Competition and Regulation in the Telecommunications Industry in ...

Competition and Regulation in Telecommunications• Natural Monopoly: occurs when it is more expensive to have severalcompanies providing the same product than it is to only have one. Publicutilities, such as water and electricity and most other network industries areclassic examples of natural monopoly. Single product monopolists will derivetheir advantage from economies of scale, whereas multi-product naturalmonopolies may also derive their advantages from economies of scope 2 .• Large specific investments and hold-up problems: when private activity investslarge amounts in assets that may only be used for one purpose, there is apotential for the extraction of rents from a contract partner. If a pipelinecompany invests in a pipeline from an oil field to a refinery, this asset is onlygood for transportation between these two points. Once it is built, theinvestment is sunk. The oil field operators might be able to extract the sunkcost from the pipeline builders should they have other possibilities for thetransportation of their oil. Private contracting may be costly in this case andregulation the preferred tool.Regulation must hence be used in sectors where competition is not sustainable dueto one of the three reasons mentioned above. The success of regulation is to bemeasured by the efficiency criteria outlined.2.1.2 Positive Theories for RegulationRegulation does not only exist to correct market failures. This is apparent from thefact that regulation continues to exist in sectors with no natural monopoly features.Regulation also exists because it is a powerful means to redistribute wealth insociety. Regulation can be used to tax one group of consumers and redistribute toanother without imposing a more transparent tax-subsidy approach (Posner 1971).Classic examples in telecommunications are cross subsidisation from long distanceto local calls, from urban areas to rural areas and from business users to domesticusers.An alternative to government using regulation for social welfare-improvingredistribution, is for specific interest groups to capture the regulatory process throughlobbying government. Stigler (1971) observed that companies demand regulation inan attempt to earn abnormal profits at the expense of consumers. Politicians areprone to interest group pressure since single voters are unable to monitor and coercethe policy maker. The successful pressure group in the regulatory game need not becompanies only, but whoever it is they should have low costs of organisation andhigh potential payoffs relative to the competing interest groups. A good example forthis is the success of EU farmers in extracting rents from the rest of the population,whereas consumers with a lower per-head payoff and a much larger membershipfind it difficult to extract benefits from policy makers.The same forces that drive politicians to regulate sectors, may also drive them toderegulate. If interest groups that are being adversely affected by regulation organisemore effectively (or if the cost of the regulation to them increases enough to makethem organise) then they may be able to reduce the level of regulation. Intelecommunications, the advent of the Internet has meant that an inefficient2 When the cost of producing two products together is less than producing them separately18