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Monopoly in the Telephone Industry in Mexico

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Monopoly in the Telephone Industry in Mexico Monopoly in the Telephone Industry in Mexico Juan A. Cárdenas Fall 2007 You can download slides from: www.econ.umn.edu/~jcardena/ About me Outline 1. Theoretical Framework 2. Privatization 3. Telmex’s Monopoly conclusions Outline 1. Theoretical Framework 2. Privatization 3. Telmex’s Monopoly conclusions Theoretical Framework Monopoly is characterized by the existence of a single provider of a good/service. • Natural or legal barriers. Monopoly has the power to set the price of its good/service How should a monopoly set its price? – Set price (and quantity) in order to maximize profits Those profits are bigger that under perfect competition Theoretical Framework P PM MC P* MR Demand QM Q* Q Hence, QM<Q* and PM>P*; DWL>0 Theoretical Framework Under which circumstances a monopoly may be desirable? – Existence of high fixed costs such as infrastructure and R&D • Transportation • Pharmaceutical industry • Telecomm industry – Otherwise the good/service would not be provided However, regulation is required to operate the monopoly Monopolies in Mexico By 1970-80’s, Mexican government operated inefficiently many industries (1155 firms, 14% GDP, 5% Labor) – Telephone (Telmex) – Electricity – Oil and gasoline (PEMEX) – Airlines, train and bus transportation. Outline 1. Theoretical Framework 2. Privatization 3. Telmex’s Monopoly conclusions Privatization During 1980’s many Latin American countries engaged in structural reforms. Reorganization of Telmex towards privatization started in 1989. Group of investors led by Inbursa won privatization process. Authorities granted 7 years of monopoly power with some regulation and growth goals. Privatization in Latin America Countries have benefited from privatization, firm owners are not the only ones keeping the gains. Some benefits: increased access and quality, investment, improved allocation of resources, public finances. Failures may occur, but they are not the norm (although they may be widely advertised!). History TELMEX is created. Merger of L.M. Ericsson (Sweden) 1947 and the International Telegraph Corporation (USA). Monopoly on Long Distance Market 1960 Tax on Long distance calls imposed by government. 1972 Controlled by Mexican government 1990 Privatization 1997 Competition in Long Distance Market Prodigy Communications Corporation (Internet). 1998 Topp Telecom (cellular telephone company). 2000 America Movil (Inbursa - 24% of Televisa) Cablevision obtains license to provide telephone 2007 services. Outline 1. Theoretical Framework 2. Privatization 3. Telmex’s Monopoly conclusions The Telmex Monopoly Fact: Up to date, Telmex has been operating as a quasi-monopoly 9 out of 10 telephone lines in Mexico are operated by Telmex. Prices -fixed lines- 2005 Price for residential fixed lines in 2005 Communication access paths per 100 inhabitants (2005) Public telecommunications investment per capita (2005) Productivity: Revenue per employee The Telmex Monopoly Fact: Up to date, Telmex has been operating as a quasi-monopoly – 9 out of 10 telephone lines in Mexico are operated by Telmex – Telcel, or America Movil its wireless phone company, operates almost 80% of all the country’s cell phones – It is also the main provider of Internet in Mexico Hard for potential competitors to enter given the network ownership. Market share of two largest companies (2006) Mobile phone prices (2006) Range of broadband prices per mbit/s Theoretical Framework checklist Monopoly: • Natural or legal barriers. • Power to set the price of its good/service, • Set price (and quantity) in order to maximize profits, pMon > pComp QMon < Qcomp πMon >πComp = 0 Positive profits? In April 2007, Forbes said Carlos Slim is now World’s 2nd-Richest Man… Year Rank 2004 17th 2005 4th 2006 3rd July 2007 1st It's been an intriguing year for wealth watching. Since we released our list of The World's Billionaires six months ago, declaring Bill Gates the world's richest man, Mexican telephone mogul Carlos Slim Helú has closed the gap. Beyond the Telmex Monopoly Telmex’s operations have financed Mr. Slim’s expansion abroad y His companies have become one of the most important providers of cell-phones and Internet in Latin America The perfect formula He is a philanthropist (“maybe he is trying to soften his image”, New York Times) – He recently donated 100 million to Clinton Foundation to fight global poverty The perfect formula BUT ALSO, he has become “friend” of the most influential politicians – Can Mexicans expect a more effective regulation? Privatization in Latin America Research on privatization suggest that 1. privatization almost always improves performance, 2. but post-privatization governance institutions and market conditions are extremely important in determining the magnitude of the improvement. The history of Mexican telecommunications is consistent with both conclusions. Behind failure: Opaque processes, lack of accountability. Inadequate deregulation and re-regulation (also poor contract design and regulatory capture) Poor corporate governance. Monthly Expenditures in Telecommunications 35,782 24,541 6,387 31,410 35,695 38,165 5,521 Outline 1. Theoretical Framework 2. Privatization 3. Telmex’s Monopoly conclusions Conclusions The social losses due to a monopoly are clearly identified by economists Regulation is highly desirable under this scenario However, policy-makers face big problems attempting to regulate this market structure – Corruption – Difficult for society to demand accountability – Regulatory capture Questions?.
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