Vertical or relative monopolistic practice of probable price squeeze or illegal

displacement of competitors in the Mexican mobile telecommunications market.

FACTS
On November 14th 2006, the Federal Competition Commission started an investigation
against Telcel, through the filing identified as file De-37-2006, to determine relative
monopolistic practices in the market of interconnection services for the calls termination in
mobile phones.
These relative monopolistic practices that were investigated consisted in finding acts,
contracts, agreements, procedures or combinations whose goal or effect was to illegally
displace other market agents, substantially impeding access or establishing exclusive
advantages in favor of one or more persons, through the systematic sale of goods or
services at prices below its average price or an occasional price below its variable average
cost, when there are elements to presume that these losses will be recouped through future
price increase; to find the use of the earnings that an economic agent obtains from the sale,
commercialization of a good or execution of a service; to investigate the establishment of
different prices or different sale conditions for different buyers or sellers in same
conditions, and the action of one or more economic agents whose purpose or effect, directly
or indirectly, is to increase costs or hinder the process of production or reduce demand for
their competitors. The market to investigate is the interconnection service for call
termination on mobile phones.
The end of these investigations culminated in a fine of 11,989 million pesos (about 1 billion
dollars) against Telcel, partially owned by the group of corporations controlled by Carlos
Slim. In interconnection services in mobile phone market, for relative monopolistic
practices.
On April 25, 2011, four and a half years after the start of the investigations, The Federal
Competition Commission decided to punish Radiomvil Dipsa, SA de CV (Telcel) because
of its repetitive commission of relative monopolistic practices, this time in the market for
interconnection service for call termination on its mobile network. In addition, the
Commission ordered the correction or deletion of the practice.
1

One of the commissioners declined to participate in the decision, and consequently, the
decision to sanction was taken on a 2-2 decision, with the president of the Commission
exercising his casting vote in case of tie, in favor o imposing a fine. This is one of the
reasons why this decision has been challenged so intensely by Telcel.
This complaint was initiated by Axtel, Alestra, Marcatel, Megacable, Protel and Telefonica
which are competitors in the local phone calls market, which are supposedly affected by the
costs of the termination and interconnection service in mobile phone calls network.
The Commission determined that Telcel increased the costs of its competitors by imposing
an interconnection rate (off-net) higher than the one it establishes for calls on its own
network (on-net), and even higher than the final prices that charges its own users. This
incurs in a relative monopolistic practice provided for in Section XI of Article 10 of the
Federal Competition Law by abusing its substantial market power to unduly displace
competitors and thus affecting the competition process in local and mobile telephony
markets, in detriment of consumers.
The penalty amount corresponds to 10 percent of Telcel assets, the maximum penalty
provided for in Article 35 of the Federal Competition Law in case of recidivism or
repetitive monopolistic practices. This maximum penalty was applied in view of the gravity
conditions, injury, intent, market share, and market size, length of practice, repetition and
economic capacity of the offender, as provided in Article 36 of the Law. The OECD has
estimated that competition problems associated with high interconnection rates in Mexico
generate damages of $ 6 billion dollars each year (about 72.000 billion pesos)1 to
consumers. The Federal Competition Commission set a deadline of 30 days to submit a
proposal from Telcel to implement a resolution to ensure that the practice will be corrected
or deleted and the damage eliminated to the competitive process and consumers; as
expected, Telcel filed an appeal and even obtained an injunction to bar the Commission
president to intervene in the resolution of the appeal, due to supposed bias to punish Telcel.
1

CFC / OECD Recommendations to promote a regulatory framework more conducive to

competition in the telecommunications network interconnection, June 2009, available at

http://www.oecd.org/dataoecd/32/6/45049465.pdf

APPLICATION OF LAW TO THE FACTS

The investigated facts consisted in determining whether Telcel, by establishing a
termination tariff higher than the prices it offers to final users of the local telephony system
and higher than the termination tariff it establishes for itself, has the goal or direct or
indirect effect to increase costs of its competitors and / or reduce its demand; and as well to
establish exclusive advantages in favor of itself and cause the illegal displacement of third
parties that are telecommunications public network dealers in the markets related to both
mobile and land local telephony service, respectively, according to section Xi of Article 10
of the Federal Competition Law.
The analysis of the of the investigated practice determined that the elements obtain during
the practice investigation were the ones corresponding to Telcel conduct consisting in the
tariffs charge for termination to third telecommunications public network dealers that offer
local telephony services, which are higher that the prices that Telcel charge for mobile local
telephony service to its final users, due that the mobile local telephony services use, among
other elements, he termination function of Telcel telecommunications public network, and
therefore, should include their costs.
The analysis of the supposed facts were sustained in the next elements:
The termination function in Telcel telecommunication public network is a necessary
element to complete the local on-net

and off-net phone calls directed to final users

subscribed to Telcel local telecommunications public network.

