Article published in EUReporter on April 24, 2006.
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.
Cécile Philippe is director of the Institut économique Molinari