Cell phone companies in Europe have long been free to set retail prices for their services. What’s more, two or more companies are permitted to provide services. For these reasons, the market is competitive, relative to regular telephones. So, it was shocking to see the European Commission regulate the price of roaming services last year. Are the EC’s claims of success valid? FULL ARTICLE
Source link: http://archive.mises.org/8939/the-eurotariff-for-roaming-services/
The Eurotariff for Roaming Services
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That’s a tough one, when there are no obvious or immediate effects. Might have been good to show a similar situation in a different industry.
Is it possible that there may be other effects that would be hard to trace relating to a telecom version of a “shortage”? Maybe, for example, more dropped calls, calls not going through, and worse connections b/c of increase demand and use of the telecom system. It seems that, if these could be culprits, they would not be as easy to track and/or measure.
The decline in quality of service (as C. Roe suggests) would seem to be the logical alternative a physical shortage as seen in price ceilings on more tangible goods. The long term effects would also include reduced capital investment in the industry and a decline in the number of firms as marginal suppliers are driven out of business by lower revenues.
In any case, even if we could obtain these data, the relevant comparison is to what would have happened in the absence of the intervention. This is a counterfactual that we can’t actually observe, only guess at based on the changes in the actual data over time and in comparison to other regions telecom markets. Data cannot conclusively disprove Mises’ pure theory.
On a theoreitcal note, it’s also important to consider the impact of previous interventions in trying to understand the effects of the price ceiling. E.g. how has the state’s imposition of artificial national boundaries upon the market impacted the distribution of networks and the determination of roaming charges?
Gentlemen:
Please look no further than the New York City subway system, which unfortunately, I am forced to endure twice a day traveling to my job on Wall St. (22 years and counting). Here is a case of the government having kept the price of a transit ride artificially low for years (it makes little difference that there is one supplier of subway transit in New York City vs. the European telcom example where many supply the artificially low-priced service) thereby causing serious lack of infrastructure exapansion and improvements, as well as general maintenance. We are still waiting for the Second Ave. subway to be built which would relieve congestion on other overused lines. (approx. 70 years of waiting to be exact) Lack of money for all this. I wonder why…..
Great work,
Ted Rund
trund@optonline.net
I have a problem with this:
“Firstly there could be a simple explanation: the theory of price control only applies when the price control is genuine, that is, the price is different from the one the unhampered market would set. If the regulated maximum is above the unhampered market price, the price control will have no effect at all.
However, the maximum price was set at EUR 0.49 per minute, while the market price was in the range of EUR 1 per minute (see graphic above).[4] In short, the price control is genuine, so this is not the explanation we are seeking.”
The second paragraph is too dismissive and doesn’t really adress the first. The key word in the first paragraph is “unhampered”. Can we really say that an oligopoly of telecom companies, aided by artificial barriers to entry, represents a free market?
Ill effects of government intervention take time to appear. Just give it time and disaster will happen.
Look at the profits of these mobile telecom operators – you should clearly see there is no “market”. If there was real competition, the profits would be much less.
There is even less of a “market” for roamed roamed services. The prices for roaming services are extremely hard to find when coming to a country and most users just let their phone select the provider with the strongest signal etc.
This is even worse for data services. Users may have flat montly fee of e.g. €15 in their home country, and then get a bill for €3000 for roamed data, while the production cost for both is the same.
These companies are just ripping of each other’s customers, just because they can.
Finally, the equipment rationale at the end is totally bogus. The cost of the telecom equipment is less than 10% of the overall costs. Marketing, customer service, taxes each cost more than the equipment. Also, the companies will invest only in equipment that will pay itself off, and there need not be any “savings” for these, as the equipment deals come with financing.
Even a mid-sized mobile operator makes more profits than all the equipment vendors combined…
Then about the prices. In Finland we have three national operators. Average minute prices are less than 10 cents, and anyone who wants can buy service for less than 7 cents/minute. And these compaines are profitable.
