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):
- When there is “ruinous competition;” or
- 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.”
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.
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.