Dealing with market power in governing competition in telecom

In the early 1980s, the US was facing the problem of governing state-owned telecom monopoly through regulations. Due to information asymmetry, it was argued that the regulator was not getting a clear picture to set regulatory guidelines. On the other hand, due to the lack of competition, there was no market force on state telecom monopoly-- AT&T, to be as aggressive as desired in risking investment to maximise benefit from dynamic efficiency, gained from technology and innovation. Despite the argument that due to high scale, scope and externality characteristics there was little room to benefit from competition, the US court took the decision in favour of deregulating state telecom monopoly by opening it to competition. On the other hand, although state telecom monopolies in developing countries were running at a profit, due to lack of capital they were failing to expand at rapid pace meeting the demands. As a result, in most developing countries, telecom density was quite low. For example, in Bangladesh, it was less than 1 per cent. To overcome the capital constraint, developing countries started to open telecom industry to private investment.
Significant latent demand and also the emergence of cellular telephone attracted private investments, often from foreign sources. Foreign direct investment started to pour funds in telecom industries of developing countries, primarily to lay out mobile telephone services. In the competitive market, operators had the freedom to choose their competitive strategies. Among the strategic options included rolling out plans for targeting customers groups and pricing policies. Some of the early entrants focused on rapid recovery of invested fund by charging a high price on services. Others followed a predatory pricing strategy by charging very low. For example, in Bangladesh, Citycell pursued rapid investment recovery strategy by charging a high price to a small group of customers. On the other hand, by pursuing low pricing to allure customers from competitors, Banglalink could not succeed to reach profit, let alone emerging as the dominant operator. But top performer followed the middle path of offering possibly the best service, with the rapid expansion of the network, charging a moderate price. Eventually, among the cohort, best performer emerged attaining the price setting capability to make a profit, while compelling the competitors to take a lower price to incur a loss. Despite having more than one definitions of significant market power, this price setting capability appears to be a critical one.
The question could be how can an operator in the telecom sector attain price-setting capability to grow as a significant market power (SMP)? The telecom industry benefits from technological innovations to enjoy dynamic efficiency, opening the opportunity of offering a better quality product at a lower price in making more profit. It happens to be that technology progression in the telecom industry in the recent past was fast enough of not giving followers enough time to catch up. As a result, Schumpeter's argument that followers through catch-up strategy would reestablish the market equilibrium, consequentially eroding price setting capability of the lead performer, became null and void in the recent past in the telecom industry. On the other hand, there are extremely high scale, scope and network externality advantages in favour of attaining price setting capability.
The top performer exercises prudent network laying out and technology up-gradation in synchronisation of customer acquisition through optimal pricing and product portfolio and service quality so that scale, scope and loyalty strengths keep growing at faster pace than competitors'. The scale and scope advantage keep lowering the cost. On the other hand, the externality effects with growing customer base keep increasing the perceived value, consequently increasing willingness to pay and loyalty. On the other hand, customers in the category of early majority are far more receptive to the quality of service and less sensitive to price than their counterparts in the categories of late majority and laggard. It appears that the top performer succeeds to grab most of the customers in the early majority segment. As a result, short term predatory incentives provided by competitors fail to allure away customers from top performers. Moreover, 10 to 20 percent lower telecom bill does not appear to be significant enough for many customers of top performers to switch; but this differential is sufficient enough to exercise price setting strategy. For this reason, even after the adoption of a number portability, no significant number of customers left the top mobile operator of Bangladesh to avail lower priced services offered by competing operators.
The next question-- what could be done with price setting capability of the dominant operator? Should regulator come up with a set of restraining measures limiting the performance of the top performer? Often it has been found that top performers carefully keep working in making their good services great ones. Although competing operators followed the footsteps of the top performer, they neither attained price setting capability nor reached profit. Unfortunately, this is the natural tendency of the telecom market-winner takes all. The regulatory measures of slowing down top performer in boosting the financials of less performing ones does not appear to be a smart option. Such a choice will deprive the customers to get better quality at a lower price derived from innovation. On the other hand, if the top performer succeeds to monopolise through price setting capability, competition will disappear. Once the competition disappears, there will not be any incentive for the monopoly to risk investment to pursue innovation-for offering increasing quality at reduced price.
Over the decades, both policymakers and regulators were mostly busy in counting their successes in terms of licence issuing, collecting fees and revenue shares. Unfortunately, they failed to give adequate attention to channel investment and structure the industry in an intelligent manner to govern competition. Once the top performer has monopolised the market by pursuing good to a great strategy, there has been a wake-up call. Particularly, this wake-up call has become loud and clear with consistent failure of attempts in turning loss-making state operators into profit-making ones. There is no doubt that it's late. But it's not too late to take measures to create possibilities of profitable competition for most of the operators. But such possibility creation should not be at the cost of slowing down the top performer. It's time to take far smarter steps than ever taken to avoid the transfer of state monopoly to a private monopoly in pursuing market-led reform of the telecom industry, but it must not be at the cost of competition and innovation.

M Rokonuzzaman Ph.D is academic and researcher on technology,
innovation and policy. [email protected]