Measuring competitive pressure using OECD Price Benchmarking Baskets Christoph Stork and Laura Lumingu
Need to Regulate Full competition in the telecom sector cannot be expected anywhere anytime soon Until then, fair competition needs to be established or maintained through sector specific regulation Price is the ultimate indicator for competition Lower prices expand markets to rural areas and lower income groups...not universal service obligations Monitoring prices and hence cost to end-user remains a key regulatory function
Regulatory Applications 1. Consumer protection, price transparency and effective cost to consumers. Example Namibia: 29 products, constantly changing promotions, insufficient information on webpage and form retail outlets Example Vodacom South Africa: 37 products varying on every single aspect (peak/off peak, on/of-net, fixed, bundled airtime, handset...) 2. Defining universal service obligations in terms of affordability is an alternative approach to the usual geographic access obligations 3. Monitoring impact of regulatory interventions such as licensing, retail and wholesale tariff regulation, number portability...
OECD Basket Methodology Benchmarking: Comparing products of an operator Comparing operators (cheapest products of operators) Comparing countries (cheapest products available in a county) Weaknesses: Only dominant operators (new entrants are likely to be price challengers) No one is average: does not reflect the most popular package but the cheapest product (web-based tariff calculators would be an alternative) The same basket is used for all operators (subscribers of smaller operators are likely to have a different off-net/on-net ratio compared to larger operators)
Example: Mobile termination rates reductions and retail prices Several studies attempt to show that if termination rates are being reduced retail prices will increase using OECD basket methodology (e.g. CEG 2009 and Genakos & Valletti 2009) OECD price baskets methodology only captures the retail prices of dominant operators (together 50% market share) Including smaller operators would indicate price changes following regulatory interventions better Dominant operators are less likely to change retail prices than new entrants
MTR and Mobile Usage cost came down in 21 EU countries OECD low mobile user basket price MTR 2008 in 2008 compared to 2006 compared to 2006 Austria 77% 54% Belgium 84% 62% Denmark 73% 75% Finland 60% 67% France 90% 70% Germany 85% 72% Greece 67% 80% Hungary 94% 80% Iceland 82% 65% Ireland 74% 94% Italy 84% 88% Luxembourg 95% 64% Netherlands 88% 82% Norway 78% 95% Poland 71% 79% Portugal 86% 94% Slovak Republic 95% 65% Spain 97% 63% Sweden 88% 58% Switzerland 77% 75% UK 94% 89% Critical piece of evidence against a “waterbed effect”
Shortfall of Waterbed studies (eg CEG (2009) and Genakos & Valletti (2009)) Attempt to measure the impact of termination rate reductions using a panel data approach. Retail prices depend on too many factors and countries are too different to each other in those factors to construct a panel of data that would provide meaningful results Less econometrically sophisticated but more plausible would be to look into specific cases Did Vodafone UK increase its retail prices after any of the MTR reduction in the UK? How did the smaller operators or the net-interconnect-payers react? For this the OECD basket methodology can be extended to all operators and all products to provide the crucial data needed
Measuring Competitive Pressure
Modified Baskets 2006 definitions to all operators from 18 African countries Covering all prepaid products (vast majority of Africans mobile phone users use prepaid) Including Postpaid would make things even more complex but is used for regulatory purposes in eg Namibia
