Deregulation in Mobile Sector Gives Big Boost to Consumers
By An Jae wook
Competition among suppliers brings benefits to consumers since it pushes down prices and improves service quality. Moreover, competition accelerates production and boosts productivity for the benefit of all. The best way to promote competition is deregulation. This was very evident in the recent competition of tariff cuts in the wake of an easing of regulations over price controls.
After the Information and Communication Ministry allowed a discount to the tariffs charged on calls between subscribers signing up to the same service provider, local mobile carriers rushed to cut the rates competitively. SK Telecom has recently announced two new pricing packages, including a 50 percent tariff cut on on-net calls to SKT subscriber calls with an additional monthly basic fee of 2,500 won.
SK Telecom had so far charged 20 won per second for a voice call. LG Telecom followed suit by offering 1,200-minute on-net calling free of charge if a subscriber under the ``Standard Plus'' package pays 2,500 won additionally, on top of 13,000 won in basic monthly fees. Following in their footsteps, KTF announced a similar discount package. The nation's second largest mobile carrier offered a 30 percent discount to all voice and video mobile calls with an addition of 2,500 won to the monthly bill. It also launched a ``50 percent discount for KT Family'' pricing to halve the rates for all the voice and video calls between KTF subscribers as well as between mobile and wired phones. The tariffs for calls using KT Powertel's radio transmission service were also part of the 50-percent discount plan.
The pricing competition was not confined to the wireless market segment. KT, which sells a fixed-line telephone call service, a direct substitute for wireless calls, announced three new discount pricing packages, including a blanket rate for both local and long-distance calls at an additional 2,000 won per month.
All of these billing cuts are apparently translating into larger benefits to consumers. The Fair Trade Commission, however, warned, ``Generally speaking, discounts on intra-network calls can prompt mobile phone users to switch to the biggest operator, which should lead to cementing its market dominance.'' ``Across-the-board discounts are deemed more desirable in the view of fair competition and benefits for customers,'' it insisted.
The Fair Trade Commission seemingly believes that if a loser is forced to exit due to the price-cutting war, then only two players will be left on the market and this reinforces a monopoly. The underlying assumption is that the larger the number of enterprises, the more competitive the market and the more benefit to consumers. However, this perception only reveals ignorance about the economy.
If we follow the FTC's logic, then the best way to make the market more competitive would be to increase the number of enterprises. Let's allow 10 or 20 enterprises to do the job that only one can do. And make it illegal for them to seek innovation to cut costs and expand their presence through streamlining efforts. This is like saying that an efficient enterprise should be prohibited and only a number of small inefficient players be allowed to lead the economy. No corporate profits earned through cost reductions should be shared with consumers and scarce resources must be prevented from flowing into the area where they can be used in the most efficient way. This serves only incompetent enterprises, with consumers' interest totally ignored.
The U.S. made a similar mistake about a century ago due to ignorance about economics. The federal government stigmatized Standard Oil as a monopoly just because of its dominant market share in the refinery industry and ordered a split-up. After Standard Oil was split up, prices of refined oil products surged suddenly to outpace the pre-split price levels, undercutting consumer welfare. Against this backdrop, South Korea's antitrust body is still living with the knowledge system of 100 years ago.
Whether an industry is competitive or not is determined by the existence of an entry barrier, rather than the number of enterprises. The industry is not competitive when the law inhibits a newcomer. On the contrary, if the market is wide open to anybody with little regulations, then it is a competitive industry. Therefore, you should not simply label a company as a monopoly only because its market share is high if there is no entry barrier imposed by the government. A high market share is a meaningful indicator of the monopoly power in an industry with entry barriers. But a dominant market share is not a threat if there is no entry barrier. But rather it can be a good indicator of consumer satisfaction. In this context, the FTC, if it is worried about a monopoly power in the wireless telecom sector, should stop scrutinizing new clients signing up to the dominant operator one by one but rather remove the entry barriers and make the market a level-playing field.
Price Controls and Entry Barriers
The Fair Trade Commission has argued the across-the-board tariff cut is more desirable but the concept itself is obscure. If it means the production cost, then it will be as absurd as the disclosure of the construction cost for apartment buildings. Rather it would imply a broad-based price, including both intra-network and inter-network call rates. If so, the across-the-board tariff cut would better serve the consumers' interest than the on-net tariff discount.
But such a blanket rate cut is in essence impossible under the current business circumstances as the government controls mobile rates. SK Telecom, classified as a market dominating enterprise with more than 50 percent market share, requires government approval for any tariff cuts, unlike its minor rivals. Therefore, SK Telecom cannot undertake a comprehensive tariff cut even if it has the will and capability. The latest on-net tariff discount was also accompanied by the government's consent. With the tight price controls in place, insisting that a blanket rate cut is more desirable than on-net rate discount is nothing different from urging a person with tied legs to win a race. If the government really wants to improve consumer welfare through a comprehensive mobile rate cut, then it should first abolish the price controls. Mobile carriers would then do the rest in a free market.
Due to the regulations, local mobile carriers have been involved in irregular practices by paying huge subsidies to new subscribers. Only a few consumers enjoyed the benefit of the subsidy whereas the majority had to face exorbitant phone bills. South Koreans pay far higher mobile bills than people in Hong Kong and Europe where there is no price control.
It's more urgent to tear down any existing entry barriers and make the market a level-playing field. The government must have learned from the recent example of the prompt responses by industry to its approval of on-net tariff discount that a deregulation tends to inspire industry competition, which in turn leads to lower prices for the benefit of consumers. Competition among mobile carriers tends to reach the peak when an entry barrier is removed to allow anyone to start a business. Therefore, removing the entry barriers on the wireless industry is most critical to the promotion of competition. Once the barriers are abolished, then industry competition will gain further momentum, triggering off price cuts and quality improvement for the benefit of consumers. Then enterprises will devote their energies to increasing management efficiency and seeking for ways to cut costs while heavily investing in technology development to boost productivity in order to make profits and survive in the cut-throat competition. This should render larger gains to the entire society.
The government defends itself on the grounds that the regulations are intended to protect both consumers and industry. However, the reality is that the regulations only serve to bail out incompetent and inefficient enterprisers while transferring the cost to consumers and the rest of society. The price controls and the entry barriers in the wireless industry are not an exception. They are simply keeping the weak and poor-managed players barely afloat. The approval of the on-net tariff discount is provoking fierce competition among the three mobile carriers but this is only a ``limited'' competition. In order to precipitate real competition and better serve the interest of consumers, the government should eliminate all the entry barriers and pricing regulations and let the market set the rules independently. This is the most desirable way to enhance the consumer welfare.
The writer, a professor of Kyunghee University, is now a visiting professor of Ohio State University. This story was carried on the Web site of the Center for Free Enterprise.