CONSUMERS are said to be charged
too much for using their mobile phones
outside their home countries. As Liberal
Democrat MEP Sharon Bowles said “The
ludicrous cost of receiving calls or calling
from a mobile phone abroad has been
burning a hole in consumers’ pockets for
far too long.” To put an end to such a
situation, Viviane Reding, EU Information Society and Media Commissioner,
has decided to cut the price mobile operators can ask to their customers. While this
new regulation might seem attractive and
popular, a cap on the price of long-distance calls is certain to create a shortage
in the furniture of such services. It will
necessarily impair the satisfaction of some
consumers.
The belief that prices controls are very
eff ective to push lower charges is very profound. However, it is ill-founded. Actually,
if the intervener imposes a maximum control price above which any sales becomes
illegal, then the quantity demanded for
that price exceeds the quantity supplied.
The main characteristic of a price maximum is the queue. It creates an artificial
shortage of the service, which continues as
long as the control is in existence.
Price controls illustrate how rules of
economics are misunderstood. Controls
are usually imposed on the basis that the
market price is way too high in comparison with the actual cost. As MEP Bowles
said, “it is a myth that the cost of processing ‘international charges’ is more, and it
is outrageous that mobile operators have
got away with it for so long.”
What people at the European Commission do not realize is that the state
of international roaming profitability
can only be temporary if no other state
regulation, for instance licenses delivered
to some participants, hinders entry on
the mobile market. On a free-market,
the high profi tability of the furniture of
international calls will make of interest to
other companies, for example in related
sectors and where more modest margins
are recorded, to modify their production
and to thus respond to the demand. In the
search for profits, these new entrants will
increase the availability of goods and thus
reduce their price.
The existence of profit is not enough
to conclude that there is a problem on the
market. They are a natural and efficient
(in terms of incentives) feature of the
market. In order to make any conclusion
about possible ‘unjustified’ gains, one
need to inquire further and see if mobile
phones operators benefit state privileges
that make possible for them to exclude
potential newcomers. If it is the case, the
proper way to put an end to such ‘artificial’
gains is to eliminate such legal barriers to
entry, not to impose price controls.
If the European Commission persists
in imposing a maximum control price
on the furniture of mobile international
calls, then it will only make this activity
less attractive and resources will shift out
of production. Mobile operators will shift their factors to the production and sale of
other products and services to the detriment of those consumers the Commission
was willing to protect.
Profits and losses are the compass
according to which resources shift from
location and employments in which the
public values them less to those in which
the public values them more. Public authorities have no better tool to substitute
to it and allocate resources where they are
the most demanded. When they regulate
the market, they destroy the basis on which
entrepreneurs operate. They destroy the
adjustment that would have happened and
bring about misallocation of resources in
satisfying most consumer wants. The only
way they can help the market to function
properly is to remove those legal barriers
that hinder competition.
. |
