The proposed telecoms legislation should take account of predatory pricing by firms with dominant power

Dear Editor,
Stabroek Business reported that an anonymous “source close to the telecommunications sector” has advised that government should take seriously the position that granting an operating licence to an illegal operator would amount to rewarding it for illegality (‘Gov’t should ponder GT&T concern over draft law – telecoms source’ SN, December 17).  This position implies that operating licences will be limited to the six currently licensed telecommunications firms and denying one of these firms a licence would make a difference in the competitive marketplace.  This is most unlikely.

Two necessary conditions for the creation of a competitive environment are first, the absence of barriers to the entry in and exit from the market, and second, that the market is characterized by many buyers and sellers.  The draft Telecommunications Act and Regulations does contain an entry fee but it is not prohibitive and represents a reasonable expectation for a telecommunications company.  There-fore, there is nothing in the draft legislation which will result in limiting firms from entering/exiting the telecommunications market.  The proposed law automatically grants licences to six firms but will not deny licences to other firms.  The latter firms would have to follow an application process.  Thus, denying one firm entry for “bad behaviour” is trivial and inconsequential in the larger scheme of things.

The second condition is far more substantive and needs attention as the draft does not deal with it fully.  It is about having dominant power to sway the market.  Although the proposed legislation recognizes this and authorizes the regulators to identify firms with dominant power based on a set of criteria, it does not prescribe a remedy for firms with dominant power.
The problem with firms with dominant power is their tendency to engage in cross-price subsidization, ie, the subsidization of one economic activity by another for the purpose of distorting the market, and in predatory pricing, ie, pricing below cost to drive competition out of the market.

In a landmark case in the USA, Judge Harold H Greene, in an antitrust lawsuit filed against AT&T, ordered it to divest its operations into seven independent regional operating companies known as ‘Baby Bells.’  The charge by the Department of Justice against AT&T was that it was harming long-distance competitors by charging high local rates to other providers of long-distance service (which require local service), and  that it was difficult to monitor cost-shifting among AT&T’s regulated (telephone) and other relatively unregulated businesses. The break-up of the telephone company mitigated the department’s concerns and the resulting competition in the long-distance calling market dropped rates from an average of $0.62/minute to single digit rates today.  The solution, as demonstrated by this landmark case, is to physically separate the activities for which the firm has dominant power from those activities that are competitive, and regulate the prices charged by the firm having dominant power.

For example, in Guyana GT&T has dominant power with access to internet bandwidth from its submarine cable.  This company then sells bandwidth to Service Providers (wholesale transactions) as well as to end-users (retail transactions).  Is the price the retail arm of GT&T pays to the wholesale arm the same as that paid by the Service Providers to the wholesale arm?  I doubt it, and it will be impossible to identify since the costs and revenues of GT&T’s wholesale and retail activities are commingled, very much like AT&T in the USA landmark case.
The remedy, in this example, is to physically separate GT&T’s retail and wholesale activities, and regulate that with dominant power (wholesale) so that all Service Providers, including GT&T retail, would be subject to the same prices for their bandwidth for distribution to end-users.

The proposed legislation is a major improvement on the current telecommunications system, but it will not yield maximum benefits accruing from competition unless revisions are made to address cross-price subsidization and predatory pricing by firms with dominant power.
Yours faithfully,
Louis Holder

Around the Web

Comments