There has been talk about a possible merger/buyout between two of the operators. If this happens I bet the prices will go up…
Others have already addressed this a little, but I feel I need to chime in.
This analysis is wrong. It assumes this is the first regulation, but it is not. Each country has its own telecomm operators. I don’t know the exact regulation, but given that roaming charges are universial I think I’m safe in saying that their regulators have prevented cross country roaming agreements.
Compare to the US (which is also not a free market, but the regulations are different). I have often used my t-moble phone while connected to a Cingular Tower to call someone else in a different state with a Verizon Phone. There is no extra charge on my bill even though at least 3 (and most likely several more that I know nothing of) companies are involved, and the company I pay has the least costs. They have agreements in place to make this work out.
Customer demand in the US has given us the above. Why hassn’t it done the same in Europe where people travel between networks even more often (All 3 of the networks I listed have national coverage – it was several years before I found a spot with cingular coverage but no t-mobile tower)?
When there are regulations the companies have every incentive to raise the prices as much as they can (they are charging the customers of other people who have no choice but to pay – of course if they charge too much this becomes elastic and they make less money). Without regulation they have incentive to not do this, because if they can say “no roaming charges”, people who travel will flock to them which increases their profits.
Roaming charges are something that exists because of regulations. All companies are better off not charging them – they will never be large enough to really pay off your network investment (too random). So better to make agreements that you don’t have them, and in return you get more customers because of marketing. (Note, roaming will still exist, but only for budget plans aimed at the poor who will almost never roam – here roaming charges are trying to wring any profit from someone who you are otherwise breaking even on)
Once again, if you have regulation in any form, you cannot point to any failures of the market.
“Look at the profits of these mobile telecom operators – you should clearly see there is no “market”. If there was real competition, the profits would be much less.”
Profits could be at any rate in competition. They will tend downwards as other companies enter, but there’s nothing that is inherently prohibitive of them in a free market, until adjustments are made. If you’re using the nonsense known as perfect competition to reach this result, realize it is a mere theoretical tool, not a description of reality…
“These companies are just ripping of each other’s customers, just because they can.”
Why can they?
I am afraid this analysis is largely incomplete. The author anticipates “decline in quality”, etc., fully in accord with school theory.
Unfortunately the main point here is not the romaing rates regulation. The whole GSM industry appears to be typical European Union social engineering project.
First, the GSM standard has been pushed through by political decisions. There could have been other competing technologies, but national regulators decided (“inspired” by political decisions) to push GSM as “european baby”.
Second, GSM markets in all states are regulated. In some member states (CZ, SK) I would describe this regulation as “tough”. Do you consider two or three selected operators as “market competition”? I don’t.
And now I am coming to my conclusion at last. There already IS bad quality service omnipresent in toughly regulated countries. Operators in Czech Republic and Slovakia (where I can observe personally all details) provide mediocre services, incomplete data service coverage, bad customer service (some operators completely ignore customer problems and claims unless it is a big corporate customer) charge insane fees for various minor features and put strong emphasis on entertainment features (because they need to cover almost complete lack of useful features and services).
So, the real problem is NOT the roaming regulation. That’s just the next step of the whole soon-to-become totalitarian telecommunication system in EU.
I am grateful for all your comments.
Of course, there is more regulation in mobile, and most of them has more impact in the telecom sector than roaming prices regulation has.
Still, I do not think the analysis is incomplete because of this. I am trying to use a mental construction to isolate this concrete regulation from other regulations. So, we could conclude whatever “the rest of things being equal”.
That said, my concern was trying to explain how the theory of price control acts in the case of an structure of production featuring large investments in relation to other factors, as it is the case in telecom.
My general conclusion is that concrete manifestation of Mises theory of price control depends heavily on the structure of production. And I think this conclusion still helds, even if not all regulation is considered in the analysis (this would be, on the other hand, impossible: nobody considers fiscal or labour regulation when analysing the effects of sector specific regulation, even if they have probably more impact).
Thanks again.
