Case Summary 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 subscribers 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 loops (wholesale access) in Germany a ...

1. Case Summary
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
subscribers 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

2. 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 loops (wholesale access) in Germany

3. and the prices charged for retail access is sufficiently small
making it unprofitable for new entrants to compete.
Product Markets and Regulatory Environment
Wholesale Access
Local-level access to DT’s fixed-telephone networks can take
two different forms. One-way DT was permitted to provide
access to its networks was line sharing, whereby competitors
pay fees for shared use of local loops (initially this connection
type was not required). Line sharing permits an incumbent firm
(in this case DT) to continue offering voice telephony services
and use the same line to permit an entrant to offer a new
service, like high-speed Internet access. From a technical
perspective, voice and data line sharing are achieved by
connecting a splitter and multiplexer (a voice-data filter)
between the incumbent’s switch and the local loop. Under line-
sharing arrangements the local loop remains an integrated part
of the incumbent’s (DT’s) network.
In contrast to line-sharing arrangements, full unbundled access
to a local loop occurs when a market entrant completely takes
over selected local loops. Technically, at the switch different
retail consumers are separated and connected to the subscriber’s
main distribution frame. This structured arrangement between
the incumbent (DT) and new entrants allows new
entrants to access their own local loops without using the
incumbent’s switching facilities. Full unbundling of wholesale
access, then, gives new entrants complete control over local
loops; even control of transmission technologies and types of
services offered.
According to German law, charges for wholesale access must
have a cost basis and receive prior authorization by the
regulatory authority. Moreover, charges set by DT must contain

4. no other special charges or discounts, and cannot confer an
anticompetitive advantage to particular operators.
In accordance with German telecommunication law, DT filed an
application with the regulatory authority to authorize monthly
charges for unbundled access to DT’s local loop, one-off
charges for opening new connections and one-off charges for
taking over an existing serviceable connection. In 1998, the
regulatory authority authorized DT’s one-off charges of
EUR 309.84 for opening a new connection and EUR 135.49 for
taking over an existing line. But, instead of accepting DT’s
proposed monthly charge of EUR 14.73 for unbundled local
loop access, the regulatory authority authorized a monthly
charge of EUR 10.56. At the time of the decision, the regulatory
authority required DT to submit more detailed cost calculation
and conjectured that the competitors’ monthly unbundled access
charge would fall below EUR 10.
After several years of negotiations between DT and the
regulatory authority, by April 2003 the regulatory authority had
set competitors’ unbundled monthly access rates to EUR 11.80.
Moreover, one-off charges were reduced to EUR 81.12 for new,
basic connection, EUR 70.56 for straightforward takeover and
EUR 34.94 for discontinuance (with simultaneous customer
transfer) or EU 50.71 (without simultaneous transfer).
Retail Access
Retail access to DT’s fixed telecommunication network is
achieved in two ways. First, retail consumers can access DT’s
network via a traditional analogue connection. The second
means of access is through a digital narrowband connection
(integrated services digital network, or ISDN). Both of these
access methods provide connection over DT’s existing copper
pair network. Upgraded broadband connections are also

5. available for faster Internet connection.
Retail charges (tariffs) for access to one of these connection
types consist of two components. This first is a basic monthly
charge that varies with the connection quality. The second
component is a one-off charge for a new line connection or the
takeover of an existing line.
Unlike charges for wholesale connections to competitors, which
are regulated according to
cost principles, retail prices for analogue and ISDN lines are
regulated under a price cap
system and only permitted to change according to a set basket
of telecommunication services (prices do not adjust as the cost
of providing individual services change). Retail prices for
broadband connection, however, are not subject to either type of
regulation.
In 1997, the Federal Ministry of Posts and Telecommunication
introduced the price cap mechanism for retail fixed-network
charges. At that time, two baskets were established: One for
residential connection to standard analogue or ISDN lines, the
other for services to business customers for similar connection
types.
At this time, the Ministry ordered DT to reduce the aggregate
price for each basket by 4.3
percent during the first price cap period; the period spanning 1
January 1998 to 31 December
1999. After this period ended, the price for a basket was further
ordered to fall by 5.6 percent during the second price cap
period; the period spanning 1 January 2000 to 31 December
2001. The logic behind these mandatory price-cap reductions
was to capture productivity and efficiency gains realized by DT.
Given the mandatory price reductions, DT was free to modify

6. charges for individual components with the caveat that these
changes were subject to the approval of the regulatory
authority. There was no restriction on the number of
adjustments for which DT could apply in any price-cap period.
This means that DT could increase prices for one or more basket
components provided that the cap for the overall basket was not
exceeded.
During periods one and two, DT reduced retail prices far below
the required reductions. These reductions applied only to call
charges. The monthly and one-off access charges for standard
analogue connection remained unchanged over both periods.
During those periods, DT’s monthly subscription fees were EUR
10.93. Yet, basic monthly charges for ISDN connections
remained relatively stable until 31 March 2000. DT did,
however, apply to reduce the prices on several specialized ISDN
lines in December 1999, which were given regulatory approval
on 16 February 2000. Retail one-off charges for analogue and
ISDN lines remained at EUR 22.22 for takeover of a serviceable
connection and EUR 44.45 for providing a new connection over
the period 1998 to 2001.
In January 2002, a new price cap system was established by the
regulatory authority. The new
system replaced the two-basket model for residential and
business consumers with a four- basket system. Baskets for
retail services now consisted of a basket for retail lines (end-
user lines), local calls, domestic long-distance calls, and
international calls. As a result, DT was required to increase its
charges for retail lines.
As mentioned, retail prices for broadband connections are not
regulated under the price-cap system. Instead, DT is free to set
these prices at its own discretion. After prices for certain

