“Market prices” from your friendly Globe, Smart, and Sun providers

My economics class is now into how a market determines the price of a good under conditions of perfect competition.  I wanted to give my students homework on whether there is perfect competition in the text messaging market.  But I decided to leave this for class discussion.

A related question is on the role of government in such a market.  Hence, the Q and A that follows.

Can the government dictate the price of a text message?

The answer is Probably Not, and can be deduced from the 1995 law creating the National Telecommunications Commission (NTC) (RA 7925).

The government can step in to regulate prices of telecom providers under the following conditions (RA 7925, Sec. 17):

  1. When there is “ruinous competition;” or
  2. When there is no ruinous competition but the following requisites are met:   (a)   A monopoly, cartel, or “combination in restraint of competition” exists;  (b)  The prices are “distorted or unable to function freely;” AND (c)  The public is adversely affected.

The precise wording of Sec. 17 is as follows:

Rates and Tariffs. – The Commission shall establish rates and tariffs which are fair and reasonable and which provide for the economic viability of telecommunications entities and a fair return on their investments considering the prevailing cost of capital in the domestic and international markets.

The Commission shall exempt any specific telecommunications service from its rate or tariff regulations if the service has sufficient competition to ensure fair and reasonable rates or tariffs. The Commission shall, however, retain its residual powers to regulate rates or tariffs when ruinous competition results or when a monopoly or a cartel or combination in restraint of free competition exists and the rates or tariffs are distorted or unable to function freely and the public is adversely affected. In such cases, the Commission shall either establish a floor or ceiling on the rates or tariffs.”

Analysis

We can dispense with ruinous competition as unlikely.  So far, the few players can be seen as an oligopoly that has managed to maintain relatively high levels of profitability.  Note that the existence of oligopoly does not trigger any role for NTC to set prices.  If there were to come a time when cut-throat competition came to be, the government may step in to set floor prices, rather than maxima.

The other possibility is where the prices are perceived as “too high.” Here, any aggrieved party will have to show that the three requirements listed in the law are all met.  For example, the party has to prove the existence of a cartel, the price distortion, and the adverse impact on the public.  It is a major challenge to any lawyer or group of lawyers to give advice to any aggrieved party who has to prove all the three elements.  As a practical matter, absent admission against self-interest by the telecoms, a successful suit on behalf of the public is unlikely.

RA 7925 has a definitions section (Sec. 3).  But this section does not define the terms “ruinous competition,” “monopoly,” “cartel,” “combination in restraint of competition,” “price distortion,” or “adverse effect on the public.”  In short, it will be for NTC initially  to interpret what these words mean, and the Courts would be involved only if an aggrieved party raises a proper controversy.

Conclusion

It seems fair to conclude that the NTC has no real powers to determine the price of a text message.  It will be decided by “competition” among the telecom providers in whatever form that takes so long as it is not ruinous.  Dura lex sed lex.

P.S. One senator does not agree with the above interpretation of the law.

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10 thoughts on ““Market prices” from your friendly Globe, Smart, and Sun providers

  1. Dear Prof,

    A cartel can only exist because the govt protects it. That was the case when PLDT ran a monopoly on telephones during the Marcos years. Take away govt protection and the cartel disintegrates.

    Why? Because when a cartel tries to keep prices too high, there’s always the temptation for other players to get into the game, grab a slice of the pie by undercutting prices, even if they have to do this illegally.

    At the height of PLDT’s reign as a monopoly, a normal application for a phone would take 10 years in Manila. During that time, criminal gangs within the company could provide you a line in less than that time if you paid a higher price.

    Of course, the prices were exorbitant. But it was the govt to be blamed. For no sooner was this protection lifted that the telecom industry really took off. Today, one can have a phone, a wireless cellphone even, in 24 hours and for a small fraction of what it would cost in the 70s.

    And we should NEVER thank govt for that.

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  2. Dear Prof,

    Does PLDT during the Marcos years qualify as cartel? I guess the answer really doesn’t matter… cartel or not, we all got screwed really bad, didn’t we?

    The more pressing question is the question at hand: Should the govt dictate the price of text messaging?

    The only answer that really makes sense in the real world is “HELL, NO!”

    Remember, during the Marcos years, the govt through PLDT dictated how much a phone service should cost. The result was of course disastrous if you were old enough to remember it.

    You offered to answer the question with “Probably not” based on deductive reasoning on RA 7925. “Probably not” is just as good as “Probably yes”. Or maybe, it is just as bad. We can’t really say… can we? RA 7925, like most govt laws, is nothing more but mumbo-jumbo.

    On the other hand, I base my reasoning on direct experience with govt. This is something that millions out there who lived during that awful time in our country would recognize.

    In this dismal subject of economics, which weighs more: mumbo-jumbo or real human experience?

    Like

    1. A monopoly cannot be a cartel, but a cartel wants to be a monopoly. I don’t know enough about the early PLDT years. I suspect we had US-style regulations that applied to the then AT and T. There is some serious work that even AT and T managed to weasel from the regulations.

      The conventional wisdom now is that regulation is ineffective, but that allowing easy entry is almost good enough. The question is whether our laws or practices allow for easy entry.

      Like

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