Nova workboard

a blog from young economists at Nova SBE

Rome-Milan: competition finally worked out!

The availability of the high-speed train followed by the entrance of new competitors both on the long distance train and on the Fiumicino-Linate route, significantly benefited consumers, both in terms of prices and of quality.

The Milan-Rome route – with more than 30.000 spots available daily between train and plan – is a crucial part of the Italian transport network as well as one of the most profitable in Europe.[1] Before the completion of the high-speed train line, the two means of transport constituted two different markets. Indeed, with a travel time of five hours, the train service, provided by the state-owned monopolist Trenitalia, was not convenient for round journeys during the same day. Therefore, time-less business clients preferred the plane. Targeting mainly this segment, airlines working on that line managed to make relevant profits. Such that, the route was considered the golden goose of the Italian – if not  European – air transport market.

In spite of the significant profits it was making on that route, Alitalia was not in a good shape. In order to tackle its financial distress, the Government set a complex and controversial operation – Operazione Fenice. This plan included the merger with the second Italian airline, Airone, basically the only other player on the Fiumicino-Linate route. Therefore, in order to conclude the operation, the Antitrust Authority (AGCM)[2] did what it had been asked to do: allowing a monopoly for a limited period of time.

In the meanwhile, the various parts of the high-speed railways were being completed and the travel time fell significantly, up to three hours at the end of 2009.  Just a couple of years later, the private company NTV entered the long-distance-high-speed-train market and immediately exerted a significant competitive pressure on the former monopolist. The outcome was a considerably cheaper as well as better service.

The features of the new train service reduced the gap with the plane. Thus, some competition between the two means arose as well.  Nevertheless according to the AGCM, the cross elasticity between the two services was not enough, especially during the more profitable periods of the day, early morning and late evening, that allows for a round trip in the same day.[3] Furthermore, having no access to Linate slots, Milan City Airport, the other airlines cannot actually compete with Alitalia. Therefore the overall competitive pressure was by far too weak. [4] Coherently, starting from October 2012, Alitalia has been forced by the AGCM to dismiss some of its slots in order to let another player, the English low-cost company Easyjet, enter the Fiumicino-Linate route.[5]

At the end of the day, this complex story has an happy ending: prices fell by more than one third during the last 5 years, while the quality and punctuality are now significantly better. [6] In other words: competition worked out! And now what’s next? What happened in a comparable setting, the route between Barcelona and Madrid bodes well: after the liberalization of the flight market, which was suffering the train competitive pressure, the number of flights tripled and the prices decreased further. [7]

Luigi Di Vincenzo


Will we see the richest man on earth begging?

Carlos Slim is, according to Forbes,[1] the richest man on earth. Nevertheless the revenues (or monopolistic rents?), he extracts from the Mexican telecommunication market, seem to be in danger.

In spite of being active in a vast array of industries, telephony definitely spearheads Slim’s empire and the Mexican activities are definitely its golden goose. By controlling 80% landlines and more the 70% of the mobile connections, America Movil succeeds in having the highest margins worldwilde[2]

But let’s try to analyse a little bit the situation using some data. First of all the interconnection fees – which are crucial in telecommunication competition – are ranked among the top ones in the globe.[3] Moreover, getting a broadband connection in Mexico costs almost twice as in Chile, which has the second most expensive connection in the world (at PPP);[4] coherently only 0,5% of the Mexican population has one. Even more significantly, the mobile market penetration rate stands at 88% – among the lowest in the continent, in spite of Mexico ranking among the richest countries of the region. On top of that, the level of investment, and consequently the quality of the service, is extremely low.[5] Finally, according to OECD estimations, all these burdens cost 26 billions dollars per year (at PPP) to the Mexican economy.[6]

Well, price significantluy above marginal costs, market quota above 70%, low investment and quality, practises aimed at limiting competition… This really sounds like an anticompetitive behaviour! So what has the Competition Authority has been doing?

The Competition Authority’s attempts to somehow limit the abuse of dominant position have a long history, but it was in the last couple of years that the most interesting developments took place. In April 2011, a fine of more than 1 billion euros (the highest of Mexican antitrust history) has been imposed to Telcel, one of America Movil’s Mexican subsidiaries, responsible of overcharging competitors to connect call to Telcel users.[7]

One year later, the fine has been revoked. The revocation is conditional to the accomplishment of certain conditionalities, the most important of which consists of a significant reduction of interconnection fees (close to the levels established by the European Union)[8] and the obbligatio to offer these tariff to any operator.[9]

But don’t worry too much for Carlos! Up to 2014, the interconnection fees will stay unchanged, so at least one more year of extra-profits is ensured. Furthermore, Telcel has not been obliged neither to pay any damages to the overcharged clients nor to introduce measures aiming at favoring the entrance of new players, such as national roaming.[10]

So coming back to our initial question, Slim’s pension should be safe, at least for a while. And, by the way, do not try to say he was abusing his dominant position: he will keep denying it!

Luigi Di Vincenzo

[4] OECD data 2011