Competition and Regulation in the Telecommunications Industry in ...

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Competition and Regulation in Telecommunicationsa) if two networks do not compete in any markets (as is the case of twonational providers from different countries) then the outcome mayresemble costs more closely,b) If there is uneven traffic flow, one provider will deliberately overprice inorder to gain an effective subsidy from users of the other network (acommon practice amongst African national providers and one whichTelkom could employ in a duopoly scenario)c) If the two networks do compete in other segments of the market (such asprovision of long distance communications) then there is incentive todeliberately overprice in order to ruin the competitiveness of the othernetwork in the other market.As Telkom will have a dominant position in the local access market regardlessof model chosen, it is likely that they will have the incentive to overpriceaccess.An alternative is to bundle interconnection pricing with the price cap bundle –a global price cap as suggested by Laffont & Tirole (2000). This has theadvantage of the incumbent viewing access as just another product. If itoverprices local access then it needs to lower other prices to compensate.This may mean that long distance prices are not overly high in the end.The level of price for interconnection needs to recover a portion of the ‘accessdeficit’ from other firms if there is no scope for cross-subsidy (i.e. the openmarket option). In this case, the regulator needs to ensure that there is nocost transfer from the long-distance operations of the incumbent.5.4 QualityThe existence of price controls often necessitates the use of quality controlstoo. The reason is that a price-regulated firm has incentives to lower thequality of service to meet price controls instead of lowering costs. The currentcontract with Telkom for the exclusivity period has such measures. As Telkomis likely to still have some price controls in the post-exclusivity period due totheir dominance, quality measures would be appropriate too. There are arange of quality measures that can be used, including:• call completion rate• faults per 100 lines• speed for repairing faults• speed of installing a line• public phone box maintenance and repairQuality can be incorporated through financial penalties (current method),incorporating a quality index in the price cap, or an informal warning anddiscipline through more stringent price caps in the next round.58
Competition and Regulation in TelecommunicationsConcluding RemarksThere are many industry analysts who view the past 5 year exclusivity periodof Telkom to be a mistake by continuing to hamper downstream businesses.These analysts will argue for complete liberalisation. Other groups of societywill view the universal service rollout and low loss of jobs as success pointsfor the policy, and will look to continue this in the form of an exclusiveduopoly. The WTO commitment ensures that we need to at least move to alimited entry policy. However, in the end, the policy framework forderegulation of the telecommunications industry is going to be a politicalprocess.Ayogu and Hodge (2000) note that the distribution of gains and losses in thefull competition model favour the wealthy in society – the businesses and theheavy users of telecommunications. The low-income groups are likely to bearall the short-term adjustment costs (job losses) for some uncertain futurereward (jobs from downstream users of telecommunications and lower priceson future telephone use). Given the constituency of the government, thissuggests a gradual liberalisation approach may be preferred, where revenuemaximisation occurs and the gains can be transferred to the losers throughfiscal policy.If the full competition model is to be adopted, it needs to be structured toprovide stronger universal service support and deliver downstream benefits tolow-income groups rapidly. This suggests maybe raising the USF levy andpursuing strict competition and regulatory enforcement in the sector to lowerprices and benefit downstream job creators.59
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