Competition and Regulation in the Telecommunications Industry in ...

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Competition and Regulation in Telecommunicationsfoodhousingincome taxtransportcloth/footfurniture/equiphealthinsuranceread/recr/holsdrink/cigspersonal carecommunicationsinvest/savingseducationhouse operationpensionsdomestic workersfuel/powerother0.64.143.33.32.72.52.42.121.81.61.63.8510.214.716.118.20 2 4 6 8 10 12 14 16 18 20Percentage of ExpenditureSource: Statistics South Africa, Income and Expenditure Survey, 199516
Competition and Regulation in Telecommunications2. International Reform of Telecommunications Regulation2.1 The Rationale for RegulationRegulation is the intervention of a government body in a market, through the use ofprice, access or product controls. Price controls occur in telecommunications, whereTelkom has to get its tariffs approved by the South African regulator, ICASA. Thesame goes for access controls, as ICASA has the right to issue licenses for thedifferent types of telecomm markets, as it has in Telkom for the fixed line market andMTN and Vodacom for the mobile phone market.There are two basic types of theories about regulation we can differentiate: normativetheories outlining the response to market failures and positive theories describing thedynamics between policy makers and recipients of regulation.2.1.1 Normative Theory of RegulationThe normative theory postulates that regulation ought to be introduced when there ismarket failure. How market failure is identified and how it arises are the questionsthat remain to be answered.As to the identification of market failure, we identify four types of efficiency that haveto be fulfilled to guarantee an efficient outcome:• Allocative efficiency: occurs when goods are priced at marginal cost, hencesold at the true economic cost to the producer, without any rents that mayhave been derived from the market structure.• Cost efficiency: when a firm or industry produces at the lowest possible costlevel. In some industries, it may be possible that many competitors lead toallocative efficiency, but that the lack of scale effects means production is notcost efficient.• Dynamic efficiency: when cost savings are implemented efficiently and thereis no delay in the development and introduction of new products.• Distributional efficiency: finding the socially desired trade-off between themaximisation of surplus and the distribution thereof.Having identified the different types of efficiency, the ways in which market failurearises have to be identified. Here, we identify three basic types:• Externalities: any transaction has a cost and a benefit to it. These costs andbenefits may well differ for the individual and the society. A car driver, forexample, will not take into account her effects on pollution when planning atrip. When the social costs exceed the private costs, or the private benefitsexceed the social benefits, the level of activity is too high. When socialbenefits exceed private benefits, allocation will be lower than desired. Anexample for the first would be car usage, an example for the secondinvestment by firms who do not take into account the beneficial spill-overs forother companies. Taxes, in the case of over allocation, and subsidies in thecase of under allocation may be used to rectify the situation.17
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