scale of monopoly power.

One special case for an inefficiency is X inefficiency which is where there is a lack of real competition
and any benefits that a monopoly could potential pass on to its customers in taken as producer
surplus due to a lack of an incentive to boost consumer surplus. This lack of competition gives a
monopolist “less of an incentive to invest in new ideas or consider consumer welfare. It can also be
argued that even if the monopolist benefits from economies of scale, they will have little incentive to
control production costs and X inefficiencies will mean that there will be no real cost savings.” 2

If the industry is taken over by a monopolist the profit

maximsing point (MC=MR) is at price Pmon and output
Q2.
The monopolist is able to charge a higher price, restrict
total output and thereby reduce economic welfare. The
rise in price to Pmon reduces consumer surplus. Some of
this reduction in consumer welfare is a pure transferto the
producer through higher profits, but some of the loss is
not reassigned to any other economic agent. This is
known as the deadweight welfare loss and is equal to
the area ABC.

What are the possible advantages of monopoly power?

However monopolies can bring about some benefits as well.
1. Economies of Scale: Since monopolies tend to operate on a large scale they will be better
placed to take advantages of economies of scale. By doing this they would reduce average
total costs and therefore increase the productive efficiency of the plant
2. Research and Development: They have more money to invest in research and development,
to improve the overall equity of their customers.
3. International Competitiveness: Domestic firms may have monopoly power in the domestic
country but not globally. (e.g. British Steel)
4. A firm may become a monopoly through being efficient and dynamic. A monopoly is thus a
sign of success not inefficiency. (e.g. Google)

How does EU competition policy affect firms operating in the UK?

2
Quote taken from: http://tutor2u.net/economics/revision-notes/a2-micro-monopoly-economic-
efficiency.html
  Limiting the potential of certain companies: Some companies need to be able to expand in
order to benefit from the lowest possible average costs and maximise profits in order to
compete with global companies. Internal barriers prevent certain companies from reaching
their full potential on the global stage. The EU competition policy restricts growth and rights
laws in favour of small infant firms which mean that the larger more profitable firms can’t
continue to grow and succeed. It has lead to some companies moving to other countries
which are more flexible since the incentive to grow is removed in many European countries.
 This also deters other countries wanting to move to the UK since even though the internal
laws can be manipulated it is backed up by EU competition policies.
 Competition is not always a good thing - some industries, for example defence, healthcare or
nuclear power, are sensitive and should be protected from market forces.
 The CC has taken its remit too far in pursuing cases outside its jurisdiction. This dilutes the
authority of the EU.
 The EU has been obsessed at hunting out the problems, thus creating extra costs for
taxpayers and businesses.

With reference to the case study identified in question 1, to what extent do you agree
with the OFT/CC findings? / What policies would you recommend, and why?

TV Online Demand Bundle Host Price / per month

BSkyB £35.50
Virgin Media £34.00
BT £18 + £2.50 per film
It is clear that BSkyB’s behaviour in this market has been anti-competitive, with clear rights issued to
restrict its competition’s access (BT, Setanta, Top Up TV (TUTV), and Virgin Media) to key movie
stock. The rights drawn up between BSkyB and the top 6 Hollywood companies do only allow UK
consumers access to these films with a Sky Movie package. With this control over the movie stocks,
BSkyB are in a position were they could manipulate price in order to maximise their producer
surplus. OFT/CC’s findings even imply that this has arguably already happened since compared to
the market’s movie package offers BSkyB is the most expensive (at £35.50 a month). Although the
packages shown in the table above do vary in terms of their On Demand services this does illustrate
the closest comparison of the Movie on Demand Packages. For the data provided it would be safe to
agree with the findings from the OFT/CC that BSkyB can have a higher price for their service than its
competitors due to these owership rights that they hold. However it is difficult to isolate these
factors as the major determinants also it is assumed since the other movie stocks are considered to
be public in the market.

The OFT/CC findings also highlighted concerns that BSkyB’s ownership rights would not only lead to
price manipulation, it would also be responsible for a potential monopoly case. If these key movie
stocks are demand enough to the extent that they represent more than 50% of all new films either
streamed or downloaded then a monopolistic market may be created. BSkyB’s rights in this instance
would represent a fair representation of the stock across the market.

However the findings are not full-proof. The OFT/CC findings did suggest that BSkyB was acting as a
‘price maker’ in the market which from the data doesn’t appear to be the case. It is only £1.50 more
per month than the Virgin media package. This narrow difference between the two packages
suggests that the market may actually be more competitive than implied by the report. If this is the
case and Virgin holds alternative film rights which BSkyB is without then there may actually be a
balance in the market.

The OFT/CC findings argue that BskyB is acting as a monopoly which appears to be true however the
scale used for collecting this data is too small. This market has been view to exist only in the UK
where in reality it faces a lot of competition from other firms operating outisde of this country.
Netflix an American download company, enable users to download a large amount of content from
anywhere in the world and services around the world can do the same thing. This market is als o
becoming increasingly threatened by illegal downloads which have become easier to do in the past
ocuple of years. Many of the consumers that would act as the core market for this service do have
this alternative, which doesn’t abide by the same rules and this service therefore gives the consumer
access to these film that currently are exclusively held by BSkyB. This service also has other perks, for
instance it is free to consume and it can feature films that haven’t even been made accessible on the
UK market (if the film has been ‘leaked’). Although these services are illegal, the risk hasn’t seemed
to have fazed many of its users with it now posing a very eminent threat to the Movie on Demand
Service. If this is the case and this market is losing a lot of demand in the market due to this external
competitor then maybe in order to ‘breakeven’ BSkyB need to exist as a monopoly in the Movie on
Demand market.

What policies would you recommend, and why?

One way to handle this case might be to look at this at an international level instead of using facts
and figures at a national level since the threat to the industry comes from the worldwide web the
data used in the investigation should conducted at a similar scale.

The major threat to the market comes from the internet and since this market is struggling at the
market. Maybe a monoploistic market is necessary in this market to keep it afloat. The rights issued
to BskyB may need to be improved to incorporate a larger market in order to protect BskyB’s
ownership of these movie stocks.