Therefore, Telcel uses its termination function on its local telecommunications public
network in on-net calls that it commercializes to is final users.
By using the termination function on its on-net calls, Telcel incurs in certain costs that shall
be reflected in the final price of the local telephony services.
By rendering the termination function to telecommunications public network dealers, both
local and mobile, Telcel incurs in certain costs that shall be reflected in the charged tariffs.

Parallel, the termination tariffs that the local and mobile telecommunications public
network dealers pay to Telcel constitute the costs of the local telephony services, land and
mobile, and therefore, shall be included in the final costs.
The analysis done by the Commission for the probable monopolistic practice considered in
Section XI of Article 10 of the competition law, related to possible increase in costs,
putting obstacles to the productive process or decrease in demand that their competitors
affront, to be considered as such, it is necessary to prove the next elements:
a) That an action imputable to Telcel exists, consistent in the charge for the service of
termination assigned to the complainants, whose value is higher that the charges for
the provision of the mobile local telephony service used
b) That the complainants are competitors of the probable responsible of the practices
c) That the goal or effect, direct or indirect, of the conduct is the combination of one or
more of the next elements: increase costs / block the productive process and / or
reduce demand
The prima facie analysis of the commission concluded that there are enough elements to
assume that Telcel (in the on-net services for local telephony services) charges itself a
lower cost for the termination function that the one it charges the telecommunication public
network dealers.
The form the relevant market was determined, in relation on the termination function in
Telcel telecommunication public network, and attending the characteristics of the
investigated conduct, the analyzed market correspond to the land and mobile local
telephony services that require the interconnection termination function.
The definition of relevant market also takes in account that the termination services of
phone calls of telecommunication public network of local service telephony, is part of the
interconnection services. Interconnecton is the physical and logical connection between two
telecommunications public networks, which permits the public traffic between the central
cores of both networks. The interconnection permits the users of one of those networks to
connect and use public traffic for the users of the other network and vice versa, or use
services offered by the other network.
4

According to article 12 of the law, to determine the relevant market, the next criteria shall
be considered:
I. - The possibilities of replacing the goods or services concerned by others, national origin
as a foreigner, considering the technological possibilities, to what extent consumers are
with

substitutes

and

the

time

required

for

such

substitution;

II .- The distribution costs of the good itself; of their relevant inputs; the supplements and
substitutes from other regions and abroad, taking into account freight, insurance, tariffs and
non-tariff

restrictions,

restrictions

imposed

by

economic

agents

or

their

associations and the time required to supply the market from those regions;
III .- The costs and the probability that users or consumers to turn to other
markets;
IV .- The regulatory constraints of federal, local or international limited access
users or consumers to alternative sources of supply or suppliers access to customers
alternative
In synthesis, the local service dealers cannot refuse to acquire the relevant services and the
users that originate phone calls in the modality the one who calls pays shall pay its
telephony supplier the tariffs for the complete phone calls from end to end that are
generated.
The relevant market thus corresponds to the commercialization of the interconnection
termination services render by Telcel in these telecommunications public networks to the
telecommunications public networks dealers.
The determination of the substantial power.
According to article 13 of the Federal Competition law and Articles 10, 11, 12 and 13 of
the Rules of the competition Law, Telcel is in economic agent with substantial power in the
relevant market.
Article 13 establishes that to determine substantial power, one element that shall be
considered is the participation in this market and if they can fix prices or restrict supply in