Difference % dominant Cheapest prepaid product in Cheapest prepaid product Feb operator is more expensive the country from dominant operators than cheapest in country 2010 Medium High Low Medium High Low Medium Low User High User User User User User User User User Botswana 5.04 10.28 20.67 5.04 10.28 20.67 0% 0% 0% Ethiopia* 3.74 7.59 14.98 3.74 7.59 14.98 0% 0% 0% Mozambique 7.45 15.07 29.88 7.45 15.07 29.88 0% 0% 0% Senegal 6.12 12.31 24.25 6.12 12.31 24.25 0% 0% 0% South Africa 7.64 15.38 29.63 7.64 16.12 33.13 0% 5% 12% Tunisia 5.06 10.24 20.19 5.06 10.24 20.19 0% 0% 0% Zambia 6.57 13.28 25.99 6.60 13.54 26.37 0% 2% 1% Cameroon 8.59 16.42 30.45 9.30 17.91 33.22 8% 9% 9% Uganda 6.33 12.90 24.05 6.95 13.90 26.85 10% 8% 12% Burkina Faso 11.04 22.65 45.19 12.54 25.98 52.52 14% 15% 16% Cõte d’Ivoire 7.00 14.34 28.88 8.15 16.34 31.59 17% 14% 9% Ghana 2.29 4.36 8.01 3.04 6.10 12.16 33% 40% 52% Benin 4.92 11.05 24.75 7.50 14.74 27.84 52% 33% 12% Kenya 3.35 6.37 11.42 5.93 11.82 22.78 77% 86% 100% Namibia 5.06 10.74 22.19 8.96 18.27 36.19 77% 70% 63% Rwanda 3.74 7.94 16.59 6.87 13.63 26.45 84% 72% 59% Nigeria 3.63 7.58 15.48 7.76 15.85 32.13 114% 109% 108% Tanzania 2.93 6.06 12.24 7.26 15.24 31.84 148% 152% 160%
Difference (% = Mobile Years Feb difference / dominant Cheapest penetration since Dominant price) Operators Operator for (ITU ICT last Operator 2010 Low Medium High low user basket eye for entry 2008) % % % Botswana 0% 0% 0% 3 2 Mascom Mascom 77.34 Ethiopia* 0% 0% 0% 1 11 ETC ETC 2.42 Mozambique 0% 0% 0% 2 7 mCel mCel 19.68 Senegal 0% 0% 0% 3 1 Orange Orange 44.13 MTN & South Africa 0% 5% 11% 4 4 MTN 90.60 Vodacom Tunisia 0% 0% 0% 2 8 Tunisiana Tunisiana 84.59 Zambia 0% 2% 1% 3 7 MTN Zain 28.04 Cameroon 8% 8% 8% 2 10 Orange MTN 32.28 Uganda Uganda 9% 7% 10% 4 2 MTN 27.02 Telecom Burkina Faso 12% 13% 14% 3 9 Telcel Zain 16.76 Cõte d’Ivoire 14% 12% 9% 4 3 Moov Orange & MTN 50.74 Ghana 25% 29% 34% 5 3 Tigo MTN 49.55 Benin 34% 25% 11% 5 3 Libercom MTN & Moov 41.85 Kenya 44% 46% 50% 3 2 Orange Safaricom 42.06 Telecom Namibia 44% 41% 39% 3 1 MTC 49.39 Namibia Rwanda 46% 42% 37% 3 1 Rwandatel MTN 13.61 GloMobile &
Difference Most expensive operator - cheapest operator
Cost of OECD High User Basket in N$ for products of MTC (Namibia’s incumbent operators)
Example Namibia The OECD basket methodology was used in Namibia during the past 5 years 2005: Argument prices are too high in Namibia compared to Botswana and South Africa ...competition would reduce prices and expand the market 2006: Presentation to cabinet using OECD price benchmarks 2010: Demonstration that retail prices in Namibia dropped and not increased following termination rate reductions Applying the basket methodology consistently demonstrated the effect of liberalisation and competition in Namibia
Cheapest product available for Low user OECD basket of incumbent (MTC) in Namibia
Performance of incumbent mobile operator in Namibia: MTC 2005 2006 2007 2008 2009 Subscribers 403,743 555,501 743,509 1,008,658 1,283,530 EBITDA Margin 61% 60.2% 52.2% 50.9% 53.8% After tax Profit million N$ 292.9 337.2 339.6 356.2 387.5 Dividend paid in million N$ 110 80 245 221 370 250 Base Stations 763 (2004) Investments announced into 4G LTE and WACS (N$400 million)
Conclusion The price basket methodology provides a valuable tool for planning, monitory and implementing regulatory interventions to enhance competition The paper also demonstrated: No one indicator is enough to understand the conditions of a country and predict the outcome of regulatory interventions Each country has to be treated on a case by case basis Building a history of price benchmarks provides an invaluable regulatory tool
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