Question

Describe the market for telephony services prior to the enactment of the 1996 Telecommunication Act in Germany. Why is it unlikely that DT would face new competition in the market for retail fixed-line telecommunication services prior to 1996?.

Answer 1

The market for telephony services in Germany before the Telecommunications Act was enacted in 1996 was dominated by a monopoly. DT was the only legal monopoly providing retail fixed-line telecommunication services. It was responsible for building the fixed telephone network and used public resources in their activities because it was fully owned by the German State. DT was the only firm making up the industry and was required to serve the entire German population. There were no other close substitutes for the fixed-line telephony services provided by DT, making the cross elasticity of demand between the services of DT and other possible telephony service providers to be zero or very negligible.

It was very unlikely that DT would face new competition in the market for retail fixed-line telephony services because of the many barriers to the entry of firms into the industry. In order to effectively compete with DT, new entrants required the investment of large amounts of capital in order to set up the network infrastructure needed in the provision of retail telecommunication services. On DT’s side, being the only firm in the industry, it was very likely that the firm was making abnormal profits coupled with the advantage of being accessible to government resources made it difficult for new firms with fewer resources to come on board. In addition, DT was already enjoying economies of scale and extensive nationwide coverage which made the possible entry of new firms extremely unprofitable.