the market relevant by themselves, without the competitive agents being able, actually or
potentially, counteract that power;
Considering that Telcel is the only one that can ofer cush service sin the relevant market,
the position of the termination services that they ofer is absolute. The relevant services
canot be obtained through imports and the dealers that use sudh serives can not go with
other suppliers. In this way, the criteria established in the Competition Law Rules sustain
the conclusion that Telcel is an economic agent with susbtantial power in the relevant
market.
The goal or effect of the conduct has to be analyzed under the hypothesis of Article 10 of
the Competition Law, because it deals with conducts whose object or effect is or may be to
establish exclusive advantages in favor of Telcel, and at the same time cause the illegal
displacement of telecommunication public networks dealers that compete with Telmex and
Telcel, in the related markets of local telephony services, land or mobile, respectively. This
conclusion derives form the next arguments.
The local telephony service dealers, either land or mobile, offer their users different
services, among them the local phone calls to mobile local telephony services, in particular,
Telcel users.
The land or mobile telephony dealers deliver Telcel the originated calls by their users, and
they are obliged to pay the tariff for termination of such phone calls to Telcel. Therefore,
they include such cost in the prices they charge to their users for the phone calls mad e to
Telcel users.
On its part, Telcel offers its final users prices charged by the minute lower that in local
phone calls included in their commercial plans and additional on-net that are substantially
lower that the termination tariff that such economic agent charges to the telecommunication
public networks dealers complainant.
In the same way, form the final prices that Telcel include in their commercial plans, there is
evidence that the proportional part that would correspond to the implicit tariff for the

termination function results also substantially lower that the termination tariff that such
economic agent charges telecommunications public networks dealers complainants.
Telcel conduct permits to offer lower tariffs available for phone calls direct to Telcel users
at level that no other dealer can offer, and that must pay a tariff higher than the price Telcel
charges.
Since the termination tariff is higher to the dealers of the telecommunication public
networks that obtain such item, with respect to the final prices that Telcel offers in the
mobile local telephony service, its operation costs result higher and the demand of final
users for off-net local telephony service detonated to Telcel users is reduced because of
Telcel conduct. This precisely is the hypothesis of the relative monopolistic practice
foreseen in article 10.
From what is explained before, the monopolistic practices that are investigated refer
essentially to the difference between the tariffs that Telcel charges to other dealers for
ending the calls that have as final destiny a Telcel user, and the prices that it offers to its
final users in the mobile local telephony service.
Telcel has also charged other local and mobile dealers the tariffs for termination of calls in
its telecommunications public network, higher that the tariff it charges its own users for
calls on-net.
A mobile telecommunications public network uses the same infrastructure elements to end
calls that are originated it from the same public network or a different public network.
Telcel offers is final users prices that are lower in the local telephony services that other
dealers could not replicate, because they pay Telcel termination tariffs substantially higher.
The difference between the termination tariffs for phone calls in Telcel networks compared
with the tariff to phone calls on-net obeys to the charge of a tariff for termination superior
to its cost
Telcel is an economical agent that has substantial market.

It is considered that Telcel conduct, consistent in establish a termination tariff higher that
prices offered to the final users of the local telephony services, has as direct effect and goal
to increase costs of its competitor and reduce its demand, and to establish exclusive
advantages in favor of itself and cause illegal displacement of third party dealer of mobile
an local networks in the related local telephony services market, either land r mobile. This
suits perfectly to the Section XI of Article 10 of the Law, and as consequence, having this
agent substantial power in the relevant market; it is a probable responsible of executing
monopolistic practices that violates article 8 of the competition law.
ARGUMENTS AGAINST AND IN FAVOR
If my competitors (rivals) costs go higher and things remain constant this will generate a profit
for the dominant competitor. The problem is that acting to drive up the costs of rivals can
usually have a cost to the operator who could make this practice.
The practice works only if the agent with substantial market power can make up the price, at
the same level of supply-more than raise their average costs. The theory is that the agent can
cause costs and therefore the prices of a competitor increase. This will create a scenario that
now the agent with substantial power can freely upload their own prices at levels higher
than competitive price.
To be effective this practice, the agent should be able to increase costs significantly, this
means that the agent should have control over some input which means a significant portion
of total production costs of rival.2
However a company that has been raising rivals' costs has not won anything yet, hurt its
rivals, but only win if he can raise the price above the competitive price
An example of such practices could be given if it is an over-purchase of inputs needed for
production inputs required by competitors to produce.
Other arguments for Telcel
Telcel may argue that the complaints and the elements in the procedure have to do more
with interconnection tariffs and plans that existed before the new Competition Law and
new competition rules, this means that they may be barred of some specific dispositions of
the new law that were not applicable at the time the conduct was generated.
2

Krattenmaker, Thomas G., and Salop, Steven C., "Anticompetitive Exclusion: Rising Rivals' Costs
to Achieve Power over Price", 96 Yale Law Journal 209, 242 (1986), cited by Scheffman, David T.,
and Higgins , Richard S., "Twenty years of raising rivals'costs: history, assessment and future",
George Mason Law Review, Vol 22:2, 2003, p. 371-388
8

