Roaming, market prices and innovation
When the EU-Ministers for Economics met yesterday launching an initiative to cut the roaming fees for mobile phones, the old questions were triggered in my head: should a government intervene in pricing? Should a government intervene in the mechanisms of the market? I think what we can observe here is the powerful mechanism of the political market for votes and its bad impact on the regular market – I will argue that the EU forefeits innovation.
Incentives to milk the customer
Let’s look at the facts: roaming is making or receiving calls in a foreign mobile phone network. Prices for roaming are exorbitantly high. Why? Firstly, consumers making contracts rarely look at the figures given for roaming and do not compare prices – for them the domestic prices are most relevant – so in economic terms one of the essential premises for the price-mechanism, the comparison prices, does not work.
Secondly, there is no exit- or punish strategy. If you are going to another country to make a phone call, it is unlikely that you will make the effort of making a contract with a foreign supplier of a mobile network. Therefore you will simply use what your own mobile phone supplier offers you. He has beforehand acted as an agent to negotiate a price for your usage of the foreign network.
But does he have a realistic intention to negotiate a lower price for you? One could argue that he does not participate in the roaming fees of the foreign supplies and therefore as your agent could try to work in your interest and get a cheap price for you.
But as in many typical principal-agent conflicts, the interests of the supplier dominates the interest of the customer. If foreign customers use his network here in the domestic markets, then he can charge them the high roaming fees. Despite the fact that we already have pan-European mobile phone networks such as Vodafone, a cartell of expensive roaming fees serving the interest of the network suppliers has been erected.
Keep in mind that this is quite a rational strategy for the suppliers and the fact that European networks already exist, makes this strategy even more feasible. This strategy is based on mutual trust and reliance on high prices – it can be easily undercut by one supplier advertising low roaming fees. This will effectively happen if the market were scattered with lots of small suppliers. But since networks in different countries belong to the same supplier, the “simulation” of a scattered network helps to keep the prices high.
Thirdly, there are high market-entry barriers. Normally, such closed-club behaviour should stimulate competition from other suppliers and would yield falling prices. The prices have not changed much in the last two years because the erection of new networks is so costly. And also the national governments have done their share by limiting the licenses for the available frequencies.
Fourthly, and this is probably the most important fact, people are willing to pay the high roaming fees. Those travelling often have the financial resources to pay for roaming fees as well – be it with their business phones or private phones.
EU – defensor consumentis
The EU now makes the cases of lowering the charges. Why can it do that? Normally, the EU should protect the four freedoms of the EU: mobility of capital, people, labour and goods. None of that are endangered by the high-roaming prices. The EU however claims to represent the interest of the consumers? They seem to have a point because there is no real justification for the high prices.
Firstly, the investments into the regular mobile phone networks are diminishing already, the high payoffs are simply an extra-reward for the suppliers. In other words, the suppliers now just earn money that is not necessarily reinvested into new technology, but rather in marketing to keep market share, but marketing does not as such increase productivity.
Secondly, other countries show that the mobile phone prices are totally random price and do not reflect the marginal costs at all. In countries with lower income per capita the prices often are lower as well. If you compare Asian and European rates, you will see a huge difference in phone costs, but no difference in the quality of supply (which would be the argument for explaining price differences).
Thirdly, the argument that any price ceiling leads to a gap between supply and demand, or in other words too much demand for too little supply can not be justified in this case since the marginal costs of another sold minute are so low. Why would any supplier restricts his supply even with low prices?
Fourthly, even though the rates will in the end not be lowered much, the EU move is popular and would surely revitalize the EU prestige. And this is also in the interest of the politicians, isn’t it?
Apple will save us all
The case for restricting the roaming fees seems to be strong. The EU however did not consider that any expensive technology automatically triggers the development of new technology. We are maybe now at a stage where users can use Voice-Over-Internet-Phone on their mobile phones. The technology is almost there, the supply in form of Wireless Lan is also existent, however at the moment there is nobody offering a good combination of Wireless Lan and Mobile Phone Technology. The new iPhone might offer this technology, we don’t know.
This technology might make it possible to make phone calls wherever you are: in a domestic or a foreign network without paying any roaming prices. However this technology needs high roaming prices for the standard networks because this will help to convince customers to buy the new technology or to switch their contracts.
Therefore the biggest lobbyist against cutting the high roaming fees should be Apple. Or anybody else interested in technological innovation. And this, in the end, is also in the interest of the consumers.
See also Nowpublic, Technologyunderground, Blitzo, Goodphones, UK Mobile Phone Blog
Januar 29th, 2008 at 17:17
Very well written article. I love the point – the interests of the supplier dominates the interest of the customer! Where was the synergy for consumers with the consolidation of 02 and vodafone becoming a de facto duopoly?