Live comments from the CCP Summer Conference 2014 – Session 4

Session 4: Competition and the Demand-side:

Joe Farrell (University of California, Berkeley) (via video link) presented on the demand side of problem markets. The antitrust concerns which the study of competition tends to focus upon are supply side matters. According to Joseph Farrell, scholars assume that firms tend to behave under the assumption that customer is choosing the best deal but this may not be the case in problem markets. He describes the three mechanisms by which the demand side of markets may fail: Consumers who behave irrationally, Agency problems which “compound” customers, such as firms or government face, and problems consumers have observing or evaluating complex pricing or product characteristics. These problems may eliminate competition, or may merely funnel it towards different arenas. According to him, wary customers can undermine cross-elasticity by enabling bad deals to retain substantial share or discourage anyone from offering good deals.

Session 4 - Je Farrell

Geoffrey Myers and Katie Curry (Ofcom) explored Ofcom’s fundamental review of the problem market of non-geographic calls. Non-geographic calls include calls to mobile phones or to services with numbers beginning “08” or premium rate numbers beginning “09.” There is poor consumer awareness of the prices and externalities associated with calling these number different operators (for example, calling numbers from a mobile phone).

Telephone calls are a two-sided market, where the caller and the call recipient are on opposite sides of the market. For calls on landline, geographical numbers the recipient never pays. For non-geographic calls, either the caller or the recipient may pay the telephone provider. The caller and the recipient may buy phone services from different operators. This provides many advantages, such as allowing business to use a single, national number to access their services or in order to offer their customers a free service number. Premium rate numbers provide a means by which firms may offer a service.

Market failures in this market arise from three sources: a lack of consumer knowledge of the cost of calling numbers, the lack of concern of callers’ operators for the welfare of call recipients and their operator, and the misuse and degradation of certain number “brands” by callers’ operators and recipients. The harms caused by these factors include harm to firms using these number, to public service providers who wish to provide a free number but cannot and costs to vulnerable consumers who unknowingly overpay for calls.

To alleviate these problems, Ofcom has announced changes in the regulatory regime such as mandating free mobile phone and landline calls when calling “080” numbers and unbundling the price paid by the caller for calls to “084”, “087” and “09” numbers into an access charge, paid to the callers’ telecoms provider, and a service charge, passed on to the call recipient. This allows providers of public services to operate a free phone service to callers, and allows firms to communicate the price of their own service to consumers clearly. The improved visibility of the fee paid to the operator may encourage competition between operators. Consumers’ confidence in the fees associated with calling non-geographic numbers may increase over time, leading to these numbers becoming trusted brands.

Session 4 Ofcom

About CCP
The Centre for Competition Policy (CCP) conducts interdisciplinary research into competition policy and regulation.

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