Competition in international phone calling and price discrimination

BRIEFING NOTE
Competition and price dispersion (or price discrimination) in international long-distance calls

Source:
Sean Ennis (2006) "Competition and Price Dispersion in International Long-Distance Calling", Journal of Regulatory Economics 29:303-317, 2006.
https://doi.org/10.1007/s11149-006-7401-9

Introduction :

Sean Ennis' (2006) study of the relationship between competition and prices in the US international long-distance calling market is one of the first studies that distinguishes cost decreases from competition that decreases price. The analysis focuses on the impact of changing market concentration on prices offered to consumers, distinguishing between two types of rate plans: low-price flagship plans and higher-price basic plans. It focuses on a period of dramatic cost change: 1994 to 1998. The study challenges the notion that falling prices are solely attributable to increased competition, highlighting the significant role of cost reductions and price discrimination.

Main Themes and Key Ideas:

1. Increased Competition and Lower Prices:

One of the main justifications for promoting competition in the telecommunications sector was the belief that it would lead to lower prices for consumers. As the study guide states, "According to the article, one of the main reasons given for promoting competition in telecommunications markets was the belief that competition would lower prices for consumers."

However, the article qualifies this hasty conclusion by pointing out that "despite the extensive and long-standing pursuit of competition by U.S. and other telecommunications regulators, relatively little solid evidence exists as to whether increased competition actually reduces long-distance service prices." (Ennis, 2006, p. 303).

2. The Role of Cost Reduction:

The study highlights that the decrease in tariffs observed during the period analyzed coincides with a substantial decrease in the costs of telecommunications services, particularly national access charges and international equivalents.

The author points out that during the same period that competition was increasing and rates were falling, the costs of telecommunications services, such as domestic access charges and international equivalents, also declined substantially. They did so in varying degrees across countries, ensuring that competition changes are separable from the common element of declining costs due to technological change.

Ennis (2006) states that "domestic access charges fell from 17.3 cents per minute in 1984 to 2.8 cents per minute in 2000... and for international calls, the equivalent access charge has, for many countries, declined by a similar magnitude." (p. 304). He argues that such cost reductions could have led to price reductions even in the absence of increased competition.

3. Distinction between Flagship Pricing Plans and Basic Plans:

The study distinguishes two types of international long-distance calling plans: * Flagship Plans: Low-cost plans, frequently chosen by price-conscious consumers. According to the study guide, these are the plans "frequently chosen by price-conscious consumers." * Basic Plans: Higher-priced plans, constituting the default selection for consumers. The study guide describes these as "the default selection for consumers."

The price difference between these two types of plans can be significant, with calls made with a basic plan costing up to ten times more than those made with a flagship plan (Ennis, 2006, p. 304).

4. Relationship between Competition and Price of Flagship Plans:

The study finds that increased competition on an international route (measured by decreased concentration via the HHI index) is significantly associated with lower prices for flagship plans.

The study found that increased competition on an international route (associated with decreased concentration) is significantly associated with lower prices for flagship plans.

Ennis (2006) states that "increased competition is associated with significantly lower prices for long-distance consumers." (p. 303).

5. Relationship between Competition and Price of Basic Plans:

Unlike flagship plans, the study finds that for basic plans, increased competition on a route is actually associated with higher prices.

The study found that for basic plans, increased competition on a route is actually associated with higher prices. Thus, price dispersion appears to increase with competition.

Ennis (2006) writes: "For basic international plans that are the default selection for consumers, increased competition on a route is actually associated with higher prices." (p. 303).

6. Price Dispersion and Competition:

The main finding of the study is that price dispersion (the difference between base fares and flagship plan fares) appears to increase with increased competition on international routes.

Price dispersion is "the difference between the base price and the flagship plan price, divided by the average price for the route under consideration."

According to the results, "price dispersion between base and flagship plans increased as concentration on international routes decreased (i.e., competition increased) between 1994 and 1998."

Ennis (2006) concludes that "price dispersion appears to increase as competition increases." (p. 303).

7. The International Settlement Process:

The International Settlement Process is the regulatory framework governing the routing of international long-distance calls.

The three main components of cost for a U.S. telecommunications company routing a call abroad are: the local access charge in the United States, the network cost to route the call abroad, and the accounting rate paid to the foreign carrier.

Ennis (2006) explains that "the cost to a telecommunications company of completing a call to a foreign country is composed of three main parts: a local access charge paid to the local U.S. telephone company, the network cost of routing the call to another country, and a per-minute 'accounting' rate that is paid to the foreign carrier completing the call." (p. 306).

8. ISR (International Simple Resale):

ISR is the provision of international dial-up traffic services via international private lines.

The FCC introduced it for countries that met certain national competitiveness criteria and whose settlement rates were below certain thresholds (Study Guide).

Ennis (2006) states that ISR allowed US and foreign operators to "avoid the traditional system of regulations." (p. 307).

9. Measuring Competition with the HHI Index:

The Hirschman-Herfindahl Index (HHI) is used in this study to measure concentration (and conversely, competition) on international routes.

It is calculated based on the minutes of traffic carried by the different operators on this route, rather than on their revenues.

Ennis (2006) points out that the use of traffic minutes "limits the direct impact of price on HHI." (p. 310).

10. Implications for Consumers and Regulatory Policies:

The study suggests that increased competition may benefit price-sensitive consumers who actively seek out the best deals (flagship plans), but may potentially harm less informed or less price-sensitive consumers who stick with basic plans.

The increase in price dispersion could indicate increased market segmentation, where companies target different consumer groups with distinct pricing strategies.

Regulatory policies should take into account these differentiated effects of competition and transparency of price offers to ensure that all consumers benefit from market liberalization.

Conclusion :

Ennis's (2006) study highlights a complex relationship between competition and prices in the international long-distance calling market. While increased competition appears to lead to lower prices for flagship plans, it is paradoxically associated with higher prices for basic plans, leading to increased price dispersion. These findings suggest that the impact of competition on consumers depends on their price sensitivity and their commitment to searching for the best deals. The study also highlights the importance of considering cost changes alongside competition when analyzing rate changes. Finally, it suggests that analysis by international route is relevant despite the bundling of rates in commercial offers, due to the often concentrated calling habits of international consumers.

Paper Summary Initial Draft By NotebookLM