Telecomm: Competition vs. Regulation

I wrote this last May 26, 2008:

Competition vs. Regulation

There's a strong and noisy move on the part of the government -- from malacanang to DOTC, NTC, to the House and Senate -- to force the 3 telecomm companies to make SMS or texting free, they will charge only on voice calls. In addition, there are also proposals to bring back the "cap" on earnings these firms are allowed to make.

This looks cute, especially for us consumers. We can expect that the 50 or 60 million texts/day will rise to 100 or 200 million texts per day. One can send again dozens of jokes or quotes or anything everyday, they're free anyway.

The telecomms companies' cell sites will be swarmed with millions of texts everyday. They need to put up more cell sites to back-up existing ones, but with little revenue as people will reduce their voice calls and send free texts, they'll have less money to build new cellsites. So the old problem of messages either delivered several minutes or an hour delayed, or not delivered at all, can come back. When the public will complain why their messages are delivered late or none at all, do they have the right, or at least the moral ascendancy, to complain? If someone asks me to deliver 5 kilos of rice or fish to his relative about 5 kms away and he pays me nothing and he's not even my friend or relative, can he complain if i don't do his "request"?

There are only 3 telecomms firms in this country of about 40 million cellphone subscribers. Singapore with only 4 million people has about 5 competing telecomms companies. I dont know the figures in other countries. My point is that there is little competition here among telecomms firms. If Gokongwei did not put up a 3rd option for the consumers, I wonder what would be the rates of Smart and Globe now, perhaps 10% or 40% higher? So people should be thankful of Gokongwei? maybe yes, but maybe not. Because when his firm became the 3rd player, there was no more 4th or 5th player anymore. So competition is again limited.

Who limits competition? Who says one can or not do telecoms business here? The government, in particular, the NTC and DOTC. So now, the ones who limit competition is the one who are attempting to force those they have allowed to do business to provide certain free services, etc.

Regulation allows the regulators to behave as if they own the firms that they are regulating, even if they are not the owners of those firms. Ownership and control are 2 different things. One need not own something but if he has control of that thing, he can do whatever he wants. Like a family driver. He does not own the car, but if he decides to drive on his own and visit his friends without the knowledge or permission of his employer, he can do it. If he gets caught though, that's another story.

So the NTC and the government as a whole, do not own the 3 telecomms companies. But they are the regulators -- they're the ones who gave franchise, the ones who stipulated what are contained in the franchise, etc. Hence, they can control the behavior of the firms they are regulating. And there are stiff penalties, political or otherwise, if those regulated will not follow the wishes of the regulators.

My beef is that if we have a contestable market situation in telecomms industry (and all other sectors or industries and sub-sectors), "right-pricing" of any service will not be a problem. Existing players cannot be complacent and charge high rates and make big profit for long because there will be new players who will come in to take advantage of the high profitability of that industry, by offering consumers even better services for the same price, or offer the same quality of services at a lower price. If the industry profitability declines to a minimum due to a big number of players and competitors, some players might close shop and potential players will be discouraged from coming in. In short, it is competition, not government regulation, that will discipline all players in a sector.

But government bureaucrats and politicians do not see it this way. For them, only them -- not the profit hungry companies -- can protect the public. But politicians and bureaucrats produce nothing, not even a single kilo of nails or rice or fish. They produce tons of paper work and regulations. It's those private enterprises that produce all the things and services that we need, from ballpens to shoes to hamburgers to cars to computers, to laundry to hair cut, etc.

If we have more producers competing with each other, society will be more well-off, there will be more food, more cellphones, more telecomms companies, more spas, etc. And if we have less regulators and politicians, we will have less monopolies/oligopolies, less taxes, less regulations/accreditations/inspections, etc.
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I got 3 comments from friends in my earlier article, "competition vs regulation". Here they are, along with additional points.

(1) From Eunica:

"Thing is, in regulation, regulatory bodies normally lose sight of what they are created for- which is to promote competition and regulate where it is necessary. in fact this is the battlecry of regulation when privatisation in the UK started with just one wave of Margaret Thatcher's magic wand in 1979. but it seems to me that most regulatory agencies have veered away from this and now functions mainly to regulate. It would be important to note though that proponents (1983) envisaged a short-term form of regulation only since they thought that after 5 years or so, the regulatory regime would have (and inevitably) brought about competition already (which did not materialise entirely in UK and elsewhere).

"Critiques would still say that regulation is too costly for businesses and for the government. and it is so true...

"Showing the costly and rigorous processes of regulating firms, however, might not be enough to disprove the merits of regulation especially of natural monopolies. And maybe it is true that competition is still the solution. But in a contestable market, we can only "mimic" the results of a perfectly competitive market through second-best pricing. Ramsey pricing also ensures that integrated firms do not exercise their gained market power by setting the price between the Incremental cost and the Stand-alone cost (proving the absence of cross-subsidisation ).

