Competition and Regulation in the Telecommunications Industry in ...

Competition and Regulation in TelecommunicationsThe results are robust in the way that different model specifications regarding inputand output prices, as well as using slightly different data sets do not change the basicresults that incentive regulation does have beneficial effects on efficiency.A further result from the modelling is that those regulated companies with the highestexpenditures on research and development benefited most from the change to IR, aresult that is consistent with intuition.Bergman et al (1998) note that more and more European countries have started touse price cap regulation, initiated by the United Kingdom, which introduced themeasure in 1988 due to a report by Stephen Littlechild, pointing out the productiveand dynamic inefficiencies inherent in ROR. Among other states, France, Germanyand Sweden also introduced PCR in the early 1990s.Despite the positive effects on productive efficiency of PCR, there has been criticismof the system relating to strategic behaviour and allocative efficiency. The strategicbehaviour component relates to the timing of rate reviews. To maximise the costreduction incentives for the firms, the regulator has to increase the time betweenhearings, such as to allow some appropriation of the gains made by savings. This,however, increases the scope for the firm to act strategically: before adjustments,cost savings are not fully exploited, so as to signal a lower savings potential to theregulator. Once the new rates have been installed, maximum savings are beingexploited as they can be benefited from for the maximum possible time.As to allocative effects, the problem is that the X-factor is backward looking ratherthan future oriented. The nature of negotiations between the regulator and the firmsdictates that X-factors are based on historical experience rather than future potential.It is the superior knowledge managers have in comparison to regulators that makes itpossible for companies to exploit extra profits.Large segments of the telecomm industry are potentially competitive, though, and itis thus the aim of European policy to liberalise these markets, as effectivecompetition can replace regulation and ensure better market outcomes.2.3.2 Liberalising Network Industries: a Three Stage ProcessThe table below illustrates the state of liberalisation of different public services inEurope as of spring 1998 3 :Table 2.1: State of European Deregulation (1998)Germany France Italy Spain Sweden UKAir transport High Medium High Medium↑ High HighElectricity Medium↑ Low↑ Low↑ Medium↑↑ High↑ Very HighPostalservicesMedium↑↑ Low↑ Very Low↑ High↑ Very High Medium↑Rail Low↑ Low↑ Very Low↑ Very Low↑ High Very HighTelecoms Very High High↑ Medium↑↑ High↑ High↑ Very High3 Ibid. p.8021