Telcel may laso argue that their conduct may be peculiar, but has nothing to do with the
undully displacament eof compeititors, Telcel is presummeldy responsible of charging
interconnection tariffs to the dealers of other netowrks in funciton of some differente
tarifary plans that may pfferd to pubic user.
Telcel may also say that the definition of the relevant market may be imprecise and without
legal sustainment. In some parts the relevant market is the interconnection service for the
ending of mobile phone calls and in other times the relevant market is determined that the
public traffic termination service of the public telecommunications network of Telcel, thus,
causing difference in the definition of the market.
Telcel may challenge the substantial power in the relevant market, because the relevant
market is not clearly defined.
It appears in the Commission webpage a communication that establishes the different an
argument of the parties in this case:
Telcel Argument
The Commission is punishing Telcel to give discounts to users.
RESPONSE TO TELCEL
The Commission is punishing the abuse of market power to raise the costs of competitors.
That is, the problem is the high interconnection rates imposed by Telcel, no discounts.
If both of interest to Telcel users to lower interconnection rates so that no one is forced to
overpay.
TELCEL ARGUMENT
Telcel has no fixed interconnection rates: the agreements with other companies are
supported by the Federal Communications Commission.
RESPONSE
If this is true: _ Why is there at least 41 disputes before the Federal Communications
Commission interconnection? _ Why Telcel has consistently protected against Federal
9

Communications Commission resolutions regarding interconnection? _ Why six companies

filed the complaints that led to the fine? _ Why this year Telcel charges 95 cents per minute
for interconnection, rather than the 39 cents per minute Federal Communications
Commission set?
TELCEL ARGUMENT
No recurrence or repetitive monopolistic relative practice.
RESPONSE
The law says there is recidivism when an agent "having committed an offense that has
been sanctioned commit the same type or nature" (art. 35).
Telcel was penalized for monopolistic practices (ie of the same nature) in the record-322004. This case was endorsed by the judiciary courts.
Surely recidivism would like Telcel referring to a practice identical. This would mean
that, before being a recidivist, Telcel would violate the law 11 times (for the 11 types of
established practice regarding art. 10).
TELCEL ARGUMENT
The Commission Resolution arbitrary, biased, opportunistic and exceeded.
RESPONSE
There would have to ask consumers if they consider "arbitrary, biased, opportunistic and
exceeded"

the

application

of

the

Act

to

protect

their

interests.

TELCEL ARGUMENT
The decision was made by two minority / non-consensus / by the President of the CFC.
RESPONSE
Law (Article 25) says: "The House [>] decide cases by majority vote, with the President
casting vote." The vote was 2-2, with the vote (and, therefore, the casting vote) of the
President in favor of the sanction.

10

 The Commissioner Agustin Navarro apologized for having a relationship with a officer of
the complainant company, as required by law (art. 26) and Rules of Procedure (Article 40).
TELCEL ARGUMENT
The Commission decision should be transparent plenary.
RESPONSE
The resolution is public (http://www.cfc.gob.mx/images/stories/Noticias/resolucionde-0372006.pdf). And the holding and reasoning of the commission may be found there.
The

vote

of

the

Commissioners

is

also

public

http://www.cfc.gob.mx/images/stories/Noticias/Comunicados2011/cfc%2004-2011.pdf
No Commissioner issued a particular vote using personal arguments.
HOW THE US COURTS WOULD DEAL WITH THE SAME MATTER GIVEN
TRINKO AND LINKLINE
This Telcel case and its resolution, taking in account Trinko may be solved in the same way
as in Mexico, since the case in Trinko was that final end users filed the complaint, but he
case would have been different if the public network telecommunication dealers, AT& T
for example would have filed the antitrust complaint. The allegation of breach, not of duty
to share, but of illegal displacement of competitors, would state a claim under 2 of the
Sherman Act
The goal of Verizon, if argued by a Local Exchange Carrier, was to obtain a dominant
position in the relevant market, would have entrusted to a decision similar to Telcel case in
Mexico.
In the case of Linkline I believe that if a situation similar to Telcel happens in the U.S. the
Courts would issue a different decision, since in Mexico, there is a duty to deal at the
wholesale level, but the question would be then if there is predatory pricing at the retail
level.

11

PREVIOUS APPLICABLE CASE LAW

In 2000 Gas Supremo filed a complaint against Cuernavaca Gas, SA de CV, Gas de
Cuautla, SA de CV; Gas Modelo, SA de CV, Compaia Hidro Gas de Cuernavaca, SA de
CV; Gas del Sol, SA de CV and Gas Morelos, SA de CV, for monopolistic practices
consisting in impeding the construction of a storage facility for distribution of gas at mile 7
of the Federal Highway Yautepec -Jojutla, in the Municipality of Yautepec, Morelos, all of
them

doing

business

sin

the

state

of

Morelos.

The companies were related through common shareholders and common members of their
boards, so that the Commission considered them part of an economic group that acted
together against Gas Supremo to impede it the construction of the plant and storage and the
delay of its entry to the relevant market. The commission found that this economic group
held a substantial power in the relevant market for the distribution of Gas in the State of
Morelos.
In 1999 Gas Supremo had obtained a license to build the storage facility. However, in
March and November 2001 were presented two injunctions carried out by the competitor.
Such actions caused the delay in the construction of the plant that could have been done in
6 months, and it took longer than 18 months to materialize. This delay in the construction
of the plant prevented Gas Supremo the gas distribution in Yautepec municipality, and in
32

municipalities

in

the

state

of

Morelos.

Added to this, investigations conducted by the Commission, showed evidence that the
injunctions against Gas Supremo had been presented under the patronage of the legal
representative of the companies reported, who had also participated as legal representative
of different people bringing labor injunctions against a subsidiary of Gas Supremo in other
states. From these and other evidence, it emerged that the reported companies had
knowledge of events supported by its attorneys to allow postponement of the entrance of
gas

Supremo

in

the

relevant

market.

In this case, the Commission decided to sanction with several fines because of the block to
its competitor, hampering the distribution process.
CONCLUSION

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Telcel conduct, consisting in the charge for the termination service to the
complainants whose tariff is higher than the Telcel tariff t charges itself for the ending
of on-net calls, is seen as it produces as effect or goal the illegal displacement of local
and mobile public networks dealers that compete with Telcel and grants exclusive
advantages in favor of Telcel, due to the imposition of tariffs to the dealers for the
calls ending in its public network whose tariff is higher that costs that Telcel charges
for itself in the termination in the on-net calls.
This is proved through the comparison of the tariffs that Telcel charges itself and other
users.
This shows that Telcel has increased costs and reduced profits margin of its competitor by
offering their mobile telephony local services users tariffs that are lower than the one it
offers and is needed for the termination tariff with other competitors. This puts the dealers
in the position of deciding whether a) establishing tariffs that may help them recoup their
costs due to Telcel charges, and face a reduction in the demand of their services and loss of
income because the users would switch to Telcel network or b) establish tariffs for the local
telephony services with the termination in the Telcel network that may be comparable to
the ones Telcel offers in its mobile network, and then assume losses in their mobile local
telephone services offers.
This takes as consequence that this conduct had as goal or effect, directly or indirectly to
increase costs
And block the productive process or reduce the demand that their competitors face, which
has as goal to displace illegally other competitor and crate economic advantages in favor of
Telcel.
Telcel also has substantial power in the relevant market of phone calls termination in their
national networks. Its powers derives, among other reasons, of being ht only dealer that
offers such services, and the interconnection with Telcel is necessary to any phone
company, because its networks gives services to 71% of all mobile phones in Mexico. The
Mexican communications commission has not stopped Telcel of deciding unilaterally its

13

tariffs, and other dealers may not obtain an administrative injunction by the
communications commission to change them.
By fixing its termination tariff in its network in a high level and superior to its costs, Telcel
increases costs for an elevated amount of off-net phone calls, that come from networks that
are smaller, either land or mobile lines. Since Telcel is the largest network and does no
assumes its equivalent cost t to the termination tariff if it charges other dealers, it may
establish prices to its final users lower that the tariff termination
This practice shows the denial for other dealers to replicate the different plans they offer to
the final user in an attractive form to reach the big universe of users of mobile services. The
advantage in costs created buy Telcel is artificial, since it is not based in any efficiency, but
in the abuse of its market position, in this way, its illegally displaces the other dealers of
telephony services that compete with Telcel, and reinforce in the incentives of other
consumer to say or change to Telcel lines.
Telcel conduct affects companies and consumers in a market where more than 20 million
land lines exist and more that 83 million mobile lines exists. Additionally, the conduct is
executed using public domain goods, such as the radio electric spectrum, which is given to
Telcel to render public interest service, which gives more important to the illegal conduct,
and finally, Telcel has been involved before in other kind of relative monopolistic practices.

14