Non-markets: “Look at the profits of these mobile telecom operators – you should clearly see there is no “market”. If there was real competition, the profits would be much less.”
I randomly picked Vodafone (it’s the first European operator that sprung to mind). For the last 3 years (from most to least recent) they have made profits of 19%, -17% and -74%. That doesn’t sound very profitable to me.
Non-Markets: “There is even less of a “market” for roamed roamed services. The prices for roaming services are extremely hard to find when coming to a country and most users just let their phone select the provider with the strongest signal etc.”
It seems that you acknowledge users can select a roaming provider if they care enough, however, even if there was only a single provider, the market would still be competitive absent government intervention because other providers, sensing a profit opportunity, could move in and provide roaming services. Clearly, fewer potential competitors are going to emerge as a result of price controls.
Non-Markets: “This is even worse for data services. Users may have flat montly fee of e.g. €15 in their home country, and then get a bill for €3000 for roamed data, while the production cost for both is the same.”
The production cost is NOT the same. My local provider is Telus and from them I purchase a product – domestic services. If I travel abroad, I purchase a different product – roamed services. The production cost is not the same because Telus doesn’t control international roaming rates. I don’t know how much they pay international providers to enable me to use their network, but it is definitely a cost that is absent for domestic service.
Non-Markets: “These companies are just ripping of each other’s customers, just because they can.”
No. If they are charging more than the product is worth to you, then you are a fool for trading a higher valued good (your money) for a lower valued good (the roaming service). If they are charging less than the product is worth to you then lucky you, thanks to those companies you are better off than you were before you entered the transaction, you should be happy.
Non-Markets: “Finally, the equipment rationale at the end is totally bogus. The cost of the telecom equipment is less than 10% of the overall costs. Marketing, customer service, taxes each cost more than the equipment. ”
So what? The distribution of costs is irrelevant. Either the company can afford to replace its capital equipment as it is consumed or it cannot, it doesn’t matter if the company also has to pay GBP X for marketing or Y for taxes.
Non-Markets: “Also, the companies will invest only in equipment that will pay itself off, ”
No, the companies will invest in equipment that they PREDICT will pay itself off. Even if these predictions are initially wise, they can always be reversed by things that occur outside the companies’ control, such as price controls. These might have been a factor in the GBP11.6 B impairment losses recognised by Vodafone in 2007 and GBP 23.5 B in 2006.
Non-Markets: “and there need not be any “savings” for these, as the equipment deals come with financing.”
If the equipment is financed, there will be additional financing charges that have to be paid for somehow, either by savings before the purchase or additional income earned during the product lifetime.
Non-Markets: “Even a mid-sized mobile operator makes more profits than all the equipment vendors combined…”:
I’m too lazy to look up more than one set of financials. Show me the numbers for the median mobile operator compared to all the equipment vendors and then we can analyse what, if anything, those numbers reveal. In the meantime I’m not going to assume that you assertion is either correct or relevant.
Non-Markets: “Then about the prices. In Finland we have three national operators. Average minute prices are less than 10 cents, and anyone who wants can buy service for less than 7 cents/minute. And these compaines are profitable.”
So? I assume you are talking about domestic service which is a different product than roaming.
Non-Markets: “There has been talk about a possible merger/buyout between two of the operators. If this happens I bet the prices will go up…”
Even if your bet pays off, how do you intend to draw any useful knowledge from that data? How do you know how much (if any) of the price increase will be the result of inflation, regulatory changes, technology changes, changes in consumer behaviour?
I think this analysis is mostly correct in its conclusions. There do exist some companies that have contracted with network providers in many countries in order to provide somewhat lower roaming prices (I used to have a card from http://www.easyroam.co.uk/ for traveling but I dropped it, the quality of service was beyond the pale). And people who don’t inform themselves about the roaming charges they are going to pay when traveling abroad only have themselves to blame. On the other hand, European cell phone markets are so heavily cartelized and regulated that any talk of “market price” is just a bad joke.
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