If a regulator concludes that it needs to regulate mobile retail tariffs, it must be very careful to strike the right balance between protecting consumers and maintaining incentives to invest.
To date, competition has meant that market failures like those associated with fixed-line incumbents have not been an issue in mobile markets. However, regulators, especially in the developing world, are now considering regulating mobile retail tariffs, for a number of reasons.
Firstly, in many developing markets, fixed operators are often struggling to grow, or even retain customers, while mobile operators are enjoying rapid growth. Regulators often increase mobile’s competitive advantage by insisting on affordable access to telecoms service, which is often enshrined in the national telecoms legislation.
Secondly, the lack of a strong independent competition authority in most developing countries means that the telecoms regulator is often responsible for correcting competition problems after the event. Such ex post intervention can deter collusion, but would often not be an option in the developing world, where the threat of heavy-handed retail regulation might prove more effective.
However, regulators must proceed with caution in considering whether to impose direct regulation on retail mobile tariffs. A structured, transparent and objective review of the market situation is crucial to ensuring that any regulation is justified and will further the regulator’s objectives. Below, we outline three of the main pitfalls to avoid.
Firstly, imposing artificially low prices will negatively impact investment and quality of service. Operators should be allowed to operate reasonably profitably. In many instances, the requirement to allow a reasonable return on investment is safeguarded in the legislative framework. Equally, if the regulated prices are too low, new operators have no incentive to enter the market. Often, new entry (or the threat of it) is an effective way to ensure pricing discipline in concentrated markets without intervening directly.
Secondly, unnecessary retail tariff regulation may remove all incentive to compete on price, with price ceilings acting as a ‘focal point’ for operators to collude tacitly and exploit the fact that they know more than the regulator about efficient price levels for retail services.
Thirdly, determining the ‘right’ regulated price level is extremely complicated for retail services. What are the appropriate baskets of calls and services to use to calculate the prices? Are different baskets appropriate for different types of consumer, or for urban and rural areas? When examining retail tariffs, substitution between different services must also be taken into account. What, for example, is the impact of a change in voice call pricing on SMS usage?
If a regulator concludes that it needs to regulate mobile retail tariffs, it must be very careful to strike the right balance between protecting consumers and maintaining incentives to invest, both for existing operators and potential new entrants. In countries where geographical coverage is often patchy, this may result in a seemingly intractable dilemma between affordability in urban areas and availability in rural areas – which may explain why regulators have hitherto found it better to leave retail prices to market forces.