Monopoly in the telephone industry in Mexico Daniel Sámano, 2006
About me: Theoretical Framework z Monopoly is characterized by the existence of a single provider of a good/service z Monopoly has the power to set the price of its good/service z How should a monopoly set its price? z Set price (and quantity) in order to maximize profits z Those profits are bigger that under perfect competition
Theoretical Framework P
PM MC P*
MR Demand
QM Q* Q z Hence, QM
z Existence of high fixed costs such as infrastructure and R&D
z Transportation
z Pharmaceutical industry
z Otherwise the good/service would not be provided
z However, regulation is required to operate the monopoly
Monopolies in Mexico z Old ideologies mandated government to command the economy
z Government must be an important agent in a country’s economic development Monopolies in Mexico z By 1970-80’s, Mexican government operated inefficiently many industries
z Telephone (Telmex)
z Electricity
z Oil and gasoline (PEMEX)
z Airlines and bus transportation
Monopolies in Mexico
z By late 1980’s, Mexican neo-liberal government started a privatization process
z Goal: Increase the efficiency of the economy Monopolies in Mexico z What was the outcome of the privatization process?
z Airlines, bus transportation and others were successfully privatized
z Others, such as electricity and gasoline are still owned by the government
z Telephone company (Telmex) simply became a private monopoly
The Telmex Monopoly z In 1990, Mexican businessman Carlos Slim “purchased” Telmex from the government
z He also purchased the telephone network The Telmex Monopoly z Fact: Up to date, Telmex has been operating as a quasi-monopoly
z 9 out of 10 telephone lines in Mexico are operated by Telmex
z Telcel, its mobile company, operates almost 80% of all the country’s cell phones
z It is also the main provider of Internet in Mexico z Hard for potential competitors to enter given the network ownership
The Telmex Monopoly z What about prices? Long distance rates Country Average per minute rate z According to the (USD) OECD, Mexicans pay Germany 0.18 some of the highest phone rates in the Mexico 0.55 world Poland 0.44 Spain 0.21 Turkey 0.77 USA 0.18 Beyond the Telmex Monopoly z 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
Beyond the Telmex Monopoly z He also operates other industries in Mexico
z Financial services z Restaurants z Cable TV z Airlines z Stocks of his companies can be traded trough NYSE (TMX) For the Records z In 2004, Forbes magazine ranked Carlos Slim 17th richest people in the world z What else? z In 2005, he ranked 4th according to the same source
z “…Telmex, is reportedly gearing up to double its customer base this year, primarily in Mexico, by signing up 600,000 broadband Internet subscribers…” Forbes Magazine
For the Records z In 2006, he ranks 3rd in the recently released ranking by Forbes! The perfect formula z Must be recognized that Slim has contributed to bring new technology to Latin America
z That enhances productivity of the region
z Hence, he deserves to be rewarded z He has collaborated with an excellent group of professionals z But also…
The perfect formula z He has become “friend” of the most influential politicians
z No much hope for a more effective regulation! Conclusions z The social losses due to a monopoly are clearly identified by economists z Regulation is highly desirable under this scenario z However, policy-makers face big problems attempting to regulate this market structure
z Corruption
z Difficult for society to demand accountability