Unit 3 Micro: EU Imposes Further Price Cap on Mobile Phone Companies

For several years the European Union Competition Commission has been targeting the oligopolistic mobile phone industry accusing it of damaging consumer welfare with high roaming charges when people are travelling and working within Europe. Yesterday marked another landmark in the battle between the regulators and the industry.

The cost of using mobile phones when travelling within Europe will be reduced from July 2012 after cuts to roaming costs were agreed by European Union policy makers.

As a result of direct price intervention, the cost of data services on smart phones within the EU single market will be capped at €0.70 a megabyte, far less than most carriers in the EU currently charge.

Prices on voice calls will also be capped, falling from €0.35 to €0.29 in July and €0.19 in 2014. Text message prices will fall from €0.11 to €0.06.

The EU plans further structural reforms to the telecoms market hoping that more competition will bring down prices and stimulate an increase in dynamic efficiency in the industry. Lower charges for telecoms will have positive spill-over effects not only for millions of consumers but also for industries whose telecommunications costs will fall. The EU regards this as an important competition issue - a way in which microeconomic reforms can support stronger economic growth in the twenty-seven nations of the EU.

From 2014, mobile phone customers will be able to sign up with one company for domestic calls and another for their overseas trips, while retaining the same number. The hope is that new telecoms firms will want to come into the market and make it more contestable.

The industry is dominated by France Telecom (Orange), Deutsche Telekom (T-Mobile), Spain’s Telefónica (O2) and the UK’s Vodafone.

The leading mobile phone operators claim that price capping by the EU will force them to find other ways of generating revenue for example by hiking up the prices of handsets which are often sold as a loss-leader to get people to commit to a mobile network.

Some analysts say that lower prices and profits will cause a reduction in capital investment in networks especially at a time when businesses such as
Vodafone are planning to spending billions for the spectrum needed to deliver superfast mobile broadband.

Guardian: EU takes summer bite out of mobile phone roaming charges

Oligopoly and Competition

Competition in the market for mobile services is optimal if the number of firms is four or five. With fewer firms, there is less competition and prices are higher. With more than five firms, the benefits to customers of lower prices and better services level off and may actually shrink. These are the central findings of new research by Yan Li and Professor Catherine Waddams Price, to be presented at the Royal Economic Society’s 2012 annual conference. The study finds that more competition has a strong and positive effect on firm performance. More surprisingly, however, it finds that the positive effect levels off once the number of firms in the market reaches four and five. Once there are more competitors, the quality of service provided starts to fall.

Source: Royal Economic Society