"As to why we can only mimic competitive results and this is not the world's biggest secret, is mainly because there is no such thing as perfect competition. It is only an assumption."

Eunica put a number of good points, but I would like to comment only on a few things.

First, "no such thing as perfect competition; it is only an assumption".

I say there is perfect competition, at least in a particular locality. The case of retail petroleum products is one example.

In some areas where gas stations are quite close to each other, you will observe price similarity for diesel and gasoline products from amongst Shell, Caltex, Total, Petron, other players. Should there be differences, it's only 5 or 10 centavos. Why so?

a. homogenous product -- whether sold by total or petron or shell, a diesel is the same for all gas stations.
b. many buyers, many sellers -- thousands of motorists-buyers, many gas stations.
c. perfect information -- a motorist knows that the price of diesel or gasoline is about the same among neighboring gas stations; gas stations know that motorists are "canvassing" the price of their competing gas stations.
d. price taker -- the many buyers and many sellers think they're all "small enough" to influence the price of the petrol product.

Bulk buyers like operators of big bus lines (say victory bus) operate outside the gas stations-ordinary motorists market. They go directly to petrol wholesale dealers, not the retailers. So those bulk buyers dealing with wholesalers are on another level of competitive markets.

2. How "less regulation" should it be?

Actually, I believe that for many industries, there should be zero, nada, government regulation. Firms operate on brand or trademarks, and firms protect the name and reputation of that brand, and consumers hold on to that brand for product quality and price stability. Take the fastfood chains. Whether it's jollibee davao or jollibee cubao or jollibee tuguegarao, the food quality and price are the same. There are perhaps 1,000+ shops or branches of jollibee (and mcdo, chowking, starbucks, etc.) nationwide, and we don't hear a single case of food poisoning.

Hence, there is zero need actually for "health and sanitation permit" from local governments for those shops because those fast food chains are scared of any news of any food poisoning.

What government should over-regulate are those killers, rapists, land-grabbers, kidnappers, hold-uppers, bombers, drug pushers, extortionists, etc.

Entrepreneurship and job creation is not a criminal activity that needs lots of regulations, from brgy clearance to mayor's business permit to BIR, SEC, DTI permits, etc,

In microeconomics, one important concept is "contestable market". Here, entry and exit of firms (ie, opening and closing a business) should be as free as possible. Government regulations, especially complicated, costly and time-consuming ones, say 2 months or more to finish all business permits, already kill the attainment of a contestable market.

The beauty of a "contestable market" is that it is a regular, daily, reminder to incumbent firms that they cannot be complacent anytime anywhere. Once profitability is big, say during a city or barangay fiesta, new players can come in anytime to snatch up any surplus profit in the industry or locality. But incumbents have the advantage of being a "mainstay" player and if they have a good reputation, say a clean hotel with honest staff, people will stick with it despite the presence of new players (say homestays that charge nighly rates).

Back to "no such thing as competition" , one important criteria to have a perfectly competitive market, is a homogeneous product as reference point for both buyers and sellers. Any change in the product, say small-medium- large criteria for tomatoes or fruits, that already constitutes "product differentiation" and you have 3 or more heterogeneous products already. For gasoline stations for instance that offer same price of diesel and gasoline along with their competitors, the "product or service differentiation" consists of having cleaner restrooms, more polite and friendly gasoline boys, bigger and cooler convenience store, etc.

(2) From Ted:

"An oligopolistic environment breeds an inelastic demand for a product. While SMS is definitely an "elastic" service, i still see a "threshold of elasticity" where even with a cost involved, people still send sms messages, albeit not as much as in a free environment. But again, "there is no such thing as a free lunch". What telecom companies will lose in sms revenue by making it free, they will find other means to preserve their bottom line and ROIs in the long run.

"I also believe the telecom industry is not as oligopolistic as perceived. Competition is the name of the game, even if there are only 3 players. I would see it more as monopolistic competition, where there are differentiation of products. Why, if it were really oligopolistic, these telecom companies wouldnt have to spend so many millions advertising their services and getting actors and actresses to endorse them on TV, right?

"And yes, I agree that there should be less regulation and more competition. But telecommunications is an area where historically, governments - be it a socialist, totalitarian, capitalistic or pure democracies (as the U.S. touts itself to be) need to have some level of control and regulation, supposedly for the common good of the population and the nation as a whole."

I agree with Ted that the local telecomm industry is on a monopolistic competition, not oligopoly, market structure, because of the reason he gave -- high ads costs by the 3 competing firms to attract subscribers. But I am still wondering why can't they bring down the cost of local or national voice calls, when they can offer only P4-P5 per minute for international calls, why P7.50 per minute for local and national calls, at least for call to 2 other network.

My hypothesis is the NTC or DOTC regulations, i just dont know what are those, that keep local calls and SMS expensive.