Friday, July 27, 2012

Correcting the OECD's Erroneous Assessment of Telecommunications Competition in Mexico

Posted by D. Daniel Sokol Jerry Hausman (MIT) & Agustin Ros (NERA) are Correcting the OECD's Erroneous Assessment of Telecommunications Competition in Mexico.

ABSTRACT: America Movil has asked us to review and comment on the study that the Organization for Economic Cooperation and Development (OECD) published in January 2012 entitled, "Estimation of Loss in Consumer Surplus Resulting from Excessive Pricing of Telecommunication Services in Mexico" ("OECD Study"). The OECD Study concludes that high pricing of Mexico's telecommunications services caused a loss in consumer surplus estimated at $129.2 billion (USD) from 2005 to 2009, or 1.8 percent of Mexico's annual GDP. The OECD attributes this loss to lack of competition in Mexico's telecommunications sector. The OECD then used this calculated consumer-surplus loss to justify the release of another consulting report (written at Cofetel's request) recommending extensive changes to telecommunications regulations in Mexico.

There has been no loss of consumer surplus in Mexico. Rather, Mexican consumers have benefitted from consumer welfare gains. The OECD's conclusions to the contrary are incorrect and implausible. When we correct the OECD's errors and unreasonable assumptions, we find that Mexico's mobile and fixed-line prices are low and consumers are receiving billions of dollars of benefits. The mobile and fixed-line sectors perform much better than a comparable sample of its peers. The OECD's conclusion that Mexican consumers have suffered welfare losses from a lack of telecommunications competition has no basis in reality.

In Part I of this report, we explain how the OECD's refusal to provide its data to us violates the accepted practice in academic research and regulatory proceedings around the world. Such conduct would preclude publication of the OECD's results in reputable academic journals. That the OECD made its results public without even the possibility of an independent professional review borders on the unethical. In Part II, we explain how the OECD's calculation of $129.2 billion (USD) in lost consumer surplus results from mistakes, the improper use of data and seriously flawed economic analysis. The OECD's calculation relies on incorrect assumptions and commits elementary mistakes in econometric methodology. In particular, the OECD used an unrepresentative sample of rich countries to claim-falsely-that Mexican consumers are overpaying for telecommunications services. Additionally, the OECD misused price data and ignored actual market prices to create the illusion of an increase in prices and harm to consumers in Mexico that did not in fact occur. Mobile prices used in the study were not the lowest prices available to consumers in Mexico and the price changes referenced in the OECD study were not real price changes; but rather a product of the OECD's flawed pricing methodology. The OECD's flawed approach to calculating prices leads to results that are contrary to reality. The fact is that Mexican consumers are benefiting from low prices - among the lowest in Latin America - and have experienced significant gains in consumer surplus. In Part III, we select a sample of "peer" countries that are similar to Mexico in terms of GDP per capita. We review the mobile and fixed-line sectors in Mexico and find that, by proper international comparisons, Mexico's prices are low. We show that prices have declined considerably causing significant increases in purchases and benefits to consumers. The empirical evidence further refutes the OECD's conclusion that Mexico has suffered from a lack of competition in its telecommunications sectors.

In Part IV, we demonstrate that not only has there been no consumer loss in Mexico but there have, in fact, been significant gains in consumer surplus, much more than expected when compared to peer countries. We use publicly available data to estimate econometric demand and price models for Mexico's mobile and fixed-line sectors (based on a sample of peer countries). We then use these models to assess the actual performance of the Mexican telecommunications markets. Based on this analysis we find that telecommunications prices in Mexico are low. Specifically, we find that Mexico's actual mobile and fixed-line prices are below the predicted prices. In other words, Mexican consumers are paying lower prices than what one would expect based on comparisons of comparable countries. Also, and contrary to the OECD's calculation of consumer loss, we calculate that in 2011 Mexican consumers have received at least $4 to $5 billion (USD) in consumer surplus from these lower mobile prices and in 2010 they received over $1 billion (USD) in consumer surplus

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