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EU’s Soviet-style roaming caps

par Valentin Petkantchin
vendredi 19 octobre 2007.

Article published exclusively on the Institut économique Molinari’s website.

The European Parliament voted in last May to cap roaming charges. The hope of the EU Telecoms Commissioner Viviane Reding was that "Europe’s internal market will finally become truly borderless, even for mobile phone bills." But how can this feat be accomplished by a bureaucratic measure that runs totally counter to the very nature of the market process where prices reflect supply and demand ?

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The European Parliament voted in last May to cap roaming charges. New "Eurotariffs" capped at 49 cents a minute for foreign calls made to other countries and 24 cents for calls received outside the country of residence were thus set to take effect last summer. The hope of the EU Telecoms Commissioner Viviane Reding was that "Europe’s internal market will finally become truly borderless, even for mobile phone bills."

But how can this feat be accomplished by a bureaucratic measure that runs totally counter to the very nature of the market process where prices reflect supply and demand ?

As customers, we may lament that international rates – which in some cases were as expensive as one euro a minute – were higher than national rates. But unlike a genuine price drop resulting from increased competition, regulatory imposition of maximum prices has its own perverse effects. It amounts to putting the cart before the horse.

The new regulation certainly benefits some consumers who make international phone calls. However, in the longer term, such price controls will end up causing harm to all consumers.

Imposing prices in this way makes it less rewarding to produce or invest in the regulated service. It creates incentives for resources and production factors to leave the sector where such controls apply. The direct outcome then is to cause a shortage of the regulated goods or services, or to prevent or delay their improvements. The new roaming regulation may cause for example mobile operators to delay deploying, increasing capacity or replacing networks, especially in remote areas or in places where it costs more to do so and where roaming is a major income source.

Moreover, far from intensifying competition, the decision by European authorities will actually reduce it. On the one hand, the new regulation risks leading to artificial consolidation in the industry by pushing mobile operators most sensitive to price controls out of the market.

On the other hand, bureaucratic capping of roaming prices also affects related sectors that may offer similar communication services. For example, voice over Internet (VoIP) and Wi-Fi technologies provide mobile wireless communications at the local level, with calls then routed over various types of wired networks.

These technologies are already available in several places and can provide alternatives to traditional mobile phones for calls anywhere in the world. Companies like the VoIP service provider Mobiboo, or others such as Netgear or Skype, promote their offerings by showing how much consumers can save compared to higher-priced international mobile calls.

Those alternatives and all the others that could emerge one day are made less attractive by downward price controls. Down the road, consumers could thus be deprived of options they might otherwise have benefited from.

Price controls are definitely not the answer to high roaming charges. The new regulation is made all the more dangerous by creating a precedent for European authorities to institute other controls of the same type. What has become "borderless" in the EU is not the market but price controls instead.

Valentin Petkantchin, Director of Research, Institut économique Molinari




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