7. broadband connection decreased and several complaints from
DT’s competitors occurred, the regulatory initiated an
investigation of broadband connection pricing practices. The
basis for the investigation was whether DT lowered its price
below cost and constituted
anticompetitive pricing practices. Despite having found some
evidence that DT’s prices were below cost for certain products,
the regulatory authority took no action against these prices.
Instead, in other decisions made during March 2001, the
regulatory authority ordered DT to make it possible for
competitors to sell wholesale local network services to other
consumers and to make joint use of local loop (line sharing).
DT, however, did not comply with these orders resulting in re-
investigation of the alleged broadband connection charge
abuses. DT did eventually increase its monthly charges for
broadband connection services, which resulted in the regulatory
authority terminating its case again DT.
Complaint Against DT
Several competitors allege that DT’s charges to competitors for
wholesale access to its fixed network (both monthly charges and
one-off charges) are so expensive that competitors are forced to
charge prices to retail consumers that are far in excess of what
DT can charge retail consumers for similar services. Thus,
competitors argue that they can never make a profit or
efficiently compete with DT. This situation is called a margin
squeeze.
DT argues that its pricing practices cannot constitute a margin
squeeze since wholesale charges are imposed by the regulatory
authority. DT contends that a margin squeeze must be the result
of excessive wholesale prices or insufficient retail prices (or
some combination of
the two). The legal solution, DT argues, can only be corrected if
it can vary both wholesale and

8. retail charges. In the present environment, DT only controls
retail charges.
Others’ contend that the margin squeeze is relevant to this
situation since a competitor buys wholesale services from an
established operator and depends on the established operator to
compete in the retail market. Thus, a margin squeeze can exist
between regulated wholesale and retail prices.
GUIDELINES FOR WRITING A CASE STUDY ANALYSIS
It must be 3-4 pages
It should be written using APA format, 6th edition.
A case study analysis is an opportunity to integrate and
demonstrate what you have learned from the course materials;
e.g. textbook, exam problems and discussion boards into an
actual business problem.
It requires that you carefully read the facts of the case and
identify the economic principles the case touches upon. In this
course I have identified for you the learning objectives for each
chapter and carefully highlighted the economic principles in our
discussion boards and exams. To be successful in writing your
case analysis you are required to integrate the facts from the
case with the economic principles, examine the alternative
solutions, and propose the most effective solution using
supporting evidence.
Your Case Study will have the following elements:
1. An introduction that introduce the business, industry and
the underlying business issues incorporating the economic
principles from the case.
2. A thesis statement that proposes the solution to the problem

9. you have determined or the general assessment of the case being
studied.
3. The first section of the case study should discuss the
background of the organization.
4. In the following three sections, focus on several key
economic principles that supports the point(s) raised in your
thesis. E.g. Is this a supply and demand
issue, are there any constraints, incentives,, is there market
rivalry and a perfect competition or is it a monopoly, what long
run and short run
decisions are there available? Remember each case study is
focused on specific principles and I have highlighted each
chapter covered by the case. It
is imperative that you draw in these principles.
5. Be sure to provide a careful evaluation to each economic
issue you raise
drawing on the fact of the case.
6. Next write a solution section that addresses the issues you
raised. You are the
manager/director, what would you do? (SUPPORT YOUR
DECISION)
7. Write your conclusion
STEPS TO SUCCESS
Before you begin writing, follow these guidelines to help you
prepare and understand the case study:
1 Read and examine the case thoroughly
• Take notes, highlight relevant facts, underline key problems.
2 Focus your analysis
• Identify two to five key problems
• Why do they exist?
• How do they impact the organization?
• Who is responsible for them?
3 Identify possible solutions
• Review course readings, discussions, outside research, your

10. experience.
4 Select the best solution
• Consider strong supporting evidence, pros, and cons: is this
solution realistic?
5. Proofread
• After you have composed the first draft of your case study
your analysis, read
through it to check for any gaps or inconsistencies in content or
structure: Is your thesis statement clear and direct? Have you
provided solid evidence? Is any component from the analysis
missing?
Please remember to focus on the economic factors in chapters 2
and 5 such as:
Chapter 2
I. Demand
A. Demand Shifters
1. Income
2. Prices of Related Goods
3. Advertising and Consumer Tastes
4. Popolation
5. Consumer Expectations
6. Other Factors
B. The Demand Function
C. Consumer Surplus
II. Supply
A. Supply Shifters
1. Input Prices
2. Technology or Government Regolations
3. Number of Firms
4. Substitutes in Production
5. Taxes
6. Producer Expectations
B. The Supply Function
C. Producer Surplus

11. III. Market Equilibrium
IV. Price Restrictions and Market Equilibrium
A. Price Ceilings
B. Price Floors
Chapter 5
I. The Production Function
A. Short-Run Versus Long-Run Decisions
B. Measures of Productivity
1. Total Product
2. Average Product
3. Marginal Product
C. The Role of the Manager in the Production Process
1. Produce on the Production Function
2. Use the Right Level of Inputs
D. Algebraic Forms of Production Functions
E. Algebraic Measures of Productivity
F. Isoquants
G. Isocosts
H. Cost Minimization
I. Optimal Input Substitution
II. The Cost Function
A. Short-Run Costs
B. Average and Marginal Costs
C. Relations among Costs
D. Fixed and Sunk Costs
E. Algebraic Forms of Cost Functions
F. Long-Run Costs
G. Economies of Scale
H. A Reminder: Economic Costs versus Accounting Costs
You do not need to write about all of the points above but
should focus on two or three concepts and incorporate the facts
from the case study.