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Wednesday, October 2, 2013

Estimation of Loss in Consumer Surplus Resulting from Excessive Pricing of Telecommunication Services in Mexico

Marta Stryszowska (Microeconomix, France) provides Estimation of Loss in Consumer Surplus Resulting from Excessive Pricing of  Telecommunication Services in Mexico.

ABSTRACT:  The present study evaluates the loss in consumer surplus caused by the low  degree of competition in the Mexican telecommunication sector which results in  relatively high prices, and also leads to lower levels of consumption across the  range of telecommunication services. Econometric techniques are used in order to  estimate the prices for telecommunication services and the corresponding numbers  of subscriptions to telecommunication services that would have been observed in  Mexico if there had been more competition in the Mexican telecommunication
sector. The estimation relies on cross-country panel data from OECD countries. Estimates are undertaken for mobile and fixed telecommunication services and broadband services. The consumer harm in Mexico is estimated at USD 129.2 billion, or an average of USD 25.8 billion per year in terms of purchasing power parity over the period 2005-09. The latter amount is equivalent to 1.8% of Mexican GDP per year.

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This Paper by Martha Stryszowska was published as an OECD Digital Economy Working Paper (no. 191) accompanying the OECD Review of Telecommunication Policy and Regulation in Mexico of January 2012. Although the Review does not refer to the Paper and the Paper not to the Review, the quantitative data of the Review is directly taken from the Paper.
The Paper contains fundamental errors, which have been documented extensively by myself in Adriaan ten Kate Sr., “Three Best-Selling Stories about Telecommunications in Mexico”, published in the Special Issue of the CPI Antitrust Chronicle of June 2012. The most embarrassing error is that the Paper simply takes the wrong variable to estimate welfare losses, by which it overestimates the loss from unrealized demand by 150%. Yet, this is only one of the errors.
I have brought these errors to the attention of the author before publishing my paper in order to give her a chance to defend herself, but she systematically denied responsibility arguing that she is not entitled to comment on something she did for the OECD. Likewise, the OECD has not been willing to comment on the substance of my critique arguing that the Review was approved by all the Member Countries, that the tone of other critics (not myself) was to aggressive for them to answer and similar not-to-the-point points.
I admire the courage of the author to allow the CPI to publish her study under her name. I understand that this implies that she no longer hides herself behind the OECD and take the opportunity to ask her the following question:
Why did you calculate the loss of consumer surplus not as the overcharge times the unrealized demand over two, as follows from figure 7, but as the but-for price times unrealized demand over two? For example, in your table 55 the last column is the first column times the second over two. In my view this is wrong and leads to a huge overestimation of the loss. Please explain to me why you did so.

Posted by: Adriaan ten Kate Sr. | Oct 3, 2013 11:04:08 AM

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