Broadband merger in a small island market
Malta's fixed broadband market has four retail providers. The incumbent has 45% of subscriptions, Provider B 25%, Provider C 18% and Provider D 12%. B and C notify a merger, claiming annual cost savings of €6 million and investment in fibre. The competition authority estimates the post-merger HHI would rise from about 3,118 to about 4,018. Average household spend is €38 a month; 70% of households can choose among at least three providers, but new entry requires access to ducts and spectrum that are controlled by the incumbent. The merging parties argue that the market is contestable because mobile 5G is a substitute. Consumer groups report that switching takes 11 days and 24% of households have never changed provider. The authority must decide whether to clear, block or condition the merger.
1. Calculate and interpret the HHI change. Does the merger create or strengthen market power? Explain the limits of HHI evidence in this case.
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Before the merger, HHI = 45² + 25² + 18² + 12² = 2,025 + 625 + 324 + 144 = 3,118. After B and C merge, their share is 43%, so HHI = 45² + 43² + 12² = 2,025 + 1,849 + 144 = 4,018. The increase is 900 points. On conventional thresholds this is a highly concentrated market and a large increase, creating a strong presumption that the merged firm could raise price. The top two firms would hold 88% of subscriptions, leaving D as a 12% fringe. However, HHI is not decisive. Market definition matters: if 5G is a close substitute, shares overstate power; if fixed broadband is essential for homeworking, shares understate it. The authority should also examine switching costs, duct and spectrum barriers, and whether B or C was a maverick. High concentration plus high barriers supports intervention, but the HHI alone does not prove consumer harm.
2. Evaluate the parties' €6 million efficiency claim and their 'contestable market' argument. What evidence would you require before accepting either?
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The €6 million savings are not automatically a defence. They must be merger-specific, verifiable and likely to be passed on to consumers; otherwise they are mainly private gain. With a combined share of 43%, a small price rise could be more profitable than the cost savings are worth to consumers, so the authority must compare the price effect with the efficiency effect. Contestability requires hit-and-run entry: new entrants must be able to enter, win customers and exit if the merged firm raises price. That is weak here because ducts and spectrum are controlled by the incumbent and switching takes 11 days. Mobile 5G may constrain some customers, but it does not fully substitute for fixed broadband in capacity or reliability. Evidence required: margin and cost data behind the €6 million, internal documents on pricing, entry plans, wholesale access terms and survey evidence on switching. A price-rise test would help: would a 5% increase induce entry?
3. Recommend a remedy: block, clear with divestiture, or clear with behavioural access conditions. Justify your choice with reference to the Maltese market.
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Unconditional clearance is not justified on this evidence. A block is defensible if no credible fourth operator can emerge. A structural remedy-such as requiring divestiture of part of B's or C's retail customer base or assets to D-could create a viable fourth provider and is more robust than a promise. Behavioural remedies, such as wholesale access to the incumbent's ducts or a price cap, can protect consumers but require continuous monitoring and may not solve the loss of a direct rival. In Malta's small market, a combination may be best: clear only if the merged firm offers wholesale access to D and new entrants at regulated prices, accepts a price cap for a fixed period, and commits to verifiable fibre investment. If those conditions are not enforceable, block. The remedy must target the actual barrier-duct and spectrum access-rather than rely on claimed savings.