Competition in telephony market makes CRTC obsolete: Montreal Economic Institute

Competition within the telecommunications industry sparked by new technologies has rendered CRTC intervention in the field obsolete, according to an economic note published by the Montreal Economic Institute. The note, Do we still need to regulate telephone service?, concludes that, "The market itself is better equipped than government entities to determine which degree of concentration is in the best interest of consumers."The paper views competition in a different light than the CRTC, distinguishing between competition "in the market" and competition "for the market." "Even if there is not a large number of companies in a given sector of the economy, what counts is potential competition," the paper notes. New technologies, such as cellular phones and Voice over Internet Protocol (VoIP), have created the potential for competition that will naturally keep incumbent telephony providers’ services at as low a price as possible, according to Valentin Petkantchin, author of the economic note and Montreal Economic Institute research director. "The important thing for the consumer is not that there are two or three operators (in a market). Even if there is just one operator in a very small sector, competitive pressure coming from other industries (such as cablecos or utilities possibly offering telephony services) will keep the price low," Petkantchin tells Network Letter. "The important thing is that there is potential competition coming from other industries, which is the safeguard for the only operator in the traditional telephone sector," he says.He uses the car industry as an example. "There is only one company providing Rolls Royce, so in fact, it’s a monopoly. But the company that provides the Rolls Royce cannot inflate its price because there are other providers of cars that satisfy the same need - to transport you. So there is a check by other companies on the price of the Rolls Royce." Petkantchin says that even if those cablecos or utility companies don’t actually launch telephony services by using their infrastructure or new technologies, competition still exits simply because of the threat that they could. But if the price of an incumbent’s telephony services rises too high, then players from other fields will enter the market with their own telephony offering, or an existing traditional telephone operator may expand its territory."You always have the opportunity for one telephone operator to go into the territory of another if the price goes too high, so there is really a check on the price even if there is only one provider," he adds. "What I would emphasize is that there are industries where the number of competitors will be smaller than if you were in the fast food industry. When you have an industry that is high in infrastructure investment, it’s normal from an economic point of view that the number of enterprises will be lower. What is important is not the actual number of service providers, but the fact that there is free entry into the field. If an incumbent’s price is very low, there is no place for entry. But the point is if Bell, for example, increased its prices or tried to profit from its position, there would be a place for another competitor to enter." Since competitive pressure is present in the Canadian market, Petkantchin sees no reason for the CRTC to intervene. He points out that the CRTC protected monopolies against entry for 50 years when it shouldn’t have, and is now proposing to grant privileges to their competitors when there are no more economic reasons to do so. Now, he says the CRTC is trying to force incumbents to give their competitors a margin guarantee. His paper notes that the CRTC in its December 2003 policy aimed at stimulating competition in the marketplace was imposing artificial and anticompetitive constraints on former monopolies now operating with competition for market share. The paper points out that the CRTC has proposed requiring incumbents to price their own retail basic services at 25% over estimated cost, while obliging them to sell the same services to their competitors at wholesale prices of cost plus 15%. The economic note also criticizes the CRTC proposal to force a 10% cap on discounts offered by incumbents on bundled services. "More generally, the CRTC wants to prohibit the former monopolies from using targeted pricing. This competitive technique exists in many sectors; for example, airlines offer different prices for return flights requiring a Saturday-night stay in order to charge more to business travelers," the note states. Petkantchin also tells NL that the CRTC policy of subsidizing phone service to rural areas will be counterproductive in the long run. "There’s a problem with the subsidization for rural areas because the prices and tariffs are regulated by the CRTC and are very low. So there is no incentive for the development of new technologies there," he says. "Maybe in 10 years, we will still have traditional phone services in these regions instead of new technologies because of the subsidized tariff. A very low tariff is not an incentive to develop new technologies." Petkantchin concludes in his note, "The main conclusion is that regulation, as it is in the real world, does not serve the public interest but is used by organized interests against competitors."

Competition in telephony market makes CRTC obsolete: Montreal Economic Institute

News | May 26, 2004

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