Thursday, March 5, 2015

Telco competition hasn't reduced prices

Ever since the open market structure for telecommunications was adopted in 1997 in Australia, the ACCC has been required to publish an annual report reflecting on the state of competition.

As part of that report the ACCC has developed a price index to show the movement in prices. Every year it shows a real price decline.

In the media release to accompany this year's report the ACCC Chair Rod Sims states:

Competition is driving substantive reductions in the price of telecommunications services, significant infrastructure investment to improve the quality and coverage of services, and technological innovation. Consumers are seeing lower prices and improved services as a result of the vigorous competition that began in the 1990s.

 Unfortunately for the ACCC their price index isn't the only one available.

As part of the data collection for the Consumer Price Index the ABS also publishes data on the groups of goods used to derive the index. Communications data is available from 1972 and so the real price movement (Group Index/CPI) can be derived. The chart below shows the real price movements over that period as reported at the September 2014 quarter.

Communications is the red dotted line - and the decline has been relatively consistent since the 1975 spike. That spike (I think) was due to a massive increase in stamp prices when Post and Telecom were split from the PMG.

Since 1980 the ABS has kept a separate sub-series on telecommunications and postal prices. This shows that post prices have been stable in real terms while telecommunications prices just continue to drop.

There are two small blips in the 1988-91 period and around 1997 but neither of these periods of reform result in a fundamentally new trajectory.

I have previously undertaken a rudimentary econometric analysis of the data to 2009 and was able to demonstrate that scale and experience effects explained the price movements better than did the reduction in industry concentration as a consequence of competition reform.

It is a great pity that the competition regulator continues to claim benefits for a set of reforms that cannot actually be credited to them. In particular, infrastructure competition cannot be claimed to be the source of price declines in Australian telecommunications.

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