Regulation is today widely recognized as a fundamental piece of the complex system that is one country’s economy. “Liberté, Egalité, Fraternité” – although regulation and “freedom” seem an antagonism they are not, not when regulation plays its role: enhancing and promoting economic efficiency, that ultimately improves social welfare.
French’s telecom market is a strong example of how promoting the opening of a market, under certain conditions can benefit consumers and enhance innovation. To understand why, below you can see the milestones of the market – since the foundation of the state owned organization for telecommunications Direction générale des Télécommunications, or the foundation of the Telecommunications Regulatory Authority (ART), until the entrance of the most recent telecom.
One understands that the liberalization on the market happened in many steps, but the most astonishing result of such process was the dynamic resulting from the entry of Free Mobile (in 2012). The latter was able to lure more than 2M subscribers away from its competitors in only 4 months. In fact they surpassed the figure of 10% of the market share not much time before. It practiced low costs but in which consumers recognized quality, they still do, and Free is still pushing the boundaries of competition and efficiency, benefiting consumers and ultimately, the economy itself. But how did this happen, what type of regulation yield such results. We’re sorry, but we can’t say there is recipe. We can only analyze what was done in French regulatory system:
As in the United Kingdom, the first European country to introduce price-cap regulation, also France decided to adopt it. Although it has drawbacks, the main benefit of this type of regulation is to avoid the overinvestment in capital that exist when regulators decide to use the Rate of Return Regulation, which, in contrast to Price-cap regulation, sets prices so as to allow the firm to cover its cost including a fair return on its investment. Price-cap regulation just sets price ceiling and does not focus on earning at all. Basically, price-cap regulation allows the firm, the short-run, to increase its prices (a basket) on average by a formula, RPI-X. Factor X should reflect the difference in future productivity growth between the regulated firm and competitive firms plus any future differential in the rate of growth of input prices that might hold. Thus, this allows the firm to have more autonomy and flexibility in setting prices and the problem of overinvestment in capital is solved.
In France, during the period 1991-94, France Telecom was obliged to contain its price increases each year to no more than the Consumer Price Index minus 3 per cent. In 1996 two periods with new rules were defined: January 1, 1997 to December 31, 1998 (RPI-9% per year) and January 1, 1999 to December 31, 2000 (RPI-4,5% per year). In this year, with the introduction of the French Telecommunications Act of 1996 Universal Service were defined namely as “the provision to the public of a quality telephone service at an affordable price” and any operator with responsibility for universal service is required to provide service to anyone who requests it. In 2000, the Act “names France Telecom as the operator responsible for universal service, since the universal service obligation is national in scope although all telephone service providers are obliged to carry emergency calls free of charge”. New ceiling followed in 2011.
Thus, the French’s telecommunication regulation can be said to be incentive-based since the type of regulation adopted, the Price-cap, creates incentives for the regulated firms to be efficient.
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