Thursday, October 30, 2014

Wireless Competition in Canada: Damn the Torpedoes! The Triumph of Politics over Economics

Jeffrey Church, University of Calgary - Economics and Andrew Wilkins, U Calgary School of Public Policy explain Wireless Competition in Canada: Damn the Torpedoes! The Triumph of Politics over Economics.

ABSTRACT: Last year featured a high stakes battle between two mighty protagonists. On one side, allegedly representing the interests of all Canadians, the federal government. On the other side, Bell, Rogers and Telus. The issue at stake: What institutions should govern the allocation of resources in the provision of wireless services? Should the outcomes — prices, quality,  availability, and other terms of service — be determined by the market? Or should the government intervene? The answer to these questions should depend on the extent of competition and the ability of wireless providers to exercise inefficient market power — raise prices above their long run average cost of providing services. Do Bell, Rogers and Telus exercise substantial inefficient market power?

The accumulated wisdom of market economies is that state intervention inevitably is very costly, given asymmetries of information, uncertainty, and political pressure. At the very least the onus on those demanding and proposing government action is to provide robust evidence of the substantial exercise of inefficient market power. This paper is a contribution to the ongoing debate regarding the existence and extent of market power in the provision of wireless services in Canada.

The conventional wisdom that competition in wireless services was insufficient was challenged by our earlier School of Public Policy paper. In that study we demonstrated that the Canadian wireless sector was sufficiently competitive. The evidentiary record we developed was not consistent with a robust finding of a substantial exercise of inefficient market power; policy efforts to create and sustain more competition were unlikely to be successful without ongoing subsidization; and to the extent those efforts were successful, they would likely to lead to an inefficient allocation of scarce resources, with the benefits of additional competition less than its costs.

The federal government’s standard bearer in this debate has been the Competition Bureau. The Competition Bureau has made submissions and commissioned expert evidence in regulatory proceedings that conclude that there is market power in the provision of wireless services in Canada and there are substantial benefits to enhancing competition.

This follow-up paper is a critical assessment of the Competition Bureau’s submissions and the expert evidence on which it is based. We remain unconvinced that market power is a problem in wireless services or that additional competition in wireless services is efficient. As explained at length in this paper, the expert evidence prepared for the Competition Bureau on both points is simply insufficient to warrant regulation and subsidization of competition. The evidence with respect to market power is inconsistent with substantiality and it is not robust. The expert evidence does not address whether entry is efficient. Instead it provides only an estimate of the competitive benefits of a fourth national entrant — not its costs — and it does not assess the financial viability of a fourth national competitor. The assessment of the competitive benefits of entry are unreliable, attributable to both the methodologies used by the expert and the assumptions required to implement its simulation methodology. The lack of fit between outcomes derived from the model and calibrated parameters with observed values indicate that the concerns over the specification and assumptions in implementing the model are well-founded. Its inaccuracies pre-entry cast considerable doubt on its use to accurately forecast the effect of a fourth national entrant.

Given the absence of compelling evidence demonstrating the substantial exercise of inefficient market power, the evidence that more than three carriers likely raises concerns regarding financial viability without ongoing subsidization, and the evidence that additional entry is inefficient, one wonders how long the federal government and its agencies will continue the failed policy of attempting to “enhance competition” in wireless markets. What will be the final cost to Canadians of an economically vacuous commitment to the proposition that competition is measured by the number